CHINA BUSINESS - China Conference 2017: China's Globalization Leap

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As China's globalization drive continues with the rapid rise of Chinese brands and tech companies as well as massive infrastructure and development plans across the region, AmCham invites panels of experts to discuss the changing landscape of business and what it means for Hong Kong


AmCham Vice Chairman Jack Lange delivers his opening remarks


U.S.-China Diplomatic Power Play

By Kenny Lau

David Lampton
North Korea has been a key reason for a “friction-laden” U.S.-China relationship in the Trump-Xi era, but “negotiated cooperation” is the wisest path forward, says David M. Lampton, Professor at Johns Hopkins University School of Advanced International Studies. “China is a competitor but not our biggest threat.”

“President Trump initially put several contentious issues with China on a back burner, hoping to achieve North Korea’s denuclearization…by making it worth Beijing’s while to apply the necessary pressure,” he points out.

“When it failed, issues including the South China Sea, tariffs, weapons sales to Taiwan, tightening of technology and investment flows, and secondary sanctions on Chinese institutions and individuals once again gained prominence.”

Instead, Washington should focus on three primary policy areas: economic power in Asia, reciprocity with China and, of course, North Korea, Lampton suggests. “The very first necessary step for America, however, is to get its domestic house in order. If we fail, America’s national competitiveness, moral standing, and ability to coherently act globally will continue to leech away.”

He believes it is time for Washington - in consultation with its South Korean and Japanese allies - to consider acknowledging that North Korea has a nuclear deterrent and to deter the use of these capabilities as Washington did with the USSR and China, even though it might encourage others in Asia to obtain their own nuclear deterrent. And, for Beijing, nuclearized peace on the Korean Peninsula is preferable to war.

Economically, a core question for Washington is how the United States can “shore up” its capacities and contribute to the balance of power in the region, Lampton stresses. “U.S. economic presence in Asia is not where it needs to be, and it weakens U.S. capacity to maintain balance. America needs its companies, development agencies, allies and friends, and international multilateral organizations to participate.”

“America should become more involved in the construction of regional infrastructure and collaborate to foster linkages that are not just North-South but also East-West across the wider Asia Pacific,” he adds. “If we don’t want Asia to become a sphere of one power’s influence, we must build more vigorous actors into that regional network.”

As China continued to grow from global trade, it also became “increasingly outward-vaulting, taking advantage of openness elsewhere without reciprocally opening itself where foreigners were competitive,” Lampton notes. “The issues of reciprocity and fairness have consequently moved front and center in Sino-American relations.”

“It is, however, one thing to identify inequities and another to find remedies that don’t hurt U.S. interests,” he cautions. “By limiting Chinese investment into U.S. firms, it diminishes domestic U.S. job opportunities. So, it is hard to find ways to enhance reciprocity while feelings of resentment mount. But, ignoring the problem invites extremist proposals at home and contempt by Beijing.”

Washington should understand it will be dealing with an increasingly capable China for the foreseeable future, Lampton says. “The United States would be making a strategic error if it believed China’s outward thrust is destined to fail.”


Global Push of the China Brand

In the first panel of the conference, four China experts discuss how foreign businesses can fit into the country’s globalization plan

By Jennifer Khoo


Left to right: John Dawson (Moderator), David Frey, Edward Tse, John Macpherson, Felix Zhang

Panelists

  • David Frey, Partner of Markets Strategy and National Head of U.S.-China Strategic Corridor at KPMG China
  • Edward Tse, Founder and CEO of Gao Feng Advisory Company
  • John Macpherson, Senior Partner in Greater China and North Asia at Control Risks
  • Felix Zhang, Co-founder and Group Executive Director at Envision Energy
  • John Dawson, Director/Partner, Artemis Associates (Moderator)

On the “China Brand”

Frey: We need to resist this idea of a monolithic China brand that speaks to the world with one voice. The country is very diverse. But does the idea of a “China brand” even matter? It doesn’t appear to have affected the pace of innovation in China.

Tse: There has been a gradual shift from China’s “copycat” image to one of innovation and tech over the last decade. This new era is epitomized by the confidence of Chinese entrepreneurs and the country’s growing sophistication.

Macpherson: On the one hand, there is incredible optimism about growth, and many foreign companies still view China as a must-have part of their strategy. On the other, there is great uncertainty, not just around business matters but also geopolitical affairs.

Zhang: China’s “brand,” which is its culture and its people, has come of age. Sadly, there is still much misinformation about the country that comes from people unwilling to dig a little deeper. There is a lot China can offer the world that people still don’t realize.

On the Chinese perception of American brands

Tse: Chinese consumers are growing a lot more sophisticated and they understand a lot more about strategy and business now than they did 20 years ago.

Still, the Chinese have carried an admiration for the U.S. for a long time. This deep underlying respect – especially for the power of the U.S. financial sector and Wall Street – is in their blood. Other big American players, such as Google and Amazon, have also become inspirations for the Chinese, resulting in the likes of Alibaba and Tencent. The “why not me” mentality is very strong in China.

Zhang: The Chinese perception of the American corporate has changed. Today, people care fundamentally about the product, and whether it delivers value to the business and the consumer.

On the risks of China

Frey: Despite all the optimism, there are many risks in the Chinese economy. Debt, while certainly a risk, is overplayed in the press to sell newspapers. Geopolitical risk however, needs to be on the agenda, and business executives should be trained to include this in their corporate strategies going forward.

Macpherson: Of greater concern than China’s debt levels is the risk of a lack of reform. There is an expectation that reform will be needed at a much greater scale in the years to come, particularly in the financial industry. Will reform for the economy and industry occur at the pace that it needs to occur? 

On opportunities in China

Tse: Chinese businesses have always been interested in benchmarking against the business and management strategies of leading western companies. But today, more and more Chinese companies are discovering that they have exceeded these benchmarks and are setting their own. This is what is driving blue-sky innovation in China.

Macpherson: The Chinese are the most prolific users of social media – that is how they get most of their information. This access to knowledge and idea sharing platforms equips people with what they need to drive entrepreneurship and innovation.


China Going Global

By Kenny Lau


James Wang, right, with moderator Tara Joseph

In 1993, HNA Group was merely a startup airline on Hainan Island; it has since become one of China’s most prominent conglomerates covering not only aviation but also hospitality, tourism, real estate, retail, finance, logistics, shipbuilding and eco-tech. In 2017, it took 170th place on the Global Fortune 500 list with revenues totaling US$53 billion.

“Whenever you need to travel, it can be a headache in terms of booking an air ticket, a hotel room and a car. What we try to do is provide a one-stop shop to the traveling public,” said James Wang Shuang, Chief Investment Officer of HNA Group and CEO of HNA Group (International).

Wang, who is currently based in Hong Kong, joined HNA Group in 2007 upon graduating from university; his first primary function was in aircraft leasing at a time when few people in Mainland China had a thorough understanding of the global leasing business. In 2011, after the acquisition of a GE Capital subsidiary, he became an assistant president on the commercial side.

The commercial strategy of HNA Group in the past 24 years has primarily been specialization, diversification and globalization. “We’ve built an airline which is doing well; we’ve diversified to hedge against volatilities; and, we’ve invested overseas to bring about synergy and cost saving across our business lines,” Wang says.

“One reason we are quite confident is because we are a global conglomerate,” he reasons. “Our assets overseas make up 40 percent of the group’s portfolio; 60 percent of revenue come from overseas; 75 percent of our employees are overseas. In terms of revenue, we are a U.S. company; in terms of employees, we are a European company; but we are originally from China.”

HNA Group has made several news headlines in recent years because of a host of large-scale, high-profile mergers and acquisitions, including a record-breaking land purchase in Hong Kong, a 10 percent stake in Deutsche Bank and other tangible assets across the globe.

“In my daily work, I discuss many potential M&A deals – and less than five percent go through,” Wang says. “We certainly don’t have a 100 percent successful rate post-acquisition. About five years ago, we invested in the shipping industry at the wrong cycle point when we thought it’d already bottomed. It wasn’t the case and was a lesson we learned.”

“If we can’t find value in an industry, we’ll try to quit as quickly as possible. Shipping is a good example,” he adds. “If we think an industry has potential, we’ll try expand our business there very fast by organic growth or acquisition…although we’ll likely slow down a little bit in M&As because of uncertain economic and political conditions worldwide.”

Regarding the ownership structure of HNA Group, “we’ve issued an open letter at the end of July about our shareholders,” Wang stresses. “The reason we want to be transparent is that we have nothing to hide. And we are happy to make ourselves more transparent in the future.”


The Greater Bay Area and Hong Kong Opportunities

In the day’s second panel, four industry leaders consider the opportunities and challenges facing international businesses in China’s Greater Bay Area

By Jennifer Khoo


Left to right: Robert Grieves (Moderator), Tony Chan, Emily Kong, Richard Lancaster, John Siu

Panelists

  • Tony Chan, President of Hong Kong University of Science and Technology
  • Emily Kong, Managing Director at Cisco Services, Asia Pacific Japan China, Cisco Systems, Inc
  • Richard Lancaster, CEO at CLP Holdings Ltd
  • John Siu, Managing Director in Hong Kong at Cushman & Wakefield
  • Robert Grieves, Founder and Chairman of Hamilton Advisors Limited (Moderator)

Chan: Shenzhen is the Silicon Valley of China. But the Greater Bay Area (GBA) is much larger than just Hong Kong and Shenzhen. Its other cities, such as Dongguan and Guangzhou, are all thriving. Shenzhen is out of space! Even Huawei has moved much of its manufacturing operations out of Shenzhen into Dongguan.

Talent hoping to work in the GBA will be attracted to studying in Hong Kong, and the city will also have greater access to research support in mainland China.

Kong: I encourage people to see past Shenzhen in terms of the GBA’s potential. Guangdong province alone represents 100 million of China’s population and 13 percent of China’s total economic output. We are talking about 11 cities, not just Hong Kong and Shenzhen but also Macau, Guangzhou, Dongguan, Foshan, Zhongshan, Zhuhai, Huizhou, Jiangmen and Zhaoqing. The Pearl River Delta cities are estimated to generate a total of USD4.6 trillion dollars by 2030, which really isn’t that far from now. At that point, the region will have surpassed even New York and Tokyo. GBA also provides opportunities to build an ecosystem for a smart city.

Lancaster: Interconnectivity with the GBA will bring benefits to Hong Kong where energy is concerned.

In the future, there will be a shift from traditional to data-oriented industries, and there is concern over how these industries will be powered in the future. Requirements will be different: quality of power needs to be clean and almost 100 percent reliable, with no disruptions. Having access to Guangdong’s energy system provides a backup for Hong Kong should its own fail.

As for space, the ability to access and manufacture clean energy is not possible in high density areas. Housing, hospitals and schools are all competing for Hong Kong’s limited land. Operating renewable energy plants in the GBA will help to keep this form of energy affordable.

Siu: Infrastructure improvements between Hong Kong and GBA will enhance flows of goods and people in the next few years. A shorter commuting radius will encourage Hong Kong students and professors to work in Shenzhen, where prospects of attracting investment capital for their projects are higher. 

Infrastructure improvements will also stimulate demand for local real estate, particularly in Hong Kong’s New Territories. People working in Qianhai, China’s new CBD, will want to live close to the border following the physical connection.

Chan: The biggest challenge facing Hong Kong’s capitalization of the GBA is the culture and mindset of Hong Kong society. Specifically, the lack of confidence that “we can do it.” Traditionally, Hong Kongers have been more risk averse to innovation and technology related careers, favoring instead more “stable” professions. The cultural stigma towards risk and failure will take time to change, and we need to get innovation culture out of universities and into society.

Other challenges include politics and immigration policies. Will One Bay, Two Systems work? We also need to simplify the border crossing to make going from Hong Kong to Shenzhen more like going from San Francisco to Silicon Valley.


AIIB: A Bridge of Infrastructure Finance

By Kenny Lau


Joachim von Amsberg

The Asian Infrastructure Investment Bank (AIIB) was established for the same reason as any other multilateral development bank: to address the need for infrastructure development among emerging economies in the 21st century, says Joachim von Amsberg, Vice President (Policy and Strategy) at AIIB, during a speech at the China Conference.

“Infrastructure is about connecting people to services, jobs and markets within a city, within a country and across different countries,” he says. “Infrastructure is critical to the functioning of economies as a driver of development. China, which has invested heavily in large-scale infrastructure projects, represents that role like no one else, and it led to the idea of a new bank in 2013.”

The demand for infrastructure development globally is estimated to be US$90 trillion over the next 15 years (current stock is roughly US$50 trillion), von Amsberg notes. “That’s US$6 trillion every year and two additional infrastructure worlds in the next 15 years. Much of it will be in emerging Asia where 1.5 million people will move to cities every week until 2050. That’s one Hong Kong every five weeks. Think about what it means for infrastructure development.”

The paradox, however, is that “you have asset managers sitting on tens of trillion of dollars, some yielding zero or negative returns; yet, very little flows into infrastructure even though they are perfectly suitable to insurance companies and pension funds as a form of reliable, long-term investment. The supply and demand, however, aren’t coming together. Our job is to fill that huge gap of unmet needs.”

Since the mid-1940s, multilateral development banks – including the World Bank, Asian Development Bank, International Monetary Fund and others – have been the backbone of infrastructure development. “The challenge, though, is that the world has outgrown their balance sheets,” says von Amsberg. “And it’s been difficult to adjust how they are set up according to the current economic conditions.”

In 2016 AIIB opened its doors, with 57 founding members and US$100 billion of committed capital, but was also greeted with “skepticism, concern and suspicion,” he continues. “In our negotiation with European countries, we formed a set of basic principles on genuine multilateral decision-making and high-quality standards so that projects would represent international best practices.”

“We’ve set ourselves three priorities: sustainable infrastructure, cross-border connectivity and mobilizing private capital. We’ve received triple-A ratings from the three rating agencies. We’re also keen partners with other MDBs. We’re also different from China’s Belt & Road (OBOR) which is an initiative about connectivity. We’ll review those projects with the same level of due diligence, and we’ll finance many others that have little to do with OBOR.”

Hong Kong as a member of AIIB is poised to play a critical role in moving the agenda forward, von Amsberg believes. “Hong Kong is one of the few places with a critical mass of key players in an ecosystem of project developers, investors, financial advisors, lawyers, consultants and global banks. And, just like other eligible countries, both Japan and the U.S. are most welcome to join us.”


China’s Growing Market 

By Kenny Lau


Eddie Ahmed, right, with moderator Pete Sweeney

The recent sale of U.S.-based Massachusetts Mutual Life Insurance’s Hong Kong and Macau insurance units to Yunfeng Financial Group, a Chinese investment company listed in Hong Kong, is a strategic decision on both sides, Eddie Ahmed, Chairman, President & CEO of MassMutual International LLC, said in a dialogue moderated by Pete Sweeney, Asia Editor of Reuters Breakingviews.

“For us, this is a way to participate in the growing wealth of this region, particularly Chinese wealth coming to Hong Kong. For Yunfeng, it will be a wealth management platform with a fintech angle,” he says. “As we sell our business, we’ll take a 24.8 percent stake of their listed company, and we’ll be sitting on the board and helping them grow in many ways.”

Today, China is the fastest growing insurance market in the world but also a market where foreign ownership is limited. “It is impossible not to want access to the China market, and there is less of an argument today to protect Chinese firms from foreign companies,” Ahmed believes. Even if you open the market substantially over night, local players will continue to be extremely successful.”

“And how you want to open the market will depend on what product you want in your market, what innovation your market would benefit from, and whether your market of retirement services is robust enough to not open it up to other players,” he adds. “This becomes an even more important question when you have an aging population. Retirement services and life insurance products are very interlinked.”

As of late, as China has become concerned about capital flight out of the country, insurance products have come under regulatory scrutiny as a form of high-risk, high-return investment. “It raised concerns with regulators and rightly so because many were extremely aggressive in attracting that capital,” Ahmed points out. “What you need is to make sure that it is a legitimate flow of capital.”

“Insurance can be both a policy against something and an investment because it pays dividends,” he explains. “But the underlining basis must be about protection. Clearly, when you sell an investment product, you’ll have no choice but to make [high-risk, high-return] investment yourself to pay off the obligation at some point. Regulators are right to say that it doesn’t make sense.”

The insurance industry is also bound for another revolution amid growing technology, Ahmed says. “Partly because of the financial crisis, banks have already had such a disruption where they had to think differently about how they reach their customers. We’ll have a similar disruption, particularly when it comes to offering insurance products online.”

Algorithmic underwriting is a direct result of having digitized every single piece of insurance-related, demographic-specific data collected over the past decade and making use of machine-learning to create mortality, mobility and longevity models. “We are now able to approve or disapprove an online application within 20 minutes. Every time we get an application, the machine learns more.”