Listen, this is a fantastic panel about a subject that
has been kind of burning issue on the campaign trail
in the US and really in in financial capitals around
the world.
We're going to talk a little bit about China and
I'm going to start with Jorg and get a little
bit of insight from him.
Jorg, for those of you who don't know him, has
lived for what is it more than 30 years in
China, was the head of the European Chamber of Commerce
there, worked for the German chemical company BASF.
Just a fantastic legendary China hand has now moved to
Washington, DC.
Give us a, an EU kind of DC perspective right
now on what the Trump victory means for US China
relations and EU China relations.
Well, thank you, Clay.
It's I would say the view out of DC is
everything is in flux.
I mean, first of all, you know US, China, is
Biden going to meet Xi Jinping in Brazil at G20
there this week, for example, is is a big question
that we all have secondary, of course, who's going to
be appointed into Trump's cabinet?
Who's going to be treasury commerce and there was always
the name light hyzer out there.
Is he going to take USTR understand that he's not
very keen to take that place again, but what else
is there left for him at this stage?
So it all depends on that place and the cabinets.
We have Hawks that will not be coming back into
the administration like Pompeo, like my friend and Matt Pottinger.
So that means that the the Taiwan question might be
viewed differently with his lineup of less having Taiwan supporter
in in the new cabinet.
And then of course, when it's going to, when it's
going to come the tariff tsunami, Trump talked about 60%
on China's products.
That's a 430 billion U.S.
dollars.
So I will guess that he has to do 60%.
But again, on which part is it going to be
1/4?
Is it going to be staged in 2526?
I think that he cannot afford to have 60% of
all the products coming in right away.
And then, of course, the figure of Elon Musk, if
you have someone who actually has access to Beijing and
to Trump as one person, is he going to be
sort of intermediate?
Is he going to be back channel?
It's hard to imagine with his character that he's going
to be back channel.
You know, And on Europe, we have everything in flux.
I mean, we have the weakest political leadership in Europe
ever.
My own country, Germany possibly is facing elections in January,
February.
We might have a new chancellor.
His name is Melts.
I briefed him a couple of times.
He's a former investment banker.
He's a former business person.
So there might be some rationality there.
Europe is just the last stages of appointing the commissioners.
They might be more powerful than in the past, given
the weakness of Paris and and Berlin.
And then of course, the big difference between Europe and
the US will be the openness for Chinese direct investment.
Europe is very keen to have Chinese investment.
the US pretty much has closed the door very, very
quickly.
You pointed by Elon Musk is a really interesting one.
The Trump administration is going to be very hawkish on
China.
It has boasted about that.
Does that make life very complicated for Elon Musk if
he's a part of that that team and he's also
running a giant giga factory in in Shanghai and trying
to sell cars to Chinese consumers.
Well, I'm puzzled.
I mean, he's deeply better than China, 2025% of his
turnover comes from China.
At the same time, he stands for EV, but he's
with the president who stands for old energy.
So I don't know how that's all going to shape
up in this respect.
I don't know.
Very interesting.
Fred, I want to come to you next.
One of the most talented macroeconomic observers of China that
I know.
China's economy not doing very well lately.
There has been an effort since late September to turn
it around.
The government is trying to signal that it gets it,
that it will.
It wants to fix things.
On Friday, I guess it was.
It announced a $1.4 trillion stimulus package.
The markets are kind of underwhelmed.
What's your view about what ails the Chinese economy and
how committed our leaders in China to to sorting it
out and fixing it?
Yeah.
So Chinese economy clearly face a number of challenges while
housing, local debt, deflationary pressures.
I do think since September, the government has started to
at last take actions on the policy front trying to
address those challenges head on.
Not surprisingly, the markets are initially exciting and then become
a little bit disappointed, if you may, by the magnitude
of the policy packager and you might be more important
to be the composition of the policy packager.
So in terms of magnitude and like in September, the
central bank PBOC, you know, cut the policy rate by
30 basis points and the, you know, monetary resume requirement
ratio, you know, by 50 basis points.
I would have expected I did this double, triple or
you won't call triple like the magnitude, right, because of
the economy facing some real chop signs.
You need to be visible, decisive and to get ahead
of the curve.
So certainly magnitude has much to be desired on the
physical front of the same, you know, whereas bits, bits,
bits of information come out by the government acting together
could be anywhere between 2:00 to 6% of GDP.
Again, if I were driving policy, would it be north
of 10% of GDP?
You need to be big enough to convince anyone why
the government is serious about fixing the economy and turned
around.
So like like like the magnetizing what we're going to
do.
Then the conversation, you know, for whatever the reason, the
government is still kind of fixed the word supply side
anything do more infrastructure more, you know, caps investment and
it doesn't take economists to know the trouble China faces
not supply side.
China has world beaten manufacturing industry is the demand side
particular domestic demand, right.
That's what the government should do.
And but I'm hopeful, you know, the actions that I've
taken so far, you know, show the government that has
kept the economy and they are very serious turning the
rock about turning around.
And I do expect a lot more past actions to
come on stream, you know, on traditional monetary fiscal, but
importantly on the structure and the reform side.
You know, China need to convince its own consumers, middle
class consumers, convince its own privacy to entrepreneurs and of
course, you know, international investors, you know, multinational companies.
China remains committed to a free multi economy anything otherwise
backtracking David him from that goal post.
You know China want to be a Euro style dynamic
vibrant entrepreneurial Fremont economy Anything that diverts from that I
think it's in China will find it very hard, you
know to turn around since fundamental yeah, yeah.
So you've written a lot about this point about consumption
that Fred mentions.
So a very keen observer Council on Foreign Relations about,
you know, China and you've written about what you call
the kind of doom loop between the, the kind of
underconsumption and overcapacity in China.
Can you elaborate a little bit on what you mean
by that and where you see that doom loop headed?
And first of all, I want to declare, yes, there
I did talk about the doom loop and the market
did pick up on that.
But that is by no intention saying that this is
going to definitely going to head towards that direction.
But there is a risk of doom loop starting with
the plan oriented political economic system.
And if you look at China's five year plans, every
five year plan starting from the 9th 1 to the
14th one.
Since over the past four decades, it there is always
a section talking about how much market share by which
year China wanted to achieve and in terms of specific
sectors.
In other word, over the past four decades when Deng
Xiaoping started to introduce market system into the Chinese market,
it had a vision in terms of building up China's
strategic competitive manufacturing base.
And the system has just perfected itself over the past
four decades.
And without a emphasis or a specific attention to boosting
consumer market.
You know this system at this specific moment is going
to be especially going back to Fred point in terms
of asking private consumers to spend more, that is the
equivalent to ask the system to do exactly the opposite
of what it is supposed to do.
So it is going to be difficult.
And then at the local governmental level, you have this
campaign style growth, meaning everybody wanted to make sure that
I am redoing my share to reach the target to
reach the performance.
Therefore, you always end up with overshooting.
And then obviously at the company level, across board you
end up having this fierce market competition.
Domestically speaking, profit margin is so thin that companies, CEO's,
executives, they have the incentive regardless of Beijing's support or
not.
Companies have the incentive to go abroad, to sell overseas.
Obviously Beijing's disease is, you know, an opportunity.
You end up having Beijing's support.
So right now China is at a very interesting point
in the sense that you have a lot of existing
investment, you build up a lot of a lot of
strategic benefit manufacturing base and a lot of this so-called
overcapacity aspect.
They wanted to move overseas.
Whereas the newly strategic sectors are also booming now it's
a race in terms of the relative speed, right?
If the domestic newer emerging sector, they can grow faster
than the older or the OR sort of outdated or
overcapacity sector can move, move overseas.
So this can sort of like escape the doom loop,
You know, one of the premier investment bankers in the
world now based in New York for JP Morgan.
You talk to corporates all the time.
A lot of big multinationals, many of them, you know,
regulars on our Fortune 500 list, have heavy exposure to.
Trying to give us a quick overview as to what
those big corporate corporates are thinking now about this different
environment in the Chinese market.
That's very changed from what we saw in terms of,
you know, pre COVID, absolutely.
So Fortune 500 companies by and large all have exposure
to China.
Some have exposure in terms of revenue and profit generation,
others have exposure in terms of supply chains.
So in terms of revenue generation, some sectors are more
exposed to China than others.
So for example, the semiconductor industry, industrial companies, consumer companies
are very exposed to China.
Some of the companies generate anywhere between 10 to up
to 50% of revenue from China.
And then on the supply chain side, given for the
past several decades, China has emerged as the world's manufacturing
powerhouse.
Many of the companies still have substantial amount of supply
chain in China, not just final assembly, but also components.
So for example, in the Pharmaceutical industry, China still produces
a lot of the active ingredients for antibiotics.
Consumer electronics, roughly 50% of consumer electronic products in the
US are actually linked to China.
So when multinational companies look at the changing geopolitical landscape,
they still want to do business with China, they want
to stay in China, but they want to de risk
their exposure in terms of revenue but also in terms
of supply chains.
So when it comes to diversification, I want to make
the distinction between de risking and decoupling.
De risking is much more nuanced.
Decoupling basically means you're severing economic and business ties, which
is not feasible in this environment.
Now, how do multinational companies do risk their exposure #1
if they have too much revenue coming from China, they
should think about investing in emerging markets in the US
and allied countries a lot more so that they can
reduce their over exposure to the China market.
And in terms of supply chains, quite a few multinational
companies, not just in the US but also in Europe
are pursuing what's called a China plus one strategy.
They keep their supply chain in China, but they also
diversify the supply chain to countries like Mexico, like India,
Southeast Asia, which have been beneficiaries of supply chain movements.
Also, if you think about de risking, some of the
multinational companies are thinking about pursuing more of a China
for China strategy.
I'm referring to companies in the consumer sector.
So if you are an apparel company, you want to
design products in China which have more relevance for the
local Chinese consumer.
Therefore you employ local designers, you produce locally, you sometimes
perhaps even introduce Chinese cultural motifs into the designs And
this types of China for China products resonate much better
with the Chinese consumer.
Can I ask you just a quick question on that
because you know, you raise the question of sort of
localization and often the secret to successful localization is having
the right partner in China.
And what we've seen historically with a lot of multinationals
is that they've been forced to take a multi national
or a local joint venture partner.
They've hated it and they've spent their, you know, decades
lobbying to be released from this tie up with the
local partnership.
Do you now see from a kind of an M
and a standpoint that that JV alliances are back in
fashion?
It's ebbs and flows.
In the initial stages of China opening to the world,
multinational companies sometimes had to partner with a local company.
In the automotive industry, everyone had 5050 JV's even.
It worked out so well though, right?
But but now it's changed because for some time multinational
companies preferred to have wholly owned entities in China, which
they could absolutely control.
These days, many multinational companies are choosing to have a
local partner, private equity funds or local parties that have
good connectivity with a local community with a Chinese consumer.
So we're advising some of our clients to de risk
by actually perhaps selling a portion of the China business
to a local joint venture partner who can not only
make the multinational company much better connected to the China
market, but also so this is a form of de
risking.
So joint ventures, as you said, Clay became unpopular, but
I think in this new geopolitical environment, they've become more
of, they've become one Ave.
for multinational companies to de risk their exposure to the
China market.
Fred, I want to come back to you and ask
about the impact of tariffs as an economist.
If you look at this pledge by president-elect Trump, 60%
across the board tariffs on on all Chinese products, not
just selected sectors.
How much will that hurt the already kind of struggling
Chinese economy?
And do you anticipate that if Trump goes through with
that all 60% across the board, how will China retaliate?
Well, so this is a clearly risk looming very large
on the horizon.
Why?
It's really given the domestic challenges, you know, Chinese economy
facing.
But the tariff, you know, maybe I'm a, you know,
non NATO English speaker.
To me, you know, it sounds like a very ugly
word, but I think it's a beautiful world.
Beautiful world.
That's kind of true.
My limited knowledge of English language, you know, generally, if
you look at the history, right, tariffs have always do
more harm than good, right, In this country in the
1920s, thirties, the Hardy, smooth tariff act really, you know,
plunged the US and the world economy into the abyss
of, you know, depression, right?
And actually ultimately, I would argue, paved the way for
the rise of Nazism and, you know, worldwide.
So, you know, it could be very dangerous.
I understand the sentiments why there's a lot of grievance
against China and blah, blah, blah.
But I think, you know, given the stake, how high
I hope like what the Gary Cohn it, you know,
earlier, maybe she only go to, you know, discussion, but
you know, tariff 60%, you know, that's very steep.
That's like biomagic, you know, 2X above the, you know,
hardly smooth, you know, average tariff rate back in the
1920s, thirties.
And we're talking about the two largest economy in the
world while engaging in this like a very steep tariff.
And if China, you know, obviously this is very bad,
but the China's responses also matter if China choose to
retire, it did in the first trade war in the
first Trump division just lose, lose and then in a
global ramification.
So I hope this time, no matter what you know,
President Trump elect is going to do why I just
find it harder to predict his policy actions.
But if if to do to follow through his campaign
pledge.
If I, I would urge the Chinese, you know, stay
cool not to do, you know, if someone should either
left foot, you should not bite, retaliate to your own
right foot.
So look, Zoe, I want to ask quickly.
There are some people that make the argument that, in
fact, this time around is different from from the first
Trump administration in that China is much less dependent on
exports to the United States.
It's actually reduced the percentage of its exports that go
to the United States and has been fairly successful over
the last eight years in diversifying into exporting to other
economies.
Now, some of that is probably because it's being routed
through Mexico or, you know, on its way to the
US.
But do you think that China can sort of shrug
this off, diversify, export to other economies, you know, Southeast
Asia, India, the Middle East, That's where and and just
be fine.
There's also this argument that in fact, Trump might be
doing China a favor by forcing it to be learn
to become more self reliant and then it won't really
be dependent on the US at all.
I do think that China has been trying a lot
to do self-sufficiency regardless Trump or not, right?
Starting from Hu Jintao era, the idea of self-sufficiency, self-reliance
has always been there.
And given that China is now about 30% of global
manufacturing and the last time the United States was about
30% of global manufacturing was in their emerge was in
the aftermath.
Of World War 2 so from that point of view,
China cannot sufficiently or just by absolute measures to diversify
away from the United States and give for a lot
of the reasons in terms of de risking, as Jim
mentioned earlier, it's really about finding the tariff mitigation countries
from Mexico to Vietnam to to Morocco trying to figure
out how to bypass those areas.
So from that point of view, I really don't think
China can directly export the to the United States or
for that matter, that number is going to continue to,
if not decline, it is going to stagnate.
And by the way, Trump is very much focusing on
bilateral, bilateral surplus, trade surplus.
And but you know, during his first term, a trade
surplus with the United States, with China actually went up.
So I do think that the 60% tariff is going
to be a his negotiating bargain.
And the the executive branch, he does have the power
to unilaterally say the number is going to be 60%.
In other words, the risk is there.
But to what it really begs to the it's really
takes President Xi Jinping, his own hopefully his own diplomatic
and the statesmanship trying to walk back and de escalate.
I think China itself has been trying to de risk
its own economy for the past several years.
So if you look at the statistics, China's exports to
the US as a share of China's total exports has
been going down because Trump first imposed the tariffs in
his first term.
So the Chinese economy has been adjusting by increasing exports
to the rest of the world, especially the Global South,
and reducing its exports to the US And in the
meantime, the Chinese government has been trying to really spur
domestic consumption because, of course, as we said, there's a
very large manufacturing base in China, but consumption is still
lacking.
So they have been introducing proactive measures to spur domestic
consumption to absorb some of the capacity in China.
And supply chains are becoming, as we said, very fragmented.
Inflation would go up in the US if tariffs go
up.
That's natural.
So that's why everyone, all the multinational companies we speak
with are really building more redundancy into their supply chains.
They want to, you know, have the Americas, the Mexico,
Brazil serving the US market.
They want to have China for China and then maybe
Turkey, Poland, Hungary serving the European Union.
So we are definitely seeing supply chain diversification for the
past several years and perhaps it's accelerating your be curious
to hear your perspective on that.
I'm particularly interested, We've just got a few minutes here
in two questions.
Electric vehicles where China has massive overcapacity, but really is
designing amazing cars that even if you slap 100% tariffs
on them are actually very competitive.
And if you have the lower tariffs that the Europeans
have, they're still an even greater threat in the European
market.
Now, where do you see that going?
And then maybe very quickly a prediction.
What happens to TikTok?
The deadline is right after the inaugural.
Does it, does the US pull the plug or not?
Yeah.
Well, on car industry, the global car industry based in
China, ask the question, should I stay or should I
go?
And we see companies leaving the Koreans, the Japanese scale
back also for it as more or less left.
It's been very dramatic in the last couple years.
The German companies decide to hang in there and they
want to actually unlearn how to build cars and try
to establish a learning curve with Chinese partners to build
mobile phones on wheels.
And and so that there is this real shift and
that's why these billions go into the Chinese economy from
these companies, including chemicals, in order to actually catch up.
We're two years behind on body.
We're six years behind on digital.
And that's why Volkswagen doesn't have a joint venture with
X Bank.
They actually asked them to design the body with them
in order to speed up.
It's all about trying to be still competitive not only
in China, but also in the global S because even
if the US and Europe are closing down, Europe will
not close down.
But still we have the global market where the Chinese
products will eventually wipe out our cars.
So I would say the, the the learning is really
staying at the what I call the China fitness center
on EV in order to stay relevant for the game
because Chinese cars are incredible.
And last point on TikTok, actually, I don't know.
I mean, you see the Trump saying, you know, TikTok
should remain and at the same time, the the by
administration actually wants to shut it down.
I have no clue.
I just know that my kids use it too much.
Anyone else have any guesses on on TikTok?
If I can chime in very quickly, I do think
they a factor that has been overlooked here by politicians
is that small businesses actually benefit a lot from from
TikTok.
Well, it'll be interesting to see.
Jing, very quickly I want to talk to you about
investment flows because that's the other thing that's on the
agenda right now, not just imposing tariffs, but looking at
passive investment that, you know, venture capital funds, that sort
of thing going into China.
Is that something that you think is at great risk
in the administration?
Well, there are lots of private equity venture capital funds
that are still active in China, but they have also
changed their strategies.
Previously they were investing in the high growth Chinese Internet
platform companies, but now they want to partner with multinational
companies in China because of their local expertise.
So I think in this very dynamic era, companies and
funds have to remain agile.
Many of the funds, including the one that Fred runs,
they are really partnering very closely with multinational companies.
We see some potential multinational carve outs.
They're not exiting, they're just selling a proportion of their
business to a local joint venture partner who can help
them guide the future face of growth.
And in addition, I think a lot of the funds
are contemplating how to find exits.
Exits are harder, the marketplace is more challenging.
So they may have to have longer term capital rather
than a limited, you know, five to seven-year time horizon.
So longer term investments I think would be beneficial, but
also for multinational companies, long term strategy rather than a
short term focus is also advisable, right.
That has to be our last word.
Thank you very much panel for your insights.