What China’s growth and development means for a multipolar world

In a fireside chat at the 15th edition of the Business China FutureChina Global Forum on 18 October, Senior Minister Lee Hsien Loong discussed a wide range of issues with moderator Lee Huay Leng, the editor-in-chief of Singapore Press Holdings’ Chinese Media Group.

These spanned the Suzhou Industrial Project (the first government-to-government project between Singapore and China), the impact that China has made globally as it changes, and the presence of Chinese companies in the region and Singapore. Read an edited excerpt of their discussion below.
 

SM Lee: The fundamental issue is that China has changed so much from what it was, to what it is today.

First, the size. When China started its “改革开放” (Open-Door Policy) in 1978 (第十一届三中全会), it was a very small part of the world economy and a negligible part of international trade. Today, it is 20% of the world economy and 20% of global trade. So anything which China does, whether it is good or it is bad, the impact on other countries is enormous. The situation has changed.

Secondly, China has developed and become much more advanced. In the earlier phase, it was growing, it was exporting. But it was making things which other countries wanted, needed and did not make themselves. You make clothing, you make belts, buttons, you make lower-end electronics products, assemble goods, things which other countries were happy to say, “Well, it is not economic for me to do. China can do”. But now China has moved up.

All those products which are labour intensive and which it used to make, are migrating. They are going to Vietnam, they are going to Bangladesh, other third world countries. And China is moving up. China is making EVs. You are making portable photovoltaic panels. You have got your pharmaceutical industries. You are in industries which are competing with similar advanced industries in the developed economies.

It is a more competitive relationship and therefore China's growth in these markets is not just benefiting the consumers, but also impacting the producers in other countries. And that is difficult. You have to accommodate somehow, but it is difficult.

Thirdly, because China has grown and developed so much, its interests around the world have also grown and developed. And not just in scale, but also in the things which you are concerned with. You have strategic interests, you have security interests, you have foreign policy interests in very faraway parts of the world. The Belt and Road Initiative includes countries in South America. And in Africa, China is very active. China's interface with the rest of the world is multifaceted. And then the question comes, “Who is number one? Who is number two? How does number one and number two work together? Can you work together?”

I think these are objective changes. There is no doubt that for the world, we are much better off with China like it is today, than with China as it was 30 or 40 years ago or 50 years ago. But it means that there has to be an adjustment. It is not a matter of right and wrong. But it is in China's interest, and it is in the world's interest that this adjustment has to be made. What is the adjustment? It is to acknowledge that the situation has changed, that China's heft, its influence, its impact on the world is on a different scale. And you have to make accommodations and adjustments to the rules, which were set up at a time when China was much smaller.

If you are a small economy and your exports actually do not threaten any of my industries, I am prepared to cut you a lot of slack. You can subsidise them, you can protect your own market. You can have all sorts of different privileges, which the more developed economies have decided not to have amongst themselves.

But when you are now not so underdeveloped, and when you are huge, and when your exports can be maybe 80% of the global manufacturing of photovoltaic panels, for example, then those concessions are no longer politically tenable. And it has to be worked out. It has to be re-negotiated so that you can have a good basis to do those things. I think that is very hard. That is one thing China has to do.

On the other side, on the part of the other countries in the world, you have to get used to the fact that there is going to be a very big China in this world, a very powerful and developed China in this world, a China which has advanced technologies, which is going to be world-class in many areas and world-leading in some.

And we have to have some way to induct them into the global system and to accommodate their legitimate concerns and interests. And if you do not do that, and you say, “No, I do not want China to be strong. I want it to remain always number two or better still, number 2.5”, I think that is going to head for a lot of mutual distrust and difficulties.

But it is a very difficult adjustment to make, because if you are at 2.5, you wish to become 2. And when you reach 2, you may wish to become 1.5. And so how to have that balance and wisdom to maintain a cooperative relationship which will benefit both sides? I think that takes statesmanship of a very high order on the part of the major powers.
 

Q: The Americans and the Europeans are saying that China's industrial subsidies have led to over-capacity, over-investment. Do you think that over-capacity is a real issue now?

SM Lee: I think in some industries, over-capacity is an issue. For example, steel. There is a worldwide glut of steel, and it happens every so many years. It is the nature of the steel market, its demand waxes and wanes and is never completely in balance. But there are also other industries, like EVs or solar panels, where China has very intense competition and very high production.

Solar panels, I mentioned, they are 80% of the global market, and the capacity to produce, actually, is more than 100% of the demand of the whole world. So, I think that is over-capacity. On EVs, if we talk about “内卷”, I think EVs are a prime example, because there are about 150 companies making EVs in China. And China is a big market, but you do not need 150 different brands of EVs. So, in specific sectors, yes, I think there is over-capacity, and some of that will have come from state support and encouragement and financing.

But if you take it overall, look at the overall manufacturing sector in China, or the overall economy in China, I do not believe there is over-capacity. And IMF has studied this – they published a report recently. If you look at manufacturing as a whole, the capacity utilisation is respectable – same as in other countries. So, there is no overall over-capacity. But that does not mean there is no problem.

So, what is the problem? The problem is China is running a considerable export surplus, balance of payments. Exports exceeding imports, trade surplus. And therefore it is having an impact on other economies and manufacturers elsewhere. And the export surplus is about 2% of China's GDP, which means about half a per cent of the world GDP, and that is not small.

So, what is the cause of that export surplus? It is really macroeconomics. It comes about because China has a very high savings rate, and relatively low consumption demand from within China. And if you are saving such a lot, you either have to invest all of it in China or you have to export some of it to the rest of the world. And it is not possible at China's present state of development to invest all that 40% of GDP within China, which is its savings rate. A lot of that is invested in building and construction. But the building industry, unfortunately, I think, has gone too far, and that is a problem, and that has to cut back.

So how do you adjust? Either you boost consumption domestically, or it will be exported, and it will show up as a balance of payments surplus, which means a deficit for the other countries. America has the opposite problem, by the way. America saves too little, spends too much, and therefore has a balance of payments deficit, which is 3% of their GDP. That is the other side of the problem.

On the Chinese side, the solution over time has to be: to increase the domestic consumption and bring the economy into a better external balance. It is not so easy to do because it is not just a matter of households spending more. But it is about restructuring the economy so that the household earnings can rise – particularly for those who are not already very well off, and who will then spend the money. And the households must have the confidence to go out and to spend it; whether it is on travel, whether it is on food, whether it is on clothing, luxuries. They tell me that this year, during the golden weeks, the travel demand was less than in previous years. So that is a sign, but it goes beyond that. There has to be economic restructuring.

The Chinese have talked about “国外国内双循环”. That means external circulation – you have trade and economic interdependence with the outside world – but within the country, you also want to have economic circulation and trade and demand created. And that is a slogan from about two years ago, but we have not seen results yet. It is an important problem, because if it is not resolved – for China, never mind the rest of the world – you can end up in a very difficult position where you cannot get the confidence restored, and you cannot get the economy moving again. And that is something which I think China can avoid and should work to avoid.
 

Q: This morning, a lot of discussion has been on China's economy, and the government has recently announced a series of stimulus packages. What is your assessment of China's economy?

SM Lee: I think that the stimulus packages will be helpful in boosting confidence and then perhaps simulating demand to the extent that the money will be spent, and then there will be some multiplier. But I think inherently, at this phase, China's economy will grow slower than it used to. It used to grow 8% to 10% a year, sometimes even more than that. Now, if you can sustain 5% per year for another 10 years, I think you are doing well, and there are fundamental reasons for that.

First of all, you are already more mature. It is not so easy to keep on just transforming yourself.

Secondly, the labour force is not expanding anymore. The total population has peaked, the working age population has also peaked. It has levelled off, probably starting to come down already, slowly. And so, you can no longer just have a natural expansion of the economy.

Thirdly, I think, with the external environment having turned less favourable, there are geostrategic tensions between China and America, even China and Europe. And so that external environment is not as favourable as before. The foreign investments need more encouragement to come into China. The export markets are not as open as they used to be. So that is another factor which influences China – not just the growth, but also the upgrading and transformation.

Fourth, partly in response to this external environment, but also for domestic reasons – I think the Chinese government's priorities have shifted some. In an earlier phase, the slogan was “发展是硬道理” – Economic development is the topmost priority, the hard truth. But now, economic development is very important, but trumping that is national security. And I think equalling that, at least, is domestic political considerations.

In that situation, I think the environment for people to spend, for companies to start up, or for big companies to build new businesses, I think will be more cautious. It is inevitable. The government will give reassurances that they do want the private sector to have an important role. They do want entrepreneurs to have confidence. But the national security considerations are important. The political considerations cannot be ignored. And that has an impact.

So these things, I think, will weigh on the Chinese economy, in addition to the specific economic problems. For example, dealing with a housing overhang and the construction problems; and the financial problems which come from that; the debt.
 

Q: So, should we be pessimistic or optimistic?

SM Lee: Well, I think it is very unwise to write off China. This works in both directions. The Westerners say, “We will do this and the other, and China will stay down.” I tell them they are wrong. They do not fully believe me.

When I go to China, and sometimes, the confidence with which my hosts expound their views cause me to tell them, “You know, the Americans have a lot of problems. You can see all of the problems, but they have a lot of strengths, and sometimes you cannot see all of their strengths. And they are not going to disappear, and they will be there and formidable, I think, for a very long time to come.” And I am not sure whether they fully understand why I am saying this, so I think both sides have this danger of underestimating the other.

But on the Chinese side, there are some reasons which we can be confident that this is a country which is going to be there for a very long time.

First of all, it has already been there 5,000 years. But even the factors which hold it back – for example, the fact that its population and workforce is not growing – are not things which have to bind and paralyse it. The population may not be growing, but you can make better use of the population, the workforce.

China's retirement age is very low – women at 50, men at I think 55. It is going to be adjusted now, the government is shifting it; women going to 55, men going to 60 – but still quite low. Even that adjustment is not easy to make, and it is going to take them I think until about 20 years to achieve. But if you can stay productive longer, if you can stay active longer, if you can make full use of the women “妇女顶半边天” – that is one major source of growth capacity.

Another one is the rural population. China has been urbanising very systematically. Every year, about 1% of the population, 15 million people, have been moving from rural to urban, to the cities. That means, really from the agricultural sector, from farming into the cities, manufacturing, providing services. Maybe they are construction workers, but moving from the traditional economy to the modern economy. But 35% of China's population is still rural. And if you look at the developed countries, their farming population is like 2%, 3% of the population, that is all.

So China's process is not complete yet. You have to work to make it carry on and to make it productive. You have to have jobs for them in the cities. You need to have “户口” for them in the cities. You need to have homes for them in the cities. You need to provide schools for their kids. And you also must have agricultural reform so that it is possible for them to make use of the land which they have been farming. Maybe lease it out to somebody, or sell it to somebody else, consolidate, become bigger scale, more productive, and take that and go into the city and make a new life in the city.

But these are all ways in which China can continue to grow. So that is the first reason I think we should not think that China has peaked.

Secondly, I think in many areas, China is actually world-class. I talked about EVs, I talked about solar panels. Yes, there is over-capacity. Yes, there is state support, and that maybe has given the companies an extra advantage. But in fact, there is a lot of very advanced and very high-quality technology and science in the EVs, in the batteries, in the solar panels. And that is a big reason why the costs have come down, and why the Chinese products are so competitive. And so it shows the Chinese can do it.

And furthermore, which is my last reason, I think the Chinese people are quite determined. They have seen what they can do. They have seen what other countries can do, and in some areas, they know they need to catch up. And when the Chinese say 站起来, 富起来 and 强起来, I think that determination is there, and it will get them to move forward and to see through any difficulties there may be.

So I have reasons for confidence, and I am hopeful that the reasons for confidence will outweigh the signals of concern.
 

Q: Coming back to Southeast Asia, a lot of the Chinese companies are now coming to this region – 卷出来. How would it impact us?

SM Lee: Well, we will notice them. China is huge. Its impact on Southeast Asia is very large. When their companies come, it means that they provide good products, good services, fierce competition for our companies, for our industries, for our economies. In fact, we send our trade unionists and trade union leaders to go to China, to visit Shenzhen, to visit Yangshan, to visit your high-tech centres, to visit, to see the factory lines – Fosun – to understand the drive, the hunger, the transformation which is taking place and how advanced China is already. And they come back and they understand why we have to work hard, and work harder.

I think the answer should be: you have to work harder. It will be an impetus for us to upgrade, transform our companies, train our people, retrain our people, be competitive and meet the best in the world. And I think we can do that. Yesterday or today’s [Lianhe] Zaobao had a quote from Christine Lagarde, who had the same sentiment: exhorting the Europeans to do that in the face of external uncertainties and fierce competition, by which I am sure she meant competition from China. And I think it is easier for us to do it in Singapore and in Southeast Asia, than it is for Europe to do that.
 

Q: So now, given that there are many Chinese companies in Singapore and some people are labelling Singapore as a “Singapore-washing” place, is the government concerned about this?

SM Lee: Well, we do not usually use labels like that. We have companies in Singapore from all over the world. We welcome reputable companies to come here and to make use of our business environment, our pro-business climate, our infrastructure, our networks, and to contribute to Singapore's prosperity and link us to all parts of the world.

So if the Chinese come, they are good companies – they create jobs, they pay well, they bring technology, they bring markets – I say “come”. The Americans come, I say the same; the British come, I say the same; the Japanese come, they are all here. But nobody believes that just because the company is in Singapore, that means it is a Singapore-owned company. We have got Dyson here. We have got General Electric here. We have got Citibank here. We have got all the major Japanese multinationals here. Everybody knows that they are Japanese, American, British companies.

So when TikTok is in Singapore, everybody knows that Tiktok’s parent is Bytedance and Tiktok’s origins are in China. The CEO may be a Singaporean, but Singaporeans work for companies belonging to all kinds of shareholders. So on that basis, you are welcomed in Singapore. But of course, we would like to know where you come from and what your antecedents are. Because if it turns out that you are not the one we think you are, we also would like to make a few more inquiries.

Watch the video of the dialogue and read the full transcript here.