Fan Gang warns on China hypergrowth slowdown’s aftermath

Fan Gang warns on China hypergrowth slowdown’s aftermath (TBL) – Fan Gang is the man to whom so many of the Earth’s leading figures turn – from Barack Obama to Henry Kissinger, Angela Merkel to Uwe Corsepius, to ask for advice about how to deal with this China that no one understands. He’s 61 years old but looks 45. He has a daughter (only one, because when he was young Chinese couples could not have more than one child) and an interesting job: planning the China of tomorrow. He is an economist who studied in Beijing and at Harvard and is currently the director of the National Chinese Institute for Economic Reform. We’ve had the pleasure to spend an hour of talk with him. Here is what we have talked about.

We all are scared about China

Fan Gang on Western welfareChina. Everybody is talking about it, because everybody knows that in one way or another it is going to change the world. But we almost never really know what were talking about, because – let’s face it – we’ve never fully understood the Chinese.

And yet we should. Not only because they are crowding our cities and we are buying their products (even when we are not aware of it). But also because China, for the first time in thousands of years of history, has stopped seeing itself as the “center of the universe” and as consciously decided to take part in the international community.

Now, if it were question of just any country we could also choose to ignore it and go on our merry way. But not in this case. Fan Gang’s China is an enormous country of nearly 1 billion and 400 million people, who after having lost two world wars and having scraped by for four decades of communist rule cannot wait to take what they feel is theirs by right: a respectable standard of living, comparable to that of Westerners. This frightens us, because China has enormous amount of money, because it could soon become a military superpower, because it’s planning its growth with a strategic vision worthy of the legendary general Sun Tzu, and because, unlike what happens in the West, thanks to the its single political party it can make its moves not thinking of next year’s elections, but of the geopolitical chessboard of the decades to come.

And so, to get a better idea of what’s happening, we went to Beijing to spend an hour with Fan Gang.

Our exclusive interview with Fan Gang

Question: China scares us. Because it’s rich and powerful, but above all, Dr Fan Gang, because we don’t understand you. Could you explain how you are different from us, if indeed you are?

Fan Gang: People are people, in China like everywhere else. They want to become wealthy, to buy house to raise their children in and a car to get around with. What makes us different is the state of economic development that we are going through. While that are some very rich people who live in China, our per capita GDP is still around 4 thousand dollars a year (the per capita GDP of a European is 10 times higher, Ed.). And the inequalities are still deep, if you consider that for 7 Chinese people out of 10 the per capita GDP is two thousand dollars.

Today we are experiencing that time of economic and industrial flourishing that you Europeans went through a long time ago and this makes us more ambitious and determined to enrich ourselves as quickly as possible.

Moreover, everything that you’re seeing is in fact just the first generation of something that is still being born. This is the first generation of entrepreneurs, who speculate and run risks because they lack wisdom and experience. But it’s also the first generation of politicians that have had to deal with a market economy that they are still trying to understand. All this has never happened before, not even in the Middle Ages. To you Westerners Chinese politicians may seem too cautious. But that’s only because they recognize their own inexperience. In an economy dominated by credit risks and derivatives, it’s easy to make mistakes. And we don’t want to make mistakes. As far as Chinese consumers go, they too are the first generation. They want everything and they want it now.

Europe is a mature society. You’ve got money, development and welfare system that works, even if it has some problems at the moment. China does not have these privileges yet. Those living in big cities enjoy some social services, but this is not the case for those living and working in the country, which in China means 80 percent of the population.

Then there’s the matter of innovation. You tell us that China’s is an economy that copies but does not innovate. But how can such young entrepreneurial system innovate? What alternatives do we have compared with Western economies, which have 200 years of industrial development behind them? We’re copying and producing at low costs in order to get into the market. And in the meantime we’re doing our best to become great.

Why China did choose to leave behind his traditional isolation policy?

Question: For two thousand years China considered itself the center of the universe and made no real attempt to open itself to the rest of the world. Why has it changed its mind now? What’s changed?

Fan Gang: China never had any need to expand: it was a very big country and this allowed it to develop internally, in harmony. Then the great wars and defeats came, which left us with a new point of view.

All of a sudden we were smaller. In the Seventies we were so far behind Japan and the West that the gap seemed insuperable. And since in a market economy protectionism does not work over the long term, China began to grow. Believe me, there was no precise decision behind it, but rather a collective and unconscious choice. A choice whose benefits we are now beginning to enjoy thanks to the speed-over effect.

Question: Speed over?

Fan Gang: It is a fundamental mechanism for developing economies. Everything was lacking in China: knowledge, technology, adequate management. But by opening itself up to the market it had the opportunity to learn. Since our labor costs were low, your companies opened their factories here, but by doing so they also taught us to open our own. Since we were big market you built your commercial branches here, but by insisting on a joint venture model we entered into your boards of directors. By doing business with you we studied the way you negotiate. By sending our children to study in your universities we acquired your technology. And now foreign capital has only a small share in the Chinese economy: we’ve learned to get by on our own. And thanks to the speed-over effect we managed it in just three decades.

Question: If your goal was to reassure us, Dr Fan Gang, allow me to inform you that you have not succeeded. Because if today’s China is nothing but the beginning of something, there isn’t much for a European to be at ease about, wouldn’t you say?

Fan Gang: In spite of the growth that all can see, it will take another 30 to 50 years for China to become a global power. It will take us 15 just to reach your levels of per capita GDP, provided we are able to continue growing at at least 6-7 percent a year, which is by no means certain. And it is the per capita GDP that gives an exact measure of a countries development, because it shows the money produced not by the country overall, but by each individual citizen.

Question: You continue to refer to the gross domestic product as an indicator of citizens’ well-being. Yet a growing number of western economists and thinkers affirm that the values that really count cannot be measured by the GDP.

Fan Gang: And I can’t but agree: not everything can be bought, but nonetheless many things do have to be paid for. In order to have education and better living standards one needs money, especially at the beginning. And money is what the most Chinese people are trying to produce today: we are trying to increase our quality of life in order to be able to afford the things you Westerners have.

Question: In Europe people often remark that if every person in China had an automobile, the planet’s resources would be exhausted in a matter of days. That may be something of an exaggeration, but there’s no doubt that China is on its way to consuming many more resources than what it consumes today. Do you believe this phenomenon will be a problem for the ecosystem?

Fan Gang: It’s not only us: all the emerging countries are going through the same thing.

Yes, but there are nearly a billion and half of you…

Fan Gang: Believe me: it is very difficult for a public official to ask his or her people not to do something they want to do because they must save the planet. “Don’t go on vacation!”, “Don’t drive a car!”. Even more so if other people, in Europe and in the United States, do it every day without worrying about the consequences. So, to be clear: we Chinese did not take part in the great rush of consumption that you Westerners indulged in over the last decades, and so we have the right to do so now. We don’t intend to consume more than you did in the past. It’s simply our turn now.

China growth comes at a price for the Planet

Question: Ok. But, dr. Fan Gang, don’t you believe that in order to maintain equilibrium, if someone consumes more someone else will have to pay the price for if by consuming less?

Fan Gang: We still don’t know whether the planet’s resources will be sufficient or not to keep up global growth. But the Chinese have the inalienable right to consume at least as much as Westerners. That being said, we can talk all we want about resources. If there are not enough their price will increase and everyone will have to make sacrifices. But I am an optimist and I believe that humanity will be able to find adequate solutions. If resources begin to cost too much we’ll invest more money in research and find a way to use them better, or exploit new ones, such as the sun and the wind, or perhaps something completely new that we haven’t even imagined yet. Do we want to seek out a new model for development together? We’re ready and willing! But don’t come around asking us to reduce our consumption for your ecological concerns, because the answer will be no.

Question: A bit of an intransigent position…

Fan Gang: Do you know what the paradox is? Westerners continue to ask the Chinese to consume more, because they want to sell their products in this enormous market. But at the same time they ask us to reduce our level of consumption to protect the environment. Does that not seem contradictory to you?

Question: Well when you put it that way…

The solution to this paradox is the following: continue to grow, but use technology and innovation as the keys to becoming more efficient.

The Chinatown’s worldwide China

Fan Gang on today's ChinaQuestion: Over the past decades there has been an immense migratory influx of Chinese people into other countries. What role do the inhabitants of the world’s many Chinatowns play in today’s China?

Fan Gang: Without a doubt we consider them to be an integral part of the Chinese economy. The majority of them, even in Italy, have very strong links with their native country. The take orders from Chinese companies, they sell in foreign countries and send part of the revenues to China.

Question: And yet they are the only community that, at least in Italy, resists every form of integration. So this economic exchange does not generate real relations, but merely economic value. Like a bridge that doesn’t lead anywhere…

Fan Gang: If you think about it, the international community here in Beijing is not all that different. Foreigners are here for business reasons and they mostly keep to themselves. There are exceptions, but they’re quite rare. Moreover, while in the West the Chinese begin to integrate themselves socially starting from the second or third generation, here in China you do not do so, because you almost always return home after concluding the business that brought you here.

Question: Now really, are you saying that there are no Westerners that fall in love and marry a Chinese person, or vice versa?

Fan Gang: Rarely. One of my brothers married an English woman here in China. But they are isolated cases. The reason why is that China is still a developing country: few people imagine their futures in a country that is not yet completely developed. It’s not only a Chinese phenomenon, but also one that you see in every community living in a foreign country.

Question: To change the topic, how are Chinese people, at the individual level, reacting to the enormous changes that China is going through? After decades of stasis, today they can travel, shop, afford things that couldn’t even dream of yesterday. How are experiencing this situation? Are they happy, excited, proud, scared? Do they want to leave or do they want to stay and participate in this new era of China? In other words, what do the Chinese dream of?

Fan Gang: We each dream what we can allow ourselves to dream. Someone living on the streets doesn’t dream of founding a company in America, but of buying a home for themselves and their family. But when they are able to create a small business, then they start to dream of making it into a big one. And when they do, then they start to dream of moving it to Silicon Valley. The Chinese have a very pragmatic nature. They always have. We move forward in small steps and so do our dreams.

Question: Is the same true for young people as well?

Fan Gang: Chinese youth today, those that live in big cities, take things for granted that for my generation were just dreams, and so today they are quite similar to young people in Europe or America. They take for granted being able to take an airplane or study in a foreign university and do not consider themselves inferior to anyone. They speak English and are ready to take full part in the international community. On the other hand, they have no sense of history; they don’t know what China was like before their time.

But in the country, outside of the big cities, the only thing young people want is money. They want to fight to obtain what for the moment only a small percentage of their peers has obtained. Young Chinese people in cities can follow their inclinations, whether it is to become head of a company, or a journalist, a musician or a painter. But those in the countryside want money above all else, without which they can’t even start to dream those dreams.

Question: Western politicians envy you, for since there are not changes in power you have the opportunity of planning your future decades in advance. We have more difficulty doing so: European governments change often change too quickly to be able to realize ambitious, long-term projects. Is it really like this?

Fan Gang: What Chines politicians have is vision. They are by tradition inclined to look at the future in a long-term perspective. It was thus centuries ago and it is so still today. Then there’s the matter of the government’s stability. Next year in China we will have a new premier. But the officials that arrive, and who will remain in the government for the next ten years, will have the precise task of continuing what their predecessors have done…

Question: We are in agreement, but – forgive the interruption – this happens because, to the contrary of what happens in western democracies, here in China there is no change in political power. You have a single party, which makes everything easier from this point of view, wouldn’t you agree?

Fan Gang: Perhaps you are overlooking the fact that the new government will however be elected.

Question: By the people?

Fan Gang: No. By the high spheres of the party.

Fan Gang: “The next few years will be very painful for the West”

Question: There’s a question I’d like to put to you, even though it might seem banal. Today we all work more, we have better technology compared to the past and we probably have more know-how than previous generations. So why do we have so many economic difficulties? In other words: why is the world going through this serious economic crisis?

Fan Gang: In economics we explain it with the fluctuation curve. But beyond the technical aspect the explanation is simple: in the decades leading up to the crisis, particularly in the Eighties and Nineties, we spent more than we could afford to. We consumed too much. And the politicians at the time made promises that their successors were not be able to keep: fewer working hours, earlier retirement, a welfare state for everybody…

Question: So, they lied to us?

Fan Gang: Essentially, yes. And this gave way to the speculative bubble. We trusted in these promises and we spent more than we had. The result is the today’s crisis and the sacrifices we must make to recover stability.

Question: In other words, mr. Fan Gang: you think that over the next years Europeans will have to give up many of the privileges that they have acquired?

Fan Gang: Undoubtedly they will, yes. You won’t have growth for a while and you may enter into a recession period. But Europe is hardly alone in this. There were many who wasted resources in the past. Think of Dubai for example, with all those glittering skyscrapers that no one can afford to live in anymore. Now those who built them will have to be patient and wait for the economy to return to growth so that someone will once again have the money to buy them.

Question: How long will we have to wait? How long will this era of sacrifice last?

Fan Gang: There are those that say at least 20 years. As for myself, as I said before, I’m an optimist and think that we’ll manage to get out of it in 5 years, or perhaps a bit longer.

Question: China is buying companies, dr. Fan Gang. And also infrastructures and good all over the world. Why?

Fan Gang: I could answer by saying that this wouldn’t be happening if you Westerners hadn’t lost your edge (Fan smiles, Ed.). In all seriousness however, you should know that 98 percent of the planet’s resources are still controlled by Western governments or businesses. Even in Saudi Arabia. So what’s left for us? To look for the resources we need in the places where you haven’t already bought everything.

Question: In talking about resources we cannot help but touch on the fact that many wars in the past have been fought over the control of resources. Over the past decades the world has for the most part been in equilibrium, because there’s been just one real superpower, the United States. But if, as it seems may happen sooner or later, China becomes the world’s second superpower, will we still be able to keep the peace?

Fan Gang: As far as I can see, China, at least the medium term, does not have any interest in conflict, because from the military point of view it is decades behind the United States, but also because a world war would not be to anyone’s advantage. What’s left for us? Trade and economy. If everything goes normally, if China continues to grow, future conflicts will be fought on the basis of economic competition. China will become a superpower, but it will continue to use the tools that are most congenial to it: peaceful ones. If however China’s growth should stop, it will become difficult for our government to foster people’s hopes for realizing their dreams and thus war could become an option. Do want some advice? Don’t worry about China growing. Worry about the possibility that it might stop growing.