The long game: how to understand China and how it sees its role in the world

Markus Herrmann Chen, managing director, China Macro Group: If you understand Chinese intentions and where they're going better, you will also see the competitive pressure that will be increasing. It does not mean that this has to translate into conflict, but at least it will mean that everyone will have to raise their game.

Robin Pomeroy, host, Radio Davos: Welcome to Radio Davos, the podcast from the World Economic Forum that looks at the biggest challenges and how we might solve them. This week, as we prepare for the Forum’s annual meeting in China, we ask, what does the West get wrong about China?

Markus Herrmann Chen: It's not just the whole time horizon thinking that will be different in electoral democratic systems, but it's also the question of, what are you actually trying to accomplish as a nation, as a country, as a society?

Robin Pomeroy: This analyst explains why China takes the long view on policy - beyond what would be the electoral cycle in a democracy, to looking decades, or even centuries ahead

Markus Herrmann Chen: On the micro-level, you have five year plans. And then on the meso level, you kind of have, 100 year thinking. And then basically on the macro level, you are by virtue of the political system and the ideology, chosen, you are on a longer term trajectory towards realising communism.

Robin Pomeroy: And if Communist China adopted some of the capitalist thinking that used to be considered ‘Western’, perhaps the West is importing some lessons from China.

Markus Herrmann Chen: I think there was a framing in saying that the West has tried to change China's political economy, but then it was China's political economy that changed the West.

Robin Pomeroy: Subscribe to Radio Davos wherever you get your podcasts, or visit wef.ch/podcasts where you will also find our sister programmes, Meet the Leader and Agenda Dialogues.

I’m Robin Pomeroy at the World Economic Forum, and with this look at China’s economic and geopolitical strategy…

Markus Herrmann Chen: If you are in a socialist market economy, the question is what does socialist mean?

Robin Pomeroy: This is Radio Davos

In about a week’s time, depending on when you listen to this, in the city of Dalian in China, the World Economic Forum will convene what is often known as the ‘Asian Davos’. The Annual Meeting of the New Champions - or AMNC - like the January meeting in Davos, Switzerland, brings together leaders from business, government, civil society and international organizations, as well as entrepreneurs, innovators and academics, to talk about some of the world’s biggest challenges, not least in this case global cooperation and economic growth.

You can follow the action from Dalian on the Forum’s website.

Ahead of that, my colleague John Letzing wanted to talk to a China expert to find out what are the common misunderstandings about that country of 1.4 billion people, which is a huge part of the global economy.

John’s expert is Markus Herrmann Chen, who is Swiss and Chinese, and co-founded the China Macro Group, which advises companies and investors about China.

John started by asking Markus, why many people and organisations outside China fail to really understand it.

Markus Herrmann Chen: I would argue first language barrier. We focus on the primary sources because we think we can better keep track of the different notions that are being used.

Just to give you one example, a very important notion that we're looking at is how China's speaking about self-reliance. But there's a lot of different similar terms like self-sufficiency, for instance, which is just an operational KPI. But if we read an English translation, we would not be sure what was actually used in the original version.

So maybe it's sometimes also just a curiosity that is not strong enough, because some of the official documents are being seen as propaganda, which is maybe a very general term. Even if it is propaganda it should not be discredited in terms of its content. So you just need to take sufficient phenomenological interest, as I would call it.

A third element is just to what extent are you relying on reading as an information source? Public source reading, something you can do everywhere on the planet, when you want to track basically what the Chinese government and the party are thinking and basically what kind of measures they're taking, as opposed to working with quantitative data or speaking to people. I think maybe reading is also undervalued as a methodology.

And then finally, what I think is really crucial, you need to have a lot of conceptual interest and conceptual skills, maybe also because Chinese policy documents are highly conceptual.

If you think about the size of the political entity that is being governed in a centralistic way. So the concepts that you put out at the beginning of basically entering into a policy field or shaping a policy field, it has to be by nature almost philosophical, very, very abstract, that the policymaker can then fill it up and make it more concrete.

So you need to be open in terms of wanting to absorb abstract concepts. I think these may all be barriers to actually using publicly accessible written sources.

John Letzing: That's really interesting. And it almost sounds like you're describing an art critic in a sense, somebody who needs to become so familiar with the nuances of a particular style of art that they can understand it and interpret it for others.

Last year, the Pew Research Center in the US published a study on global perception of China in the US, and it showed relatively negative views of China on things such as, you know, do these countries take the interests of other countries into account and do they contribute to global peace and stability. But in your view, how much of this negative perception reflected in this study and and maybe otherwise maybe just boils down to misunderstanding and misinterpretation?

Markus Herrmann Chen: Well, maybe first of all, I would be surprised if you say it's global perception among countries. So I don't know the exact sample. But I would be surprised if the negative perception is not at least roughly balanced of US and China.

To give one example, a recent survey conducted, in Asean by the ISEAS Institute at the University of Singapore, one of the two Singaporean main universities, it concluded that the perception has shifted in those countries, and now China is being seen as a preferred superpower in that region.

But this is just one example to say that I think globally, and it would be to me surprising if basically there's a global consensus in seeing China more negatively than the US.

Fundamentally, I would be surprised if China is basically performing much worse than the US. I think it's quite clear that China is lacking soft power, especially in the West, of course, partially beyond that, to actually create positive perceptions and narratives in society of third countries, beyond the stakeholders that China's directly cooperating with.

On the question of whether China is taking the interests of other countries into account. I would say China's system is basically conditioned to act on interests and not ideals, increasingly also on stories, but I think, not on ideals. And if countries feel their interests are not taken into account, at least what I see with several countries is the question of whether the countries themselves take their interests sufficiently into account. That's basically how you would forge a cooperation if you are engaging with China, you need to be very clear what your own interest is and why you would engage in on what kind of terms.

John Letzing: Let's talk a bit about specific differences in terms of time frames. You've mentioned something that seems like a pretty crucial difference in terms of the time horizons that are being used officially in China to look ahead and plan versus what is used in places in the West. Can you maybe tell me a little bit about that difference, and maybe a bit about how we might be able to explain it?

Markus Herrmann Chen: I think there's multiple factors at play why China would think in longer time frames.

I think a very simple one would be where China is in terms of its development. So it sees more necessity to actually steer China's development, China's economic reforms, through the so-called middle income trap as one example.

And by virtue of being less developed than OECD economies, and being a latecomer in that sense, it can also learn from other success stories.

So that, taken together, it's very appealing to want to think ahead in larger timeframes.

I think a second very critical enabler of this, of course, is the political system, where you have more centralisation in the political system that enables this kind of planning versus if you have electoral cycles in Western liberal democracies. It's a very different starting position to actually think about long term horizons.

Maybe the last element I would mention is just it's also a practice that has very practically, the five-year planning has been imported from the Soviet Union in 1953, and China has been now using that and has enacted 14 five-year plans in the meantime, which is basically is creating the major rhythm of planning.

But there are also some elements of planning that that basically span beyond a five year horizon are five, 15 years or rise. And then there's also centennial goals, which basically have a much longer time horizon.

John Letzing: So if we could maybe quantify it a little bit in terms of what the differences are, are we saying that for planning purposes in China, it's potentially looking out hundreds of years?

Markus Herrmann Chen: I think there are two examples I can give. First and foremost, in the party preamble, it talks about the two centenary goals. So it immediately legitimises these 100 year planning horizons in wanting to achieve certain milestones in China's development.

The first one was to basically become a moderately prosperous society. And then the second one is to to basically realise the basic socialist modernisation by 2049.

At the same time, a bit more vague, it is still defined in the party preamble that the long term ideal is to realise communism in China. The leadership has been asked about the timeline of this specific, vague, but still goal, of realising communism. And then the answer was evasively saying that it took 2500 years from Confucius, to today, and it will take roughly that same amount of time.

So you could argue that on the micro-level, you have five year plans. And then on the meso level, you kind of have, 100 year thinking. And then basically on the macro level, you are by virtue of the political system and the ideology chosen, you are on a longer term trajectory towards realising communism.

John Letzing: And I suppose if you're sitting in a Western country that revolves around a major election every four years, or even potentially less, that's probably a bit hard to grasp.

Markus Herrmann Chen: I think it's fundamentally different.

I think the differences are the time frame, but I think it's also the purpose. Because from a Chinese perspective, and there are statements that go actually very far in saying that the mission statement of basically all actors, societal actors, economic actors, should all be aligned with the overarching goal of national rejuvenation, where basically China wants to go back to the position that it used to have in in history.

So I would say it's not just the whole time horizon thinking that will be different in electoral democratic systems, but it's also the question of, what are you actually trying to accomplish as a nation, as a country, as a society.

John Letzing: Do you think it's possible that for somebody sitting in the West and watching the growth of these really massive, powerful global corporations coming from China now, and the increases in wealth that have happened in the country, do you think there's a tendency to sort of forget about the political element?

Markus Herrmann Chen: It's not easy to generally answer that, but if I base myself on my interactions with European businesses, I would say there is, ironically, there is both an insufficient awareness of how much politics were important and how much it was a planned economy in China into the 70s and in how little time China has transformed or has been evolving. And at the same time, I think there is insufficient awareness in how much politics is still there.

And I think in China specifically that conceptually you are in a socialist market economy. So if you are in a socialist market economy, the question is what does socialist mean? And if socialist is a goal or a state, there are policies that ensure that or strive for towards that, it would be very advisable for foreign investors to exactly know what the framework conditions are, because then if you just talk about one market among your Asian markets as part of your global markets through that lens, then of course it's an oversimplification.

And then I think there is an under-appreciation of the policy factor. I think politics sometimes don't matter so much, but the sheer formalised, publicly communicated in execution policy is actually much more important. And I think that's something that you would just partially overlook if you just assume it's a market.

John Letzing: And is there a fundamental difference between China and Western economies in terms of the view of the importance of individual entrepreneurs, people who, maybe in the West might be seen as heroes in a sense, and if so, why is that maybe important to keep in mind?

Markus Herrmann Chen: If I take the policy perspective, I would say the formal policy perspective is to say that the public capital, state capital, the public sector of state owned enterprises, they are the leading force in the economy.

I think, from a socialist market economy perspective, there are concerns about private capital. Private capital may not be contributing enough to the national strategic objectives. They may be too profit seeking. They may not be sufficiently a model in terms of patriotism and giving back. So these are all verbal quotes are from leadership engagement with private sector. But at the same time. So this is the former policy layer. I would say this is the policy and normative framework under which entrepreneurs and private capital are operating.

The reality is very different. The reality is that private capital is extremely important for job creation, for value creation, for innovation.

And I think one of the main struggles right now in the Chinese economy is the fact that the number of people who are willing to create companies and build companies is stagnating, and this is a key KPI that industrial policymakers are watching, whether it's actually happening or not.

These people who would create companies now in 2024, they would be basically the next or the next, next generation after those who basically started to create companies as entrepreneurs after the opening up.

But the question is when you have moved from opening up 40 years, you go into high quality development, as the Chinese leadership is framing the current stage, China's economic development, the question is, are entrepreneurs still there and are they willing to create these companies, take the risk and build large global corporations, as you were mentioning.

John Letzing: It seems like odds are not great for any sort of official policy change to to address what you're describing, in terms of addressing the importance of these individual entrepreneurs for the economy.

Markus Herrmann Chen: So I think the the party and the government wants to make sure that basically private capital is operating under a formal policy and normative framework, but it doesn't imply directly that per se there's no incentivization, there's no acknowledgement, there is no liberties, there's no support to let private sector flourish.

Together with the pandemic in 2020 and then the enactment of the 14th five-year plan in 2021, in March, I think that was the timing when basically policymaking shifted to, for instance, acknowledge security needs more strongly. And security needs they translate into, in China's specific case, into some risk management measures that can be actually beneficial for entrepreneurs, but it can also constrain entrepreneurs.

The security component is just one of the components that can be perceived by private sector players as a more hostile environment. China is per se not no longer officially formally after any type of growth, but it has to be high quality growth. And it basically that led together with the very normal process of professionalising your supervision capabilities and geo regulations. It led to more market intervention that has basically hit some entrepreneurs very strongly. That also led to a change in perception of the business environment.

Maybe a third factor that I would also mention is the question of China reaching officially the first centennial goal. I mean, this is a massive milestone from a formal ideological and policymaking perspective. The question is no longer just about lifting your the poorest, but is actually to address inequality. And China is very unequal. If you look at it through the lens of the Gini coefficient. So there has been the concept of common prosperity, where basically the idea is to have more redistribution of resources. And I think all these factors taken together, has shaped a perception among possible entrepreneurs and existing entrepreneurs that the environment has become more hostile.

But I think the space between the normative framework set by the party and the government, and the perception, is actually very large, because there is incentivization and encouragement from Chinese government. Chinese government, in the end, of course, needs the private sector.

John Letzing: Let's talk a bit about what seems like a pretty fundamental difference between China and places in the West in terms of viewing the role and importance of markets. I guess in the West, you know, we seem to tend to believe markets have almost magical powers to create prosperity. But that doesn't seem to be quite the case in China. Tell me a bit about the difference in terms of viewing the role and importance of markets.

Markus Herrmann Chen: Markets from a Chinese perspective. It just doesn't have any idealistic texture. It is a tool and it is a tool that is deployed. It is governed. There is a lot of thinking going into it. When to use market. The logic is actually that market is a mechanism to allocate factors of production.

And as I said, it's not an ideology. I think Chinese policymakers would say there are patience of market. I think it's guided by seeing markets as being sometimes inefficient, as markets being not having the ability or undermining the ability called concentrating resources on large scale efforts that are needed that you would have if you are in the driver's seat of something that is a development project where you basically are lacking fundamental resources still, and where you have a GDP per capita of about 12,000 USD. So basically that's how you would think about it. And you don't think markets can solve that.

But also I think it's a you would feel if you have markets, you will have a lack of controlability because you're basically entrusting resource allocation to markets.

I give you one example. If I take the factor of production labour, the simple question of introducing market mechanisms would be if you fully marketize it, it would mean that everyone in China can work in every city or every place inside China. This would most likely lead to an overwhelming of the East coast cities, because most people would go where basically most productive and most productive resources are concentrated.

And finally, I would say there is a scepticism where a dominant market mechanism can be reconciled with your social policy.

In China's cases, you would actually say that it immediately it would never allow markets to be so dominant. It would immediately think through the lens of what do we want to have as social outcomes, and then steer the market directly, proactively and long term.

As an example, I was mentioning youth health. If that's a concern to you. You're not waiting until there's an incidence of basically where youth are, for instance, from a gaming perspective, if they are too much engaged in gaming as an example, and it affects youth sales, you would not even entitle the market to go there, and you would intervene into the market and set regulations to govern the market.

John Letzing: Maybe this is a related example, but I'm very interested in the concept of a Western designed stock index focused on China. So a stock index is essentially a basket of stocks which are put together, designed to reflect either a broader economy or a particular aspect of an economy. And these things are put together in the West focused on Chinese companies. However, in the relatively recent past, because of certain decisions that have been made officially in China, most particularly related to the real estate sector, maybe a conscious decision there to not essentially prop up a troubled sector, or at least to try to deflate what was seen as a bubble, the value in these indices really took a hit.

So tell me a little bit about why that is deemed an acceptable outcome, and how maybe that might be a bit tough for the average Westerner and particularly Western investor to understand.

Markus Herrmann Chen: I would say the overall financialization of real economy assets, that ratio in China is very is very low, which means to what extent is actually a real economy reflected in equities that you can actually invest in that are tradable and that are liquid and so on.

And if you look at China Index right now, first of all, it's a high concentration on large companies that basically make up a lot of this weighting of the index. And then you will also see many of these companies have been benefiting from a monopolistic status, or they were rent seeking in the sense that Chinese government did not let other foreign players enter the market and compete with these players, and then basically became very, very big.

I think that's the element of it being a Western lens into the Chinese economy, because now the question of what is the value creation going forward under so-called high quality development? I think a lot of these companies that were benefiting, they were rent seeking or having a monopoly, they will not be the value creators in into the future. So to me, the question would be to what extent is MSCI China index using criteria that are basically factoring in the policy factor, including anticipating market governance, that will come to actually intervene into these sectors.

On the real estate sector. I think everyone was in the West, in China, everyone is aware that there was a need to rightsize the real estate sector. I think the question was more the timing on when to do it and how to do it.

John Letzing: China's production of green technologies, so everything from solar panels to electric cars, the sheer volume of its production has become pretty clearly an issue of concern in many places in the West. But I'm wondering is that evidence of some of these points of difference in terms of approach? The country seems to be producing for demands many years out on the horizon, and it doesn't seem to necessarily be producing in a way to keep markets happy right now. Am I reading too much into that?

Markus Herrmann Chen: No, I think it's the right interpretation. I think the the green tech successes of China are the result of industrial policy making. If you take Made in China 2025, so it was enacted in 2015 and what it had the ten years horizon. It is also by Chinese class academics. It's being seen as largely achieved made in China. So I think that's the fruits that we now see from that.

I think one specific element that is also part of the industrial policymaking process here is that China always thought about where that could directly leapfrog, where does it not need to basically compete on existing technologies, but actually solve directly, go to the next technology level.

In green tech, maybe if I can add another contextual element, I think if you look at the development concepts that China has been using, if you start with Deng Xiaoping, basically he said whatever colour the cat, as long as it catches mice, it's fine. But it was actually under Hu Jintao in 2000, basically where he refined it and said they need a scientific outlook on development. And a large component of that was actually to think about sustainability and green. And then basically, when the planning of the industrial policymaking was made in China was being done, there was a specific emphasis and a lot of clarity on the Chinese policymaker side that in the end, they need to fix decarbonisation. Even if the Paris Agreement wasn't there yet, it was very clear. And if you want to fix it, you need the technology to do it right. So basically, you better bet on green technologies. And it was very long term plan and they have it now at their disposal.

John Letzing: You mentioned industrial policy. And in the West there's a lot of talk about how we are living in a new era of industrial policy, maybe most vividly illustrated in the US by things like the Inflation Reduction Act. And so this is essentially the government saying we need to take a firmer hand in the development of domestic industries and production through incentives and otherwise. However, this is this is far from a new story in China. So is this in a sense, is it sort of a validation of the of the Chinese model in a way?

Markus Herrmann Chen: Very interesting framing. I think there was a framing in saying that the West has tried to change China's political economy, but then it was China's political economy that changed the West.

You have this type of dynamic.

I think one of the most important speeches from a Western representative was from Jake Sullivan when he spoke at Brookings. And he basically very explicitly said that there was an overconfidence in the in the markets and in free trade to fix problems and to create welfare and also create security for the US and beyond.

And I think since then, the Inflation Reduction Act, I think President Macron called it a conceptual revolution in how it basically changed the thinking of needing industrial policy, fixing market failures, in needing to accelerate towards basically the green transition that all the other countries are in, and also in just trying to not have a black or white view of or an almost libertarian view, normatively to say that a state cannot contribute to basically the combination of growth and achieving other KPIs like the green transition, but the state has an active role to play in it.

And I think this is something it is probably it is a conceptual revolution. So just be very practical and think about what is your toolbox that you have. Entrepreneurs are there, talents are there, capital is there, but also government is there, including regulations, setting incentives, local content requirements. And if you are more practical and then you try to fix the problems, then industrial policy is part of the solution.

And in that sense I think it is a mirroring of the Chinese model, but it's probably also mirroring of the Chinese way of problem solving in being very practical and being a bit less strong on this normative, moralistic overlay of your toolbox, where you will limit your options. And if you're not just purely practical.

John Letzing: And I guess in this same vein of, what could be framed as adopting a more quote unquote 'Chinese model', I'm wondering about other ways in which this might be be being translated around the world. One particular concept that is interesting to me is, is something that I guess is called the Global Civilisation Initiative, which, if I understand correctly, seems to be saying essentially that no one country should be able to dictate political and economic development models for others. Is that something that is important in China and is it misunderstood generally in the West?

Markus Herrmann Chen: I think it's an interesting initiative. It's one of several similar initiatives that China has been launching in the past years. So I would say global governance is the rules and discourse power is the question of how are you being perceived and whether there are biases in how you're being perceived.

To give you one example, Chinese diplomacy has been trying to very consciously as in the methodology has been trying to call out hypocritical behaviour by Western countries in terms of so-called double standards. It was a term used at the 20th Party Congress in the in the political report.

And basically if you launch these initiatives and for instance, the Global Civilisation Initiative initiative, and the way I understand it, it is trying to argue that different civilisations, maybe different countries, because civilisations are big terms, so not everyone will see themselves as a civilisation, they will have their distinct values, and it's trying to basically counterbalance a universalist or universalism centred way of looking at the global community.

You could almost say, to summarise it in a very, maybe silly way, it's a diversity pitch towards a global community to say that, it's actually fine if you're different.

I think the specific context under which China is using this, it is also to argue its political system, that basically you have a party state, you have a specific way of looking at the world as Marxist ideology, you have your long term planning, you have your national rejuvenation objective. So if you're not constrained to operate in a, let's say, liberal democratic model, you make the broader pitch for diversity to actually be more inclusive of your own model. And then domestically, you can also better argue your specific political system to your domestic audiences as well.

John Letzing: Is this related in any way to what I guess has been termed wolf warrior diplomacy, messaging that has been received in the West, sometimes as overtly hostile? I mean, is that something also that can be better understood if you take a maybe a closer reading of Chinese policy?

Markus Herrmann Chen: I would say it's highly related. I will say that these different initiatives, like the Global Development Initiative, the Global Civilisation Initiative, that these different initiatives are basically on the macro level, they are the if you wanted the wolf warrior diplomacy. And on the micro execution level, wolf warrior diplomacy is much more an attitude. It's an attitude, let's say, fiercely, consciously defending Chinese interests. It's an attitude that basically diplomats were also asked to adopt when they portray and represent their country in the international context.

If you, for instance, think that the UN centred system is not a fair system, then you need some concepts to underpin that. And then basically you execute on the individual diplomatic level to actually have the right set of talking points.

John Letzing: In a very general sense, in your view, what is to be gained through a clearer understanding of where China is really coming from, what is to be gained in terms of general prosperity and global stability at this point?

Markus Herrmann Chen: It's a big question. I think the clearer you are about China's interests and the drivers and the different actors involved and why, I think it's an opportunity to also frame your own interests and clarify your own interests, that you cooperate in the breadth or in the selective aspect where you think there is a real interest.

Because inevitably, China's continued rise, peaceful rise, hopefully, basically will lead to more competition. And basically it will challenge Western or European societies in some of what they would at, in the year 2024 and some years beyond it, this year, they would assume as just given. Things like conceptual influence, soft power, conceptual influence, a welfare status and industrial technological edge and innovation.

I think if you understand Chinese intentions and where they're going better, you will also see the competitive pressure that will be increasing. It does not mean that this has to translate into conflict, but at least it will mean that everyone will have to raise their game if they want to continue enjoying what some of the West has been enjoying in terms of its privileged status, which there needed to be a lot of work to to achieve that. But basically, now there's an actor that that has a very high ambitions as well.

Robin Pomeroy: Markus Herrmann Chen, managing director of the China Macro Group was speaking to John Letzing.

You can follow the action from the Annual Meeting of the New Champions in China at wef.ch/amnc24 and across social media, using the hashtag #amnc24.

Please subscribe to Radio Davos wherever you get your podcasts and please leave us a rating or review. And join the conversation on the World Economic Forum Podcast club on Facebook.

This episode of Radio Davos was presented by me, Robin Pomeroy with reporting by John Letzing. Editing was by Jere Johansson. Studio production was by Taz Kelleher.

We will be back next week, but for now thanks to you for listening and goodbye.