Agichina24 Interview With Alberto Forchielli

Milan 12 November – Agichina24 interviewed Alberto Forchielli, founding partner of Mandarin Capital Partners and president of Osservatorio Asia, on occasion of the annual Osservatorio Asia Conference held Thursday, 8 November with the headline “Asia: The New Challenges Following the CCP’s Congress and the US Elections,” the the XVIII Congress of the Chinese Communist Party, and the US presidential elections.
The XVIII Congress of the CCP began a few days ago. After ten years of the Hu-Wen government, what are the systemic problems that the new leadership will be facing?
First of all, it is important to transition from a export-fueled economy to an economy supported by domestic consumption- easier said than done, for various reasons. Large investments have been made in recent years to build factories and infrastructure, bringing China nearly to saturation. The air is ever more polluted. It doesn’t make sense to keep producing while imitating western consumer models: there are simply too many Chinese, and not enough room.
In the coming years, China will need to strengthen the “virtual” and electronic industries, and further develop its service sector- media included. Until the people “consume” more information, there is a need for more creativity, in other words more freedom: with censorship limiting and controlling the activities of artists, it is unlikely that a Chinese Hollywood will be born.
The deregulation of the financial sector would create added value, but if it does not loosen central control of banks and financial resources it is difficult to imagine this change taking place. Opening the financial market would deprive the Party of its most basic tools: control of exchange rates, financial flows, and capital.
Chinese and international scholars have been speculating about reforms for some time. Will there be another push for reforms? Which sectors need them more?
Deng Xiaoping made the real reforms in China in the 1980’s, Zhu Rongli in the 1990’s, when the government dismantled the inefficient system of public enterprises. Not much new has happened since then: politicians have been talking about reforms for years without actually doing anything. For years they have talked about boosting domestic demand, but in the meantime they have dropped, relative to GDP.
On the finance level not much has changed: there have been a few timid attempts at offshore, but nothing significant.
Resistance is strong on the political front because reforms could impact the Party’s central power. There is a line of thought in the Party that would like to reform the system, and another group that would rather go back to the old ways because they are afraid to stray too far from the path traced by their predecessors.
Another series of obstacles to reforms are the interests represented by the big business lobbies: stimulating internal demand means shifting investments from one entrepreneurial elite to another, upsetting the large business owners that would rather keep investments in their own personal entrepreneurial fiefdom.
And to increase consumption they will need to increase wages and salaries, a move that will affect the cost of labor and China’s competitiveness when compared to other manufacturing bases. Making reforms will diminish the Party’s control over the economy and the flow of money and will expose China to new challenges and difficulties.
We have reached the point where to modernize the economic model it has become necessary to modify the political model, an option that has been excluded by Chinese politicians to this day. In the meantime, however, social inequality has become much more evident: the disparity between rich and poor, the divergence between resident and non-resident workers, both are at risk of generating internal conflict should the economy slow down visibly and in a way that impacts the wallets of the Chinese people.
Ultimately, I see two possible scenarios.
In the first, the system could accept an economic slowdown of up to 5%, relinquishing the economy’s objective of doubling GDP by 2020. In the second, the country could be hit by an economic crisis – in one year or in ten, nobody can predict – and only then, forced by the negative trend, the Party could accept a loosening of the reigns and allow substantial political and economic reforms.
The XVIII Congress began two days after the reelection of Obama as US president. How could these two events modify the global balance? What is Europe’s role between these two superpowers?
We live in a bipolar world where Europe has been hesitant to establish itself as the third pole. But at the same time it is not an old-school bipolar contest like the one dominated by the US and USSR at the height of the Cold War; new players have entered the scene today and have established their place on the international chessboard, like Russia, Brasile, or Turkey, for example.
China and the United States have extremely strong converging economic interests: the two economies have styled themselves as functions of each other. The political issues that set the two antagonist powers in opposition are concentrated mainly over the control of the Pacific Ocean.
The Chinese do not have a plan for global hegemony, but they would like to be the masters of the seas surrounding Chinese territory, and of the routes that are vital to the supply of their economy. The assertive attitude of China’s foreign policy, as we know, has created bad feelings with neighboring countries. The Americans use this situation as a sort of “commodity” to be traded with China.
I can give one example: The Chinese have been given the task of keeping at bay – and pacifying – Afghanistan. The Americans, to ensure that the Chinese carry out this task in a civil manner, use the Pacific as their weapon. In this sense, the consent of the various countries in the area serves the US as a way to control China’s actions in other parts of the world.
How has the situation changed for Western businesses in the last ten years with respect to the possibility of entering the Chinese market? Has treatment by the Chinese seen any restrictions? What can we expect in the future for these companies?
China has stopped being the production base for the rest of the world. Today, other countries have become more convenient for the cost of labor, such as Mexico, Brazil, or India. Nevertheless, a presence in the Chinese market continues to be fundamental for large corporations. Profits have been extremely high, and for this reason the industrial lobbies have always defended China.
Thanks to a 50% rate of investment, competition in China has increased, especially in sectors where Western companies were originally uncontested, like the technology sector. As a result of this massive investment and frequent “theft” of technological secrets, this has becoming a suffering sector where it will be increasingly more difficult to compete. Additionally, some Chinese industrial sectors are increasingly on their way to overproduction: the most glaring example is currently in the automotive industry, which has stalled, and it will be ever more difficult to strengthen its development.
The new sectors where it might be possible to see some returns in the next few years are in consumer goods, the environment, and energy production, since China always needs more energy. But the most important is healthcare: providing better healthcare is an objective that feels no resistance at the domestic political level. As pertains to investment in the environment, energy, and health, the various factions of the Party have reached a consensus.
Concurrently with the beginning of the Congress, Osservatorio Asia held a conference. What were the conclusions reached at the end of the conference? What are China’s challenges in the future?
After the conference, Osservatorio Asia is even more convinced that reforms will remain incomplete until the future leadership reaches moments of criticality. The Party has always maintained a certain level of adaptability. It is almost certain that China will go through a moment of great crisis before 2020: sooner or later, reformative processes will begin – but only after a crisis. Only the advent of a crisis, in other words, will force the leadership to make real changes. Europe itself is living critical moments, in the same way that China will have to cross its own.
What are the plans for the Mandarin Fund? Can you tell us about the newly begun Mandarin II project?
As a result of over-investment, Chinese companies are feeling the squeeze in their own markets. The next decade will see Chinese investment in various directions and with various objectives, among which will be ensuring availability of natural resources, food, energy, and technology. Mandarin I and II are concentrated on the latter vein.
In the field of technology acquisition, the Chinese are aiming at three markets: Japan, the USA, and Germany. Investing in Japan is a painful process, and getting in to the US is fraught with obstacles: in my opinion, Germany is the best destination for Chinese industrial investment. Mandarin I was the first Chinese outbound fund and will need to focus its operations on the German market before local competition beats us to it. We have already opened an office in Munich, and the next will be to build a bigger fund with headquarters in Germany.
The Chinese are very happy with Mandarin I, thanks to the results we have posted. Today, with equal enthusiasm, our Chinese partners are supporting this German development. In recent years, Mandarin has made itself known: we were the first fund to obtain funds from the Chinese government; we carried out the first large Chinese investment in Europe with the acquisition of CIFA. We established ourselves as the largest Chinese-European fund in existence. The Germans know about us, they admire us. It would almost be foolish not to continue in this direction: the word of the day now is to cross the Brenner pass.