Dr. Fred Hu, Founder, Chairman and CEO, Primavera Capital Group
Dr. Zongyuan Zoe Liu, Maurice R. Greenberg Fellow for China Studies, Council on Foreign Relations
Jing Ulrich, Managing Director and Vice Chairman of Investment Banking, JPMorgan Chase
Jörg Wuttke, Partner, DGA-Albright Stonebridge Group
In conversation with: Clay Chandler, Fortune
Dr. Zongyuan Zoe Liu, Maurice R. Greenberg Fellow for China Studies, Council on Foreign Relations
Jing Ulrich, Managing Director and Vice Chairman of Investment Banking, JPMorgan Chase
Jörg Wuttke, Partner, DGA-Albright Stonebridge Group
In conversation with: Clay Chandler, Fortune
Category
🤖
TechTranscript
00:00Listen, this is a fantastic panel about a subject that has been a kind of burning issue
00:04on the campaign trail in the U.S. and really in financial capitals around the world.
00:10We're going to talk a little bit about China, and I'm going to start with Jörg and get
00:16a little bit of insight from him.
00:17Jörg, for those of you who don't know him, has lived for, what is it, more than 30 years
00:21in China?
00:22Yeah.
00:23Was the head of the European Chamber of Commerce there, worked for the German chemical company
00:27BASF.
00:28Just a fantastic, legendary China hand.
00:34Has now moved to Washington, D.C.
00:36Jörg, give us an EU, kind of D.C. perspective right now on what the Trump victory means
00:44for U.S.-China relations and EU-China relations.
00:47Well, thank you, Clay.
00:48I would say the view out of D.C. is everything is in flux.
00:52I mean, first of all, U.S.-China, is Biden going to meet Xi Jinping in Brazil at G20
00:58this week, for example, is a big question that we all have.
01:01Secondary, of course, who is going to be appointed into Trump's cabinet, who is going to be Treasury,
01:07Commerce, and there was always the name Lighthizer out there.
01:11Is he going to take USTR?
01:14Understand that he's not very keen to take that place again, but what else is there left
01:18for him at this stage?
01:19So it all depends on that place and the cabinets.
01:22We have hawks that will not be coming back into the administration, like Pompeo, like
01:28my friend Matt Pottinger.
01:30So that means that the Taiwan question might be viewed differently with this lineup of
01:35less having Taiwan supporter in the new cabinet.
01:39And then, of course, when it's going to come the tariff tsunami, Trump talked about 60%
01:46on China products, that's $430 billion U.S.
01:50So I will guess that he has to do 60%, but again, on which part?
01:55Is it going to be a quarter?
01:56Is it going to be staged in 25, 26?
01:59I think that he cannot afford to have 60% of all the products coming in right away.
02:04And then, of course, the figure of Elon Musk.
02:06If you have someone who actually has access in Beijing and to Trump as one person, is
02:10he going to be sort of intermediate?
02:12Is he going to be back-channel?
02:13It's hard to imagine with this character that he's going to be back-channel, you know.
02:17And in Europe, we have everything in flux.
02:20I mean, we have the weakest political leadership in Europe ever.
02:24My own country, Germany, possibly is facing elections in January, February.
02:27We might have a new chancellor.
02:28His name is Meltz.
02:29I briefed him a couple of times.
02:31He's a former investment banker.
02:33He's a former business person, so there might be some rationality there.
02:38Europe is just in the last stages of appointing the commissioners.
02:41They might be more powerful than in the past, given the weakness of Paris and Berlin.
02:47And then, of course, the big difference between Europe and the U.S. will be the openness for
02:51Chinese direct investment.
02:52Europe is very keen to have Chinese investment.
02:55The U.S. pretty much has closed the door.
02:57Very, very quickly, your point about Elon Musk is a really interesting one.
03:02The Trump administration is going to be very hawkish on China.
03:04It has boasted about that.
03:06Does that make life very complicated for Elon Musk if he's a part of that team and he's
03:12also running a giant gigafactory in Shanghai and trying to sell cars to Chinese consumers?
03:16Well, I'm puzzled.
03:17I mean, he's deeply embedded in China.
03:20Twenty-five percent of his turnover comes from China.
03:22At the same time, he stands for EV, but he's with a president who stands for old energy.
03:28So I don't know how that's all going to shape up in this respect.
03:31I don't know.
03:32Very interesting.
03:33Fred, I want to come to you next.
03:35One of the most talented macroeconomic observers of China that I know.
03:41China's economy not doing very well lately.
03:44There has been an effort since late September to turn it around.
03:47The government is trying to signal that it gets it, that it wants to fix things.
03:51On Friday, I guess it was, it announced a $1.4 trillion stimulus package.
03:56The markets are kind of underwhelmed.
03:58What's your view about what ails the Chinese economy and how committed are leaders in China
04:04to sorting it out and fixing it?
04:06Yeah, so China's economy clearly face a number of challenges, warehousing, local debt, deflationary
04:13pressures.
04:14I do think since September, the government has started to, at last, take actions on the
04:20policy front, trying to address those challenges head-on.
04:24Not surprisingly, the markets are initially excited and then become a little bit disappointed,
04:31if you may, by the magnitude of the policy package.
04:37And it might be more important to be the composition of the policy package.
04:42So in terms of magnitude, in September, the central bank PBOC cut the policy rate by 30
04:48basis points and the monetary reserve requirement ratio by 50 basis points.
04:55I would have expected at least double, triple, or even quadruple the magnitude, right?
05:03Because the economy, facing some real trap signs, you need to be resolute, decisive,
05:10and get ahead of the curve.
05:12So certainly magnitude has much to be desired.
05:16On the fiscal front, the same, where bits and pieces of information come out by the
05:21government, adding together could be anywhere between 2% to 6% of GDP.
05:27Again, if I were driving policy, would it be north of 10% of GDP?
05:34You need to be big enough to convince anyone, right, the government is serious about fixing
05:39the economy and turn it around.
05:41So like the magnitude, that's what we have to do.
05:43Then the composition, you know, for whatever the reason, the government is still kind of
05:49fixated with supply side, anything new, more infrastructure, more, you know, capital investment.
05:56And it doesn't take economists to know the trouble China faces is not supply side.
06:02China has world-beating manufacturing industry, is the demand side, particularly domestic
06:08demand, right?
06:09That's what the government needs to do.
06:11What I'm hopeful, you know, the actions they have taken so far, you know, show the government
06:19does care about the economy, and they are very serious about turning it around.
06:25And I do expect a lot more policy actions to come on stream, you know, on traditional,
06:31monetary, fiscal, but importantly, on the structural and the reform side, you know,
06:37China need to convince its own consumers, middle-class consumers, convince its own
06:42private sector entrepreneurs, and of course, you know, international investors, you know,
06:46multinational companies, China remains committed to a free multi-economy, anything otherwise
06:54backtracking, deviating from that goalpost, you know, China want to be a E.O. style, dynamic,
07:02vibrant, entrepreneurial, free multi-economy.
07:05And that deviates from that, I think it's, and China will find it very hard, you know,
07:09to turn around since fundamentally.
07:11Yeah.
07:12Yeah.
07:13Zoe, you've written a lot about this point about consumption that Fred mentions.
07:16Zoe, very keen observer of the Council on Foreign Relations about, you know, China,
07:23and you've written about what you call the kind of doom loop between the kind of underconsumption
07:29and overcapacity in China.
07:31Can you elaborate a little bit on what you mean by that and where you see that doom loop
07:34headed?
07:35First of all, I want to clarify, yes, there, I did talk about the doom loop and the market
07:41did pick up on that, but that is by no intention saying that this is going to, definitely going
07:46to head towards that direction.
07:48But there is a risk of a doom loop starting with the plan-oriented political economic
07:55system.
07:56Right.
07:57And if you look at China's five-year plans, every five-year plan starting from the ninth
08:03one to the 14th one, since over the past four decades, there is always a section talking
08:11about how much market share by which year China wanted to achieve and in terms of specific
08:18sectors.
08:19In other words, over the past four decades, when Deng Xiaoping started to introduce market
08:26system into the Chinese market, it had a vision in terms of building up China's strategic
08:32competitive manufacturing base and the system has just perfected itself over the past four
08:39decades.
08:40And without a emphasis or a specific attention to boosting consumer market, you know this
08:47system at this specific moment is going to be, especially going back to Fred point in
08:52terms of asking private consumers to spend more.
08:56That is equivalent to ask the system to do exactly the opposite of what it is supposed
09:03to do.
09:04So it is going to be difficult.
09:06And then at the local government level, you have this campaign style growth, meaning everybody
09:11wanting to make sure that I am redoing my share to reach the target, to reach the performance.
09:17Therefore you always end up with overshooting.
09:20And then obviously at the company level, across board, you end up having this fierce
09:27market competition.
09:28Domestically speaking, profit margin is so thin that companies, CEOs, executives, they
09:35have the incentive, regardless of Beijing's support or not.
09:39Companies have the incentive to go abroad, to sell overseas.
09:44Obviously Beijing says this is an opportunity.
09:47You end up having Beijing's support.
09:49So right now China is at a very interesting point in the sense that you have a lot of
09:56existing investment.
09:57You build up a lot of strategic manufacturing base.
10:03And a lot of this so-called overcapacity aspect, they wanted to move overseas, whereas the
10:08newly strategic sectors are also booming.
10:11Now it's a race in terms of the relative speed, right?
10:15If the domestic newer emerging sector, they can grow faster than the older or sort of
10:22outdated or overcapacity sector can move overseas.
10:26So this can sort of like escape the doom loop.
10:30Jing, you know, one of the premier investment bankers in the world now based in New York
10:36for JP Morgan, you talk to corporates all the time, a lot of big multinationals, many
10:41of them, you know, regulars on our Fortune 500 list have heavy exposure to China.
10:48Give us a quick overview as to what those big corporates are thinking now about this
10:53different environment in the Chinese market that's very changed from what we saw in terms
10:58of pre-COVID.
10:59Absolutely.
11:01So Fortune 500 companies, by and large, all have exposure to China.
11:07Some have exposure in terms of revenue and profit generation.
11:12Others have exposure in terms of supply chains.
11:16So in terms of revenue generation, some sectors are more exposed to China than others.
11:22So for example, the semiconductor industry, industrial companies, consumer companies are
11:29very exposed to China.
11:31Some of the companies generate anywhere between 10 to up to 50% of revenue from China.
11:38And then on the supply chain side, given for the past several decades, China has emerged
11:45as the world's manufacturing powerhouse.
11:48Many of the companies still have substantial amount of supply chain in China, not just
11:54final assembly, but also components.
11:58So for example, in the pharmaceutical industry, China still produces a lot of the active ingredients
12:04for antibiotics.
12:07Consumer electronics, roughly 50% of consumer electronic products in the U.S. are actually
12:13linked to China.
12:15So when multinational companies look at the changing geopolitical landscape, they still
12:22want to do business with China.
12:24They want to stay in China, but they want to de-risk their exposure in terms of revenue,
12:31but also in terms of supply chains.
12:34So when it comes to diversification, I want to make the distinction between de-risking
12:41and decoupling.
12:44De-risking is much more nuanced.
12:47De-risking basically means you're severing economic and business ties, which is not feasible
12:53in this environment.
12:55Now, how do multinational companies de-risk their exposure?
13:00Number one, if they have too much revenue coming from China, they should think about
13:05investing in emerging markets in the U.S. and allied countries a lot more so that they
13:13can reduce their overexposure to the China market.
13:18And in terms of supply chains, quite a few multinational companies, not just in the U.S.,
13:23but also in Europe, are pursuing what's called a China plus one strategy.
13:28They keep their supply chain in China, but they also diversify the supply chain to countries
13:35like Mexico, like India, Southeast Asia, which have been beneficiaries of supply chain movements.
13:42Also, if you think about de-risking, some of the multinational companies are thinking
13:48about pursuing more of a China for China strategy.
13:52I'm referring to companies in the consumer sector.
13:56So if you are an apparel company, you want to design products in China which have more
14:03relevance for the local Chinese consumer, therefore you employ local designers, you
14:08produce locally, you sometimes perhaps even introduce Chinese cultural motifs into the
14:14designs.
14:15And these types of China for China products resonate much better with the Chinese consumer.
14:20Can I ask you just a quick question on that?
14:23Because you raised the question of localization, and often the secret to successful localization
14:30is having the right partner in China.
14:32And what we've seen historically with a lot of multinationals is that they've been forced
14:36to take a local joint venture partner, they've hated it, and they've spent their decades
14:42lobbying to be released from this tie-up with the local partnership.
14:46Do you now see from a kind of an M&A standpoint that JV alliances are back in fashion?
14:54It's ebbs and flows.
14:55In the initial stages of China opening to the world, multinational companies sometimes
15:00had to partner with a local company in the automotive industry, everyone had 50-50 JVs,
15:06in the retail sector.
15:07It didn't work out so well, though, right?
15:08But now it's changed, because for some time, multinational companies preferred to have
15:15wholly owned entities in China, which they could absolutely control.
15:19These days, many multinational companies are choosing to have a local partner, private
15:25equity funds, or local parties that have good connectivity with the local community, with
15:33the Chinese consumer.
15:35So we're advising some of our clients to de-risk by actually perhaps selling a portion
15:41of the China business to a local joint venture partner, who can not only make the multinational
15:46company much better connected to the China market, but also, this is a form of de-risking.
15:53So joint ventures, as you said, Clay, became unpopular.
15:57But I think in this new geopolitical environment, they've become more of, they've become one
16:05avenue for multinational companies to de-risk their exposure to the China market.
16:10Fred, I want to come back to you and ask about the impact of tariffs.
16:14As an economist, you look at this pledge by President-elect Trump, 60% across the board
16:24tariffs on all Chinese products, not just selected sectors.
16:29How much will that hurt the already kind of struggling Chinese economy?
16:34And do you anticipate that if Trump goes through with that, all 60% across the board, how will
16:39China retaliate?
16:41Well, so this is clearly a risk looming very large on the horizon, given the domestic challenges
16:49the Chinese economy is facing.
16:51But the tariff, you know, maybe I'm a non-native English speaker.
16:55To me, you know, it sounds like a very ugly word.
16:58But I think- Trump says it's a beautiful word.
17:00It's a beautiful word.
17:01The most beautiful word in the dictionary.
17:02That's kind of true.
17:03My limited knowledge of English language, you know, generally, if you look at the history,
17:09tariffs have always done more harm than good.
17:12In this country, in the 1920s and 30s, the Harley-Smith Tariff Act really plunged the
17:19U.S. and the world economy into the abyss of, you know, depression, right?
17:24And actually, ultimately, I would argue, paved the way for the rise of Nazism worldwide.
17:30So you know, it could be very dangerous.
17:33I understand the sentiments, right?
17:34There's a lot of grievance against China and blah, blah, blah.
17:38But I think, you know, given the stake, how high, I hope, like what Gary Cohn alluded
17:44earlier, maybe should only go to discussion.
17:49You know, tariff 60%, you know, that's very steep.
17:52That's actually by market, you know, 2x above the, you know, Harley-Smith, you know, average
17:57tariff rate back in the 1920s, 30s.
18:00And we're talking about the two largest economies in the world, right, engaged in this, like,
18:03very steep tariff.
18:05And if China, you know, obviously, this is very bad, but China's responses also matter.
18:11If China choose to retaliate, as did in the first trade war, in the first Trump administration,
18:15let's just lose, lose, and then, you know, global ramification.
18:19So I hope this time, no matter what, you know, President Trump elect is going to do, right,
18:23I find it hard to predict his policy actions.
18:27But to follow through his campaign pledge, if I would urge the Chinese, you know, stay
18:34cool.
18:35Not to do, you know, if someone should either left foot, you should not, by retaliation,
18:41shoot your own right foot.
18:45And so, look, Zoe, I want to ask, quickly, there are some people that make the argument
18:48that, in fact, this time around is different from the first Trump administration in that
18:53China is much less dependent on exports to the United States.
18:58It's actually reduced the percentage of its exports that go to the United States and has
19:02been fairly successful over the last eight years in diversifying into exporting to other
19:07economies.
19:08Now, some of that is probably because it's being routed through Mexico or, you know,
19:12on its way to the U.S.
19:13But do you think that China can sort of shrug this off, diversify, export to other economies,
19:20you know, Southeast Asia, India, the Middle East, elsewhere, and just be fine?
19:26There's also this argument that, in fact, Trump might be doing China a favor by forcing
19:30it to learn to become more self-reliant.
19:33And then it won't really be dependent on the U.S. at all.
19:37I do think that China has been trying a lot to do self-sufficiency regardless Trump or
19:43not.
19:44Right?
19:45Starting from Hu Jintao era, the idea of self-sufficiency, self-reliance has always been there.
19:50And given that China is now about 30 percent of global manufacturing, and the last time
19:55the United States was about 30 percent of global manufacturing was in the aftermath
20:01of World War II.
20:02So from that point of view, China cannot sufficiently or just by absolute measures to diversify
20:09away from the United States.
20:10And for a lot of the reasons in terms of de-risking, as Jim mentioned earlier, it's really about
20:16finding the tariff mitigation countries from Mexico to Vietnam to Morocco, trying to figure
20:22out how to bypass those areas.
20:24So from that point of view, I really don't think China can directly export to the United
20:30States.
20:31Or for that matter, that number is going to continue to, if not to decline, it is going
20:35to stagnate.
20:37And by the way, Trump is very much focusing on bilateral trade surplus.
20:44But during his first term, trade surplus with China actually went up.
20:50So I do think that the 60 percent tariff is going to be his negotiating bargain.
20:55And the executive branch, he does have the power to unilaterally say the number is going
21:02to be 60 percent.
21:03In other words, the risk is there.
21:06But to what it really begs to, it really takes President Xi Jinping, his own, hopefully his
21:12own diplomatic and statesmanship, trying to walk back and de-escalate.
21:17Very interesting.
21:18Jing, I see you nodding.
21:20I think China itself has been trying to de-risk its own economy for the past several years.
21:26So if you look at the statistics, China's exports to the U.S. as a share of China's
21:32total exports has been going down.
21:35Because Trump first imposed the tariffs in his first term.
21:40So the Chinese economy has been adjusting by increasing exports to the rest of the world,
21:46especially the global south, and reducing its exports to the U.S.
21:51And in the meantime, the Chinese government has been trying to really spur domestic consumption
21:57because of course, as we said, there's a very large manufacturing base in China, but consumption
22:04is still lagging.
22:05So they have been introducing proactive measures to spur domestic consumption to absorb some
22:11of the capacity in China.
22:14And supply chains are becoming, as we said, very fragmented.
22:18Inflation would go up in the U.S.
22:21If tariffs go up, that's natural.
22:23So that's why everyone, all the multinational companies we speak with, are really building
22:28more redundancy into their supply chains.
22:30They want to have the Americas, Mexico, Brazil serving the U.S. market.
22:36They want to have China for China, and then maybe Turkey, Poland, Hungary serving the
22:40European Union.
22:42So we are definitely seeing supply chain diversification for the past several years, and perhaps it's
22:48accelerating.
22:49Jorg, I'd be curious to hear your perspective on that.
22:52I'm particularly interested, we've just got a few minutes here, in two questions.
22:58Electric vehicles, where China has massive overcapacity, but really is designing amazing
23:03cars that even if you slap 100% tariffs on them, are actually very competitive.
23:08And if you have the lower tariffs that the Europeans have, they're still an even greater
23:12threat in the European market.
23:13Where do you see that going?
23:15And then maybe very quickly, a prediction, what happens to TikTok?
23:20The deadline is right after the inaugural.
23:23Does the U.S. pull the plug or not?
23:25Yeah.
23:26Well, on car industry, the global car industry based in China asked the question, should
23:30I stay or should I go?
23:32And we see companies leaving the Koreans, the Japanese scale back, also Ford has more
23:37or less left.
23:38It's been very dramatic in the last couple of years.
23:39The German companies decide to hang in there, and they want to actually unlearn how to build
23:45cars and try to establish a learning curve with Chinese partners to build mobile phones
23:52on wheels.
23:53And so there is this real shift, and that's why these billions go into the Chinese economy
23:58from these companies, including chemicals, in order to actually catch up.
24:02We're two years behind on body, we're six years behind on digital.
24:06And that's why Volkswagen doesn't have a joint venture with Xpeng.
24:08They actually asked them to design the body with them in order to speed up.
24:12It's all about trying to be still competitive, not only in China, but also in the global
24:17south.
24:18Because even if the U.S. and Europe are closing down, Europe will not close down.
24:21But still, we have the global market where the Chinese products will eventually wipe
24:24out our cars.
24:27So I would say the learning is really staying at what I call the China fitness center on
24:31EV, in order to stay relevant for the game, because Chinese cars are incredible.
24:36And last point on TikTok, actually, I don't know, I mean, you see Trump saying TikTok
24:41should remain, and at the same time, the Biden administration actually wants to shut it down.
24:46I have no clue.
24:47I just know that my kids use it too much.
24:50Anyone else have any guesses on TikTok?
24:52If I can chime in very quickly, I do think a factor that has been overlooked here by
24:59politicians is that small businesses actually benefit a lot from TikTok.
25:03From TikTok?
25:04Yes.
25:05Huh.
25:06Well, it'll be interesting to see.
25:07Jing, very quickly, I want to talk to you about investment flows, because that's the
25:10other thing that's on the agenda right now, not just imposing tariffs, but looking at
25:14passive investment, that venture capital funds, that sort of thing, going into China.
25:20Is that something that you think is at great risk in the administration?
25:24Well, there are lots of private equity venture capital funds that are still active in China,
25:29but they have also changed their strategies.
25:32Previously, they were investing in the high-growth Chinese internet platform companies, but now
25:38they want to partner with multinational companies in China because of their local expertise.
25:44So I think in this very dynamic era, companies and funds have to remain agile.
25:51Many of the funds, including the one that Fred runs, they are really partnering very
25:56closely with multinational companies.
25:58We see some potential multinational carve-outs.
26:02They're not exiting.
26:03They're just selling a proportion of their business to a local joint venture partner
26:07who can help them guide the future face of growth.
26:11And in addition, I think a lot of the funds are contemplating how to find exits.
26:18Exits are harder.
26:19The marketplace is more challenging, so they may have to have longer-term capital rather
26:25than a limited five- to seven-year time horizon.
26:29So longer-term investments, I think, would be beneficial, but also for multinational
26:34companies, long-term strategy rather than short-term focus is also advisable.
26:40Right.
26:41That has to be our last word.
26:42Thank you very much, panel, for your insights.