Eastworld Spotlight

Eswar Prasad says the digital yuan will play “a marginal role” in increasing the renminbi’s global presence.

Eastworld Spotlight: China’s digital yuan is not going to displace the U.S. dollar

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Digital yuan is not going to displace the U.S. dollar

Mhm. Welcome to East world spotlight, where the editors of Fortune magazine speak with the world's leading thinkers about matters of trade, technology and finance in the fast growing economies of Asia Against This morning, is eswar Prasad, professor of economics at Cornell University, uh A senior fellow at the brookings Institution and a prolific author. His most recent book is called The Future of Money Dr Prasad, thank you for being with us. My pleasure, Doctor Prasad as I read your opening chapter, uh it's fairly clear to me that the overarching theme of your book is that we all need to get ready because cash is on its way out. Uh Tell us a little bit about that, How much longer does cash have? So the end of cash is certainly on the horizon. Digital payments of various sorts, either with a swipe of a card um or a phone is certainly becoming the norm in advanced economies as well as in many emerging market and even relatively less uh developed economies, including low income economies. And I think this is partly a reflection of the fact that we now have technologies that make it much easier for consumers as well as businesses to be able to conduct these transactions much more efficiently than cash could ever provide. Certainly caches. A lot of advantages. It is uh something that can be used by anybody. It is cost free. Um it provides some anonymous tea. But all of the disadvantages of being swept away by the share advantage of being able to have digital payments accessible at your fingertips are in the palm of your hand a little bit more about china if you can. I mean they're very advanced in terms of the central bank digital currency done multiple trials of that. We heard just in the last couple of days that they're thinking of really expanding some of those trials during the winter olympics next year will be which will be interesting to see. Um And yet the chinese seem to have a real aversion to cryptocurrencies. They've cracked down on crypto uh minors within china and they have expressed concern about having arrival to their own central bank currency. Why do you think that's so? And how do you see the future of cryptocurrencies inside china? So it's not just china but many other, most of the countries governments and regulators that are very concerned about crypto currencies and that's for a number of reasons. Um Of course a layer of something like Bitcoin was that it would provide um some degree of digital anonymity and transactions what is referred to a studio anonymity. In other words you would conduct transactions just revealing or digital rather than your actual identities. Um Plus it would provide a low cost and efficient payment system. But what turned out to be the case is that Bitcoin at least in the initial years was being used largely for illicit transactions because of this cloak of anonymity. And I think there were concerns that cryptocurrencies might end up um fueling illegal commerce various sorts both within and across national borders now, of course, um something interesting happened in the last three or four years. It turns out that Bitcoin has proven to be an object failure as a medium of exchange. It is very cumbersome to use. It is very slow in terms of having transactions validated and it's quite expensive to use. The average cost of one transaction using Bitcoin Um has averaged about $20 this year. So you can't go out and buy a cup of coffee really using Bitcoin unless it's a very expensive and fancy a cup of coffee. But instead, Bitcoin and other cryptocurrencies have become stores of value. And that creates its own concerns. If you have a lot of investors, especially retail investors putting their money into a purely digital asset that is not backed by anything that has no intrinsic use, then that bubble may one day burst and and could end up hurting retail investors and have at least marshall implications to financial stability. So I think these are the sorts of concerns that have central banks and regulators in china and elsewhere very worried about these decentralized crypto currencies. And is that something that the problem that's particular to Bitcoin? Or do you see those problems as being endemic to all the various types of cryptocurrencies now, interestingly, Bitcoin, which remains the granddaddy of all cryptocurrencies that accounts for over 40% of the market capitalization of all cryptocurrencies put together has a variety of flaws. As I mentioned, it's not working very well as a medium of exchange plus it is very volatile. So you can't exactly use the medium of exchange where you might go by one cup of coffee with Bitcoin one day, you can buy many cups of coffee these days, but in another day that same unit may be able to get you a fancy meal in a restaurant. So that's sort of volatility doesn't work well for the medium of exchange. So what has happened is that you now have a number of crypto currencies that have come up that try to remedy each of these deficiencies in Bitcoin but end up having their own deficiencies. It turns out that Bitcoin does not provide to anonymously, it's possible to unravel the actual identities of uses of Bitcoin. So now you have a new cryptocurrencies such as Manero and Z cash um that provide greater anonymity. You have uh ethereum which has a more efficient algorithm. Um And there is an upgrade that is expected to take place this year or next. That could make it even more efficient processing transactions uh in high volume and at very low cost. Um There are other cryptocurrencies that are called stable coins which have more stable values and the stability of those values, ironically enough, comes from the banking of those cryptocurrencies by stores of fiat currencies issued by central banks. Um And of course there is this new and potentially uh interesting but also dangerous development that large multinational corporations like facebook might start issuing their own stable coins or even cryptocurrencies. And that could certainly be a game changer because it could prove to be serious competition for central bank digital currencies. And especially for the currencies of small economies that don't have credible central banks or that have very weak currencies. I sense that you're perhaps more optimistic about the prospects for the stable coins as a means of transactions uh digitally than you are about uh other types of cryptocurrencies that that can fluctuate so much in value. That's right. If you think about what uh facebook's Cryptocurrency which is going to be called D. M. Is going to accomplish its actually fulfilling a real need. Um Even in a country like the US, let alone many developing economies, a lot of people don't have easy access to a digital payment systems because they can't afford to have a credit card or they don't have easy access to a bank account. International payments are still very slow, very expensive. Um and they're very difficult to track in addition to taking a long time. So if you think about workers faced some Mexico or India who are working in the US and want to send remittances back to their home country, those are very large volumes, But the transaction fees on those are quite large. So being able to conduct international payments more efficiently more cheaply and in a way that makes them easier to track would be very good for economic migrants sending remittances back to their home countries, but could also lubricate international trade and finance. Um, so the ability of stable coins to create more efficient domestic as well as cross ball repayment systems is certainly a huge potential benefit. The risk, of course, is that these could again become unregulated condo. It's not just for illicit, but also illicit, um, uh, forms of fund transfers, including terrorism, money laundering and so on. Terrorism financing and money laundering. Um, so there are those real concerns that while the objectives and potential of these payment channels um could be very positive, there are some negative implications as well that need to be kept in mind. People argue that the rise of chinese uh central bank digital currency is something that the U. S. Should be alarmed about. That. It could potentially displace the United States dollar as the world's reserve currency. Do you share that concern? Is that a real threat or not? Something we should worry about? I do not share the concern, the E. C. And Y certainly is going to um uh play a role, although only a marginal one in terms of the Renminbi's increasing prominence in international finance. If you think about cross border payments later for trade or finance, all of those are almost entirely digital already. Um And the People's Bank of china, the chinese central bank has made it very clear that at least in the short run, it does not see the Ec and y as being available for transactional use outside the country. But in combination with china's cross model interbank payment system, which is a payment system that can communicate with the payment systems of other countries. If the easy and might were more easily available outside the country, it would become possible for china to transact with other countries that it has a lot of trade with. Take Russia for instance. Um uh Russia exports a lot of oil to china and in turn buys a lot of goods and services in china. That trade would no longer have to be inter mediated through the dollar. Ultra dollar based financial institutions. You could have direct trade between china and Russia using their own currencies for payment and settlement. Yeah, so as a medium of exchange as an international payments currency, one could certainly see the dollar's role um uh eroding over time. Although my view is that it will still become remain dominant as the international payment currency. But what really matters for a store of value of the reserve currency is a country's economic size and the depth and liquidity of its financial markets. But in addition, the institutional framework that is necessary to have the confidence of foreign investors and the elements of their institutional framework include an independent central bank, the rule of law, as well as an institution life system of checks and balances among various arms of the government. Most of the existing reserve currency economies have those attributes china does not, ensuring no indications of moving in that direction. So I think the chinese Renminbi will become a somewhat more important reserve currency if the chinese government continues with financial reforms, continues with capital account opening. But it's hard for me to see the dollar being seriously challenged by the Renminbi, even if the Renminbi were to be available in digital form, both inside and outside the country. So you don't see then that the adoption, the greater adoption of a digital currency for china makes it more complicated and challenging for them to keep their capital accounts closed. That will become somewhat harder if the C. N. Y. Does become available outside the country. And I think that is likely to be the case a few years from now. And more importantly, as chinese firms and banks start operating more uh across borders. Um and as you have more digital currencies, both private and central banks being available around the world, the conduit for money to come into and out of china will certainly increase over time. The E. C. N. Y. May not play uh you know a dominant role in that change. But it will certainly add to these other influences that are leading to china's capital account becoming more open. But of course one should recognize that the People's Bank of china has already indicated. Um And it was shown through its words and actions that it is committed to more capital account, opening a more market determined exchange rate. So I think they will not resist that happening. But it is certainly true that if china were to try to clamp down on this capital account, it's going to become a lot harder over time. Doctor Prasad. Uh This is fascinating. I want to thank you for your time, your book. The future of money will be released shortly and it's uh it looks like a fascinating read. Thank you so much for joining us. It's been my pleasure. Thank you very much for having me and for this conversation.

Xendit’s COO Tessa Wijaya on challenges operating in the region.

Eastworld Spotlight: Southeast Asia is too diverse for a ‘one-size-fits-all’ approach to digital transformation

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Southeast Asia needs a diverse approach to digitization

Eastworld Spotlight: Southeast Asia needs a diverse approach to digitization

Yeah, welcome to East World spotlight. Series of online conversations in which the editors of Fortune talk with leaders from the worlds of tech, trade and Finance in Asia. Our guest today is Tessa Wijaya, co founder and chief operations officer of sending one of Indonesia's leading Fintech startups. Before we began a quick reminder, you can get East World fortunes newsletter on asian business delivered to your inbox every Tuesday and thursday by signing up on the lead link featured in the article below this video. But Tasha welcome, Thank you for joining us. Thank you for having me. So, um, let's talk a little bit about Send it Send. It is based in Jakarta, although you're joining us today from from bali, which is nice um, and it was was launched in 2015 as a peer to peer payments provider and was the first Indonesian company accepted into the seed stage accelerator y Combinator Midway through the program. As I understand it, your startup pivoted to become a payment gateway, which enables businesses to collect and transfer payment data from buyer to seller. You've raised $88 million accel and you have offices in Indonesia and the Philippines. So, uh, congratulations on this promising start. Um, maybe you could start by just explain these people a little bit about what a payment gateway is and what you do for customers. Sure. Thanks. So what's the payment gateway? I like to use, um, the analogy, uh, logistics company, but we actually move money so we accept funds and we deliver funds on behalf of our merchants so that they can transact online with us. Um, so basically reflect the stripe of Asia. So, okay, so like describe from Asia? That's very interesting. Um, tell us a little bit about the type of merchants that you would work for. I mean, are they large? Are they small? Uh, what's the spectrum? So we work with both large and small merchants. Um One of our bigger customers, for example, is travel Loca, so we help those guys help help them accept payments online. Um through our platform, we also have a bunch of smes that we've been helping uh to really move to become a digital player. So what this means is, hey, if someone, someone wants to sell something online, stay through a platform like Shopify, we can also help them accept payments in that way. Uh And just maybe I'll explain a little bit more what what we mean by accepting payments or sending money because I think um in people's minds when they go to website and, and they go shopping for example, for something, um they think, hey, it's actually the merchants who are providing the payment rails, but in reality is payment gateways like us that provide the piping essentially to link your bank account to the merchants bank account and or to the likes of Visa, Mastercard. We help both e commerce players as well as other fintech players. Uh for example, if you're a peer to peer lender, you're coming into market in Indonesia, you need to accept payments um for repayment of loans or need to disburse loans. We can help provide those piping for you as well. Um So it's not just about e commerce, it's about other, other types of fintech or anybody really who wants to come online and accept payments uh online with us, many of these e commerce companies obviously have very sophisticated platforms themselves, uh and are to varying degrees. They have fintech capabilities. Why would they turn to you and what is it that you can provide for them, that they can't do for themselves? Yeah. Look, I always say building a payment platform is extremely hard. You have to knock on the door of basically each of the banks in Indonesia or in the market, you have to knock on the on the doors of the e wallet players in market to be able to provide those payment message. So for the likes of e commerce players, you know, they already have to build a whole platform, they already have to figure out algorithm to make sure that the right products are in place or that the right merchant, it would be really distracting for them to be figuring out how to manage payments themselves. And just as a reminder here in in market, in Southeast ASIA payment method, um that are very prevalent here are very different than in the developed world. Uh it's very much non card face, what this means is a lot of people are still paying through bank transfers or e wallet payment. So what this means is that you must be able to integrate multiple players. You must be able to figure out hey which bank transfer um which bank accounts wanted to open to be able to accept payments from certain end users. So I think for these guys for whom payments is not their core product, it would be a whole other businesses they're trying to set up which will distract them from their core business lines. So that's why we're here. So that's really interesting. You made this comparison which which many people do to send it and and stripe. But in fact the environment that you operate in is much different than the environment that strike operation for the life of strike who operate in the Western world payments is mostly about credit card. So it's about connecting to Visa and Mastercard and then it's about, you know, payment security, uh, fraud guard for us payments is a lot more varied. You have to understand that in markets in Southeast Asia, a lot of people are not even back. So we have to provide many many different options so that they can access payments online. Uh, let me give you an example. A lot of people in Indonesia. They have smartphones. I think about 70% of the population of smartphones, but many of them, many of these guys who have smartphones, some of them might not even have bank accounts. So what we would provide is things like, hey, you can go to your 7 11 several, you can, You can still shop online and then you can make that payment under 7:11 and therefore you don't even need a bank account. So that's really that market different as to why. Um, we we are here specifically for Southeast Asia. That's really extraordinary. Um you mentioned that you're operating in Indonesia and the Philippines. And um, that struck me as very uh interesting because you also talked about the complexity and the different banks and the regulatory issues. Um, I mean, obviously, Southeast Asia itself is one of the most diverse, complicated regional market uh, in the world. But it's interesting that you also describe the complexities of just trying to operate so far only in these two countries. Why why would it be so difficult to figure out only to regulatory system? Look, I mean, uh, people love to swap southeast Asia as kind of one market when in reality we have about 25,000 island in the whole southeast Asia Indonesia itself has about 17,000 islands. Can you imagine the complexity of payments? Um I analogize payments to, you know, moving money in trucks. Can you imagine moving all that through different islands where maybe the infrastructure? Um it's not exactly um, you know, top of the line yet. Um so I think, I think we have to understand that because of such varied cultural, such varied amount of people and as well as the vast number of islands payments can be super duper complex. Um What may be a pain point in Indonesia may not be one in the Philippines and then vice versa. So we're seeing, for example, in Indonesia, uh most people are already trained to sort of do bank transfers because you know, we've been trying to do so because a lot of these ride hailing apps have common market in the Philippines. What we see is that people are still predominantly paying by cash. So again, that behavior is completely different. So I think when people say, hey, let's go to south East Asia, let's tackle payments there and they sort of underestimate and think the whole Southeast Asia the same, I think that's a big mistake and really, you know, that's why we're here because we're able to understand the differences in each of these markets. Yeah, and again, this is really a key difference with a market like Indonesia or the Philippines is that there's, you know, such a substantial population, part of the population that is, that has no access to banking services at all. And this is also a big difference between even even china where, you know, you can go to fairly remote local villages and people still have bank accounts, but in Indonesia, large percentage of the population not only has no bank account, they've never even seen an ATM machine and so to figure out how to serve them is a challenge. Yes. But ironically we have the highest, I think facebook or instagram user in the world. Um, so I think we're fascinating that we're all online, we all have mobile phones, we have a way to access the digital economy, but yeah, we don't have bank accounts. It's a really amusing behavior there. Uh Well, I mean, in that sense, I mean, I find Southeast Asia to be one of the most interesting Texans in the world right now because uh there is no none of this kind of legacy finance technology. Southeast asian firms like yours are leapfrogging to do things that are really harder and more challenging than anything that's going on not only in the United States, but even in markets that are perceived as kind of cutting edge internet leaders, like, like china, I was just gonna ask a little bit about your plans for regional expansion. I mean, do you feel like these, I mean, these are two very big complicated market Indonesia and the Philippines, but that's kind of enough to be dealing with for now. Or are you looking at expanding soon into other markets? I think definitely we have bigger ambitions. Um, we'd love to be in, you know, expanding out into the likes of, you know, Malaysia Thailand Vietnam. We definitely have our eyes set on those markets. And the reason again, is this on the, on the, from the outside, you could probably say, hey, you know, the likes of Malaysia payments already set, um, multiple, probably on credit cards and there are no issues there. But when you're listening to the demand from the customers, they're saying, hey, it's still really difficult to make payments instantly or to accept payments instantly. It's still really difficult to figure out in some settlements And you know, in today's world 2021, everyone wants something instantly when it comes to doing stuff online or when when it comes to transacting online. So I think for us, definitely the ambition is there. And the reason is that I think we have been so good at being hyper localized. It's just in our D. N. A. To be able to go deep into the text back of payment players in that market to connect to the bank to connect to the wallet. It's in our DNA to be able to figure out local life systems of payment and then be able to translate that to world class apps that global players can use. Let me ask you just quickly about uh the last year, obviously the pandemic has offended a lot of different business models. How has it affected your business model? Has it been a positive or has it been a setup? Yeah, that's a really good question. I think. Look, we've been the really lucky ones. The pandemic has really accelerated the move For both markets to go digital. So basically the digital economy, uh the economy 4.0, as the president of Indonesia calls it, um that growth has been really accelerated just because, you know, you can no longer just be offline shops had to close. Um you couldn't walk outside. Um everyone was stuck at home. Um So super duper interesting for us because uh before the pandemic were predominantly serving a lot of enterprises through the pandemic, we're seeing a massive influx of smes, the mom and pop shop um that are coming online with us. Um and and let me ask you about your staff. Uh you started with, I don't know, something like 10 people. How how big is the, how many workers do you have employees do you have now? Yeah, I mean I remembered um four or five years ago. We, you know, we were we start out at a house which is the garage version of Indonesia, right? Most startups has been started in garages. Um we started about 10 people and now we're at more than 500 and a lot of us are not even based in Indonesia anymore. So um yeah, we have offices in Jakarta and Singapore as well as Philippine. It's been a super exciting time for us. Um One really interesting fact as well as we basically almost doubled and workforce and Covid started. Um so that's been a super exciting time for us. And it's all the bizarre actually because some of these guys are a lot of these guys I've never met in person. So very exciting times again. What about you? You were educated in the U. S. Uh and and then later in Australia came back to Indonesia, you were working for a private equity firm. I mean you could have stayed in a stable financial job. What prompted you to abandon all that uh to leap into being an entrepreneur and and take a chance on a fly by night, you know, start up that was just getting going. That's a really good question. I sometimes ask myself the same thing. I'm kidding. Um So I mean look a lot of people in my family um have been entrepreneurs and a lot of them have had to do it, you know, not by choice but by necessity because they have to uh to put food on the table. But also during my private equity time, I met a lot of entrepreneurs here in market, that's just got some really amazing story. I remembered one person, she was like, she was manufacturing packaging for SMP G. And she told a story about how her father started the business and when he started out, he was picking cardboard and landfill and it became this massive enterprise, and she was looking for private equity investment. And I thought, you know what, I've been looking at a lot of companies and it's been super interesting, maybe it's time to take the leap and do it the other way around. Um and really, I was really uh super lucky with timing, because right about 2015, 2016, that was when the startup scene was starting to really happen in Indonesia. A lot of Fintech was starting to pop up and it was just a really exciting time to be, uh, to be in the tech space. So I decided, okay, this is my time, this is my moment. Why not? Let's give it a try. If things don't work out, I can always go back to the investment world and yes, so I did that and never looked back then. Well, it seems to have worked out very well for you, um, and we appreciate you taking the time to tell us a little bit about the growth, attend it and I hope you'll uh, enlighten us again as your growth continues. Thank you so much for having me.

Natixis’s Alicia Garcia-Herrero says the economic milestone is a long-shot, but possible

Eastworld Spotlight: U.S. GDP growth could surpass China's in 2021

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mhm. This is the week of the so called two sessions, the most important political meetings in China. And along with the two sessions we are getting some other important milestones were getting the 14th five year Plan, a series of goals that have been called the long range goals that are extended out until 2035. So a lot to take in. What are you focused on and what kind of significant economic aspects of this strike you first decisions have become so famous when I started covering China and he already was, and now it's like the whole world looks at it. It's just impressive. But as we speak, these positions are changing in nature. Before, it was all about like a channel speech and you know, the targets for the year. If I may say so and now it's becoming more structural. It's really about where China is heading in the million runs. This time around. The growth target became more relevant than last year simply because, after years of no target, we ended up with the target. But it wasn't really about the target itself, but how low the target and why and again this brings me back to the fact that it wasn't about this year's target, but how to manage China's structural deceleration within that target. And that is exactly why they chose a low target to avoid, You know, a sudden reduction in 2013. So China is thinking, long term, more than ever, it doesn't seem like there's more focus. Uh, not in having a high growth rate per se, uh, in this plan, uh, alone, but also having what they call quality growth. Okay, Yeah, The quality growth comes from the fact that I think they learned the lesson. Let's face it, they already had very, very poor Gini coefficient, meaning already very unequal distribution, so they don't want to go any further. And I think that's part of the story of quality growth. As you know, very well, President. She focused on the elimination of poverty, which was another aspect of the great rejuvenation. So so it is becoming more like conceptual rather than, you know, target driven or quantities quantitatively driven. But I think income distribution is key, and what they will do about it, though, is meaning it's very hard for them to to work against it. for the simple reason. It is costly because you need a much bigger welfare state. And China today has about 10% points of GDP in in social expenditures of pensions, health and so on. And it has been estimated that it needs to go all the way to 20 in the next 10 years and by 2035 close to 30. I mean, it's a massive amount of resources, even that they are increasing military expenditure. R and D expenditure and their fiscal deficits are estimates in consolidated terms is about 18% this year and even before covid close to 10. So you know, it's just very, very hard for China to do what it needs to be done with you to improve income distribution. That's why I think it is kind of an aspirational goal and they don't have any target because if they were to put a target there, I think frankly speaking, they would miss it. I say you mentioned the debt problem in China. Um, in your view, does this find your plan to tackle that problem aggressively enough, or is there not enough stimulus here? How do you see it this year? we have a slightly smaller fiscal deficit, 2.2 from 3.5, if I recall correctly. By the way, that number doesn't mean anything because that's only the central government deputies. And it doesn't really, as as I probably you probably figured from my previous figures doesn't really show the extent of fiscal expansion or physical evidence in China. But it gives you a sense of the direction they are worried about additional stimulus because the debt burden, including public debt and this is the difference. Before it was all about corporate debt, then we heard about household that growing quite fast. Now we know for a fact public that has grown too fast. So, you know, it's kind of a you know, and and, by the way, corporate debt. Let's be frank here to search our state owned companies so you know, state owned enterprises. So the ultimate, uh, public debt is very, very large in China, larger than the US, larger than Europe. And I think the worry is much more on potential growth, which makes that debt unsustainable over, you know, in the long run, because you just don't have the resources to pay back an actual immediate crisis. I don't think that's the worry, but they know that the worst is coming in the long run, and that long run is getting closer and closer. That's why you know they're focused on the long run is very obvious in this two sessions and in this five year plan. So in terms of GDP growth, whether it's 6% this year or whether it's uh, 8% we do know that China is is going to overwhelmingly be the kind of best growth story in the global economy, really the only big engine of global growth this year. Next year, the US presumably will start to bounce back. How do you see the other big economy? Uh, in the in the world contributing? It's a great question because a recent event, I think, actually, as as recent as yesterday, I did say that in 2021 there could be I mean, this is unlikely, but possible that the US would grow more than China and suddenly there was silence. You know, like like you can't possibly be true, but it could be true. This could happen 2021 and maybe 2041 and let me explain what I mean by that 2021. This is because with a 1.9 trillion stimulus, if we already had a growth rate, I mean, our projections were hoping around 6%. Now you can see people upgrading that to seven even higher, you know. So that's basically higher than the government reports. Target to get chance. 6% target. I don't think China will go beyond six, but it would be, you know, seven so pretty similar. And I think there's many reasons why, frankly, Chinese speaking on the US now, and that's unsustainable growth, and that's unsustainable there and that unsustainable stock market. But if you ask me, one of the reasons is they just can't figure having very similar growth rates in 2021. That, added to the very successful vaccine rollout in the U. S. Just makes me very nervous. I have to say, I c, I can feel that and I can understand that because you know, the humongous difference of 2020 suddenly vanishes. Yeah, in all in all respects, whether it's the the way you you know, the covid response to growth itself. Why did I think 2041 because that's when China will literally stop growing. And this is because all of the structural factors I mentioned so you can imagine a probe being below to put 2.5 very likely that the U. S potential role today so then will be a time where China will slow at part with the U. S. Is not lower. But by that time, China will be bigger than the US. However, China perk up there will be more than the U. S. So So you know this story as as to who will. It's not much, frankly speaking. But the point is, we do. We do not appreciate the changes in China. You know, we we try to get these linear in, and we need to, uh, come to the fact that China's growth down the road it would be much, much lower. And I think that's why Chinese, Russian, if you ask me in many many ways, um, the economists have different figures for when they think China in real terms, Chinese GDP will overtake the United States. Do you have a year when you think that uh, 2028 could be even, uh, you know, again, it depends. I mean, the 1.9 trillion I'm going to abstract from whether this is a good idea or not. I'm only going to say that these actually lengthen the time in which China will actually have passed the U. S. Of course, that's not the reason, but it does lengthen it because that's similar packages, not even a one year package. It's a 10 year, although it's front loaded in the first year and then less so in the second year. But that's going to bring growth to the to the U. S. In my opinion for quite some time. And that's going to delay. That's 2028 perhaps, that people have in mind. Uh, it will all depend on how much China needs to cut down on all financial risks. Think government obviously has a lot of tools to sort of manage the market. Um, we seem to have seen some some government driven stock purchases. It's often observed that this is a year that's the anniversary of the Communist Party, and that it would be unseemly for the market to tank in a year that's such an important anniversary do you? Do you share that view, or do you think that that reads too much into how how much Beijing actually cares about the market? Well, to be frank, one thing is to prop up stocks in Hong Kong for reasons that we are all very aware of. And the other thing is to prop up stocks in China at the time when the stock market is probably three times as big since they did it last time, which was 2015. It's just very hard now. They can look for a while, but they can't go against the wind. And yes, they control a number of state on broker brokerage houses and so on. And, of course, the main bank. But you know, it's just not sustainable to do that, whether they want to do it for the full of 2021 then the collapse in 2022 will be normal. So, you know, it's just not. It's a game that well, it's funny this way. If I were invested in time stuff, I would use this wonderful united front to get out at the best of all times. That's that's all I would do because you know that that market is too big to be to be propped up forever, so but that's what not when it works.

Arcus Investment’s Peter Tasker on the Nikkei 225’s long, strange return to 30,000

Eastworld Spotlight: Japan’s stock market recovery is real

mhm. The Nikkei 2 to 5 is the benchmark index Japanese stock prices, and last month it rose above the 30,000 point threshold for the first time since 1990. Now many analysts are saying that it might even top its all time intraday high of 38,957 0.40 for a level that it last reached on December 29th of 1989. That was way back at the height of Japan's bubble economy. We're joined today by Peter Tasker and author of Veterans Equity Analyst, one of the smartest and most experienced observers of the Japanese economy that we know he joins us from Tokyo. Peter. It's been a long, strange trip back to 30,000. What is behind the Nikkei's recent rally? Well, indeed, You know, it was there, uh, in December 1989 so I remember all that all that time? Um, the market has changed. Japan's changed, the world's changed, but it has been one of the biggest and deepest bear markets that we've ever seen anywhere in the world. It's It's been much longer and deeper than after the Wall Street crash in 1929. Here we are. We're celebrating the 30,000, but as you rightly said, um, it's a while to go still another 30% or so to get back to the all time high. Uh, you know, we were. That's a long time ago, but definitely it's a very positive sign. Cheering sign of what's going on in Japan. Maybe help to just say a little bit about what the Nikkei 2 to 5 actually is because it's a little bit confusing to some people. How it's how it's composed and and calculated. Yeah, that's right. It's a an index. It's a bit like the Dow Jones index in the U. S. And it's an It's an average of absolute stock prices without references to the number of stocks in issue. So that does lead to some significant anomalies. Companies that have got a very high stock price, um, will have a very high waiting in the Nikkei index, even if they are not the largest companies by market target because they don't have that many stocks out. So, for example, the two biggest stocks in the Nikkei 2 to 5 a Softbank and fast retailing, which is which owns the unit clothes brand clothing brand, and those two stocks make up 20% of the Nikkei index. So if they do well, that's going to push up the market, the Nikkei index. So it is fair to say that the Nikkei has moved a long way ahead of the rest of the market because of the composition and a great success of those two companies in particular which have really blown the doors off the the. The other thing that's changed quite a bit is the the composition of the investors, uh, in Japanese equities as well that are sort of driving the movements of these. I wonder if you could say a little bit about that. What we've seen more recently, when I say recently over the past couple of Jaquet, is the gradual development of an investment culture amongst individual investors. So there are now what you might call sort of somewhat not hugely wealthy, but people with quite a bit of capital to invest in the market. And you've got a more professional class of professional investors, particularly we've now got the G P F, which is the government pension fund in Japan. It's always been there, but it got snaked up and professionalized, Um, during the last Abe administration and it became a much more active organization. Um, and, uh, they have about 50% of the book their portfolio, which is 100 100 trillion yen. It's a huge, huge portfolios. Biggest, biggest pension fund in the world by some reckonings. Um, so, uh, they have 50% of their of their allocation to equities and half of our overseas equities, and half of it is domestic equities. And you've got more. Recently, there's another thing that's been going on is that companies buying back their own shares quite quite a large amount. They become significant investors now in the market. So this is actually a pretty good thing for Japan because many of the companies in Japan have been over capitalist. They've got too much cash at hand. So, um, actually returning that cash to shareholders who are highly likely to reinvest it in other starts, Uh, it's a good thing. So these are all progressive trends that have been a long time coming, but have started to accelerate really over the last five or six years be interesting. And what about foreign participation in the Japanese market. Is that increased? Um, well, when we had the initial flurry in 2000 and 13 and 40 of abenomics, as it was called, which was the kind of new macroeconomic policy of Shinzo Abbott, who, uh, who was the prime minister at that time? That that was very popular with, uh, overseas investors And a lot of money went into Japan in that two or three year period. And then people kind of gradually took money out. Other things were going on in the world market in Japan have done quite well, so they took money out. And in fact, by 2000 and 20 they took out all the money that went in during that sort of excitement about other armies. So, yes, last year, unusually, uh, the Japanese market went up in a year in which foreigners were disinvesting quite aggressively. So we have got at the moment a market which is driven holy by, um, domestic Japanese investors. If the foreigners come in as well, um, that's going to probably be a beer forced to take the market higher. You've you've written about, you know, the thesis behind which this rally has happened. I wonder if you could maybe stay a little bit about that. I think what we really think seeing being recognized now is the culmination of the culmination of a process of Japanese companies becoming more commercial, more profitable, more concerned about shareholders. Um and, um, a balance sheet management. Um, margins. Everything has improved tremendously, really? Over time. How much credit do you give abenomics? Well, I think that that was a kind of catalyst. Uh, the previous, um, some governments had not tackled the big problems of inflation and stagnation. Um, and as a result of that, when a bear walked into the, uh, the prime minister's Office in at the end of 2000 and 12, Japanese nominal GDP was the same as it was in 1992 so that we know growth in nominal GDP for getting onto 20 years. That means essentially no growth in company revenues. Uh, no growth in salaries, you know, that's that's not a good place to be in. So he jumps started the process. Uh, and Japanese companies, uh, we're there, too. You know, there have been changes in place already, which then accelerated, but he jump started the process and some of the things like the reform of GPS, which I mentioned before. We haven't mentioned the role of the central bank in this story yet. But obviously one of the main arrows of abenomics was this ultra loose monetary policy keeping interest rates very low. Um, and of course, the BOJ has also become a very significant investor in the market. Uh, itself. Can you maybe enlighten us a little bit as to how that works? Yeah. Yeah, that's right. Well, this is obviously a very controversial area. The BOJ is the biggest investor in the market. It's like it's bigger than the G P I. F. Because of this, the GPS generally reduces holding when the market goes up. The BOJ doesn't So it's it's holdings that it it bought all through the last 10 years, have gone up and up and up. So what's embarrassing? I think they were worried that they might lose money on the stock market. What's embarrassing is they've made so much money. So it's like, What are we going to do with this? You know, they got huge profits on there's not holdings and, uh, yeah, So this is This is a sort of a dilemma. Now that they will now feel okay, That's mission accomplished. Basically, we've, as they call it, we reduced the risk premium on the market and people think it's safe to come and by the market now because it's obviously very buoyant. But what are we gonna do with all the stocks we got? So they're going to have to come up with some neat formula for exiting the equities that they've got without disturbing the market, because it's such a large amount now that if they said, you know, we're gonna sell all of our holdings tomorrow the market attack because it's simply can't take it's about 8% of market cap. You can't you can't basically just supposedly like that. So help us to kind of take all this and put it together. I mean, with all these different factors, uh, weighing and Buoying stock prices, do you think that this rally has further to run or is it already looking like we're getting back into bubble territory? I think in the case of Japan and many of the markets in the world, then actually, not all that expensive on the basis that we reopened the economies and we get back to this roughly the same level of corporate profit profitability that we had before. Um, I think the markets many of the markets in Asia included are not all are expensive. So you think that that reopening is a is a plus for for shock crisis, that it's a kind of a demand shock as everybody returns to consumption? Well, I think the the likelihood is that we're going to see some very high numbers for GDP growth across the world going coming through this year. Uh, you know, you know, levels as we saw the ones that you know the bad numbers last year they were just, you know, off the charts. And I think we're going to be off the charts on the upside at this time. Um, so yes, that's that's going That's generally going to be a positive background for corporate earnings. I think what I would say, though, is that what are the central bank's going to do that That's a crucial point because, as we know, there was This sort of massive tsunami of money has hit markets, and it also hit households. And this is different than what we saw in the global financial crisis, which is now that you've got people who got very high levels of savings, which they weren't really, it's not plan savings. It's compulsory savings because you can't spend the money in the way you wanted to. So, um, this this suggests that there could be a pullback by central banks. At some point, the money tap goes off, and that could be a bit of a reality check for investors. Um, and maybe putting upward pressure on interest rates, as we've seen to some extent already in this last couple of weeks. Okay, So are you, uh, all in all looking for the Nikkei two at some point break its all time high record? Or do you think that, uh, that is something that is a long, distant prospect? Well, it's about 30% from here. Um, So, um, it's not gonna you know who knows. Never say never. But, you know, it will take several years. Um um, but several years of decent games kind of average gains. We'll see it, uh, accomplished this decade for sure. Peter, we'll have to leave it there. um, really appreciate this kind of look into, uh, the Japanese economy, and it's remarkable comeback. Uh, and we'll we'll wait to see if your prediction comes to pass. Thank you. It's great to talk.

[MUSIC PLAYING] GRADY MCGREGOR: Welcome to Eastworld Spotlight, Fortune's interview series where we interview experts about the most pressing issues facing Asia today. Today we have Yanzhong Huang. He is a professor for global health at the Council on Foreign Relations. He is also a professor and director of Global Health Studies at Seton Hall University's School of Diplomacy and International Relations. Yanzhong has recently been an invaluable voice to explain China's response to the pandemic and what it means for the world. And he's also recently published a book called Toxic Politics-- China's Environmental Health Crisis and Its Challenge to the Chinese State. Thank you so much for joining us today. YANZHONG HUANG: Thanks for having me. GRADY MCGREGOR: So I guess to start, I was really interested in this section in your book. Because I remember when I lived in Beijing, checking the AQI readings from the US embassy, and then checking what the Chinese government was putting out, and just the visceral feeling of that on the ground every day. And I was curious why did you choose to focus on pollution for your book. And why is it such an important lens in understanding how China operates? YANZHONG HUANG: Basically, there are two reasons. One is that well, that-- we started that project in 2013, 2014, when China was facing a PM 2.5 crisis. The air pollution has become headlines-- all the media coverage. And secondly, I want to basically build on this case to bridge the gap between the studies on China's internal challenges and its international ascendance. Because we have a voluminous literature talking about China's-- the challenges China faces. And in the meantime, we have a lot of literature discussion talking about how China is becoming a threat because this military prowess, the capabilities, economic capabilities. And so I'm trying to use that case to focus on another dimension of the Chinese power that is the state capacity to provide better, high quality air, non-contaminated soil and food. And so that capacity to provide goods and services, I think it's a very important dimension of state power that is very often overlooked in China studies. GRADY MCGREGOR: Yeah, and I think you called it maybe the most formidable challenge-- and maybe one of the most formidable challenges that the Chinese government faces today. Why is that? And how would you assess its performance so far in addressing environmental health issues? YANZHONG HUANG: It is a nationwide and sustainable challenge. So if you look at the challenges to the economy, to the society, to the political legitimacy, that is also different. In fact, if you just look at the cost to the economy, according to a study-- well, actually, estimate I did-- is that it cost, in 2013, 18% of China's GDP. That is what shows how China is among those countries most adversely affected by pollution. But in the meantime, when you look at the government response, the-- it is mixed. On the one hand, you found the government has been very impressive in terms of bringing down the pollution level, both in terms of the PM 2.5 concentration level, and the number of polluted days between 2013 and 2018. But in the meantime, if you look at other indicators of measurement, such as the number of polluted days the winter time, and then you also look at the ozone level and the unintended undesirable consequences, this question, this cost-benefit analysis, you find that those achievements no longer become impressive. GRADY MCGREGOR: Under Xi Jinping, the response very much changed in terms of how it came down from the top level and then became implemented on more a local-- by local authorities. How did the change in Chinese leadership impact China's response to environmental issues? And where does that put us today? YANZHONG HUANG: The impact is, again, also mixed. Because certainly, well, if you look at President Xi, well, he has shown unprecedented levels commitment to tackling the environmental pollution problems. I think if there's any major shift in China's environmental policy, it's this growing state commitment to tackling air, water, and soil pollution through all these action plans and also through the increased implementation of these pollution control measures, like the heavily rely on mobilization approach by sending the so-called the Central Environmental Protection Inspection teams and mobilizing Thai bureaucracy in the society to achieve those objectives. And in this process, also, unlike his predecessors, he's been also trying to institutionalize those measures, instruments introduced in pollution control. And so we have indeed found those measurable decline in terms of pollution at the national level. But in the meantime, if you look at institutional aspects of this pollution control, right, the political aspects, we have exactly-- after 2012, we've seen this rise what we call the "bandwagon" politics-- when you have this political power so concentrated on one person, that is President Xi. Basically, everybody, local government officials try to jump onto these policy wagons in order to show their early and enthusiastic support with his favored policy agenda. So that is a good thing in terms of the speedy action on pollution. But in the meantime, it also change to be this bureaucratic incentive structure to give this strong incentives to f That is, to act more Catholic than Pope-- to sometimes carry those policy objectives too enthusiastically that sometimes causes unintended and undesirable consequences. GRADY MCGREGOR: And bringing us to today, President Xi also made a pledge recently to bring China carbon neutral by 2060. And do you think China's economy will have to sacrifice in order to meet that pledge? YANZHONG HUANG: Well, that is a good question. Because we have seen over-- despite those strong commitment to pollution control, and to-- also committed to tackling the climate change, this dilemma between economic growth and environmental protection continues, actually, even in the Xi year, right? We have-- but this is actually, this dilemma has, in a way, reinforced in the post-COVID era where the local governments actually trying to stimulate local economic growth to make up for the loss incurred during the COVID era. So you actually seen the permits being issued to those coal fired power plants increased in 2020 more than those were issued in 2018 and 2019. So that dilemma. And another example is the Premier Li Kequiang recently called for promoting the so-called "stall economy"-- those streetside vendors that many people believed was also a contributor to environmental pollution, right? So you have seen this dilemma continue to be there. And without changing of the-- fundamentally, the government legitimacy base, and fundamentally change those industrial and energy structural, you're going to see why this is going to continue to haunt China's efforts to tackle climate change. GRADY MCGREGOR: So it might be difficult, at this point, to say that they will meet that 2060 target. YANZHONG HUANG: Yeah. And also, you could point it out that now, with this deteriorating of US-China relations, China now is calling for that new strategy of dual circulation. It's focusing on domestic consumption, indigenous technology, right? So when China focus on economic self-sufficiency, right, the external forces that are impacting on China's green development will also be undermined. And so you mentioned in the beginning, right, that the US missions in China, right-- how the introduction of the PM 2.5 standards actually fundamentally change China's pollution control policy. But that was a good example of how the US could have leverage on China's environmental pollution control. But now with that leverage, it's becoming smaller and smaller, I think. GRADY MCGREGOR: Yeah. I think that's a good place to end. But I really appreciate you taking the time to chat with us today. YANZHONG HUANG: Thank you. My pleasure. 

Eastworld Spotlight: China’s climate challenge

China will need to completely change the way it governs.

How can China meet its climate goals?

Council on Foreign Relations’s Yanzhong Huang talks about China’s environmental dilemma.

 CLAY CHANDLER: The measures against Huawei in particular are interesting because they seem to have really found a way to kind of tighten the noose around Huawei that perhaps earlier measures were not able to do. PAUL TRIOLO: The recent restrictions against Huawei, the so-called changes to the foreign direct product rule, basically have expanded US export controls overseas to affect virtually every semiconductor company. So the first action against Huawei in May of 2019 was using US export control laws in ways that they really hadn't been intended to be used, to go after supply chains of large, complex companies like Huawei. And so pretty quickly, though, the US companies figured out that there were loopholes or the limitations to those-- to that-- those export administrative regulations. So the China hawks have worked hard over the last year to plug those. And so that's what's really happened in May with an issuance of a very vague language around this foreign direct product rule. And then in August, we had a real tightening and expansion and clarification of the rules, which basically make any company using US technology to produce semiconductors on behalf of Huawei have to get a license with the presumption of denial. So whereas previously, it had just impacted US-based suppliers, for example, Intel, Microsoft, Broadcom, Qualcomm, now this new rule basically affects any company in the world that is producing semiconductors that may end up in the hands of Huawei or one of its affiliates, which are now, I think 158 of Huawei affiliates now are on this entity list. And so this really has sort of taken Huawei's supply chain from being restricted to be almost totally shut off in the area of particularly advanced semiconductors of the type that were being manufactured, for example, in Taiwan by TSMC and are now being manufactured in other places. Even in China, SMIC is now subject to this new limitation. So whereas Huawei, as you noted, Huawei was able to get around the May restrictions from 2019 by redesigning its base stations to basically design up US technology. Here, this action is hitting much more broadly in their supply chain, and then particularly hitting those advanced semiconductors that it had decided to design on its own. That was already happening with TSMC because in May, after the May rule, TSMC announced they would stop producing key semiconductors for Huawei. So that was already a pretty big hit. So you note that up until May, I think Ren Zhengfei and others at Huawei thought they could sort of weather the US restrictions. But after May, first TSMC announced that they would stop cooperating with Huawei. And then this August restriction is much broader and now hits really any company that's providing any kind of semiconductor assembly or product to Huawei. So I think it's a tough-- it's very tough now for them to work around us. CLAY CHANDLER: These high-speed chips that you mentioned are vital to both the telecom towers and smartphones that together account for about 80% of Huawei's revenue. And without these chips, Huawei can't really produce these products at all. We know that they have stockpiled quite a few chips, especially as the tensions heat up. But how long how can Huawei last before this really starts to bite and exhaust their supply? PAUL TRIOLO: On September 15th, which is next week, that's the deadline for basically the stopping of all shipment of semiconductors to Huawei under this May order. And so TSMC, for example, which was producing key advanced semiconductors, for all of Huawei's product lines-- so, as you mentioned, smartphones, the Kiran series, the series for their 5G base stations, for their cloud and AI side and for their enterprise, all those chip supplies coming from Taiwan will cease. And so their ability of Huawei to last with those stockpiles depends on the product line. So when you're talking about smartphones, for example, they were-- they were-- Huawei, at one point-- I believe last year was producing over 250 million smartphones per year. So they were using a lot of semiconductors that are the key to those advanced features in their smartphones. And so I think one estimate has that they'll only be able to produce 50 million phones next year. There's a huge drop. So that they'll run out of those advanced semiconductors probably in sometime early next year, because the volume is so high. For 5G base stations, they might be able to last a little bit longer because the volume there isn't as high. CLAY CHANDLER: Is there a risk that this is so disruptive that it could actually threaten Huawei's existences as a company? PAUL TRIOLO: I mean, as you say, the company has been able to get around this initially by redesigning out-- redesigning their base stations and some of their other products to design at US technology. But here, there's no-- there's no real alternative to go to once the US has basically restricted their ability to produce these cutting-edge semiconductors. The leading Chinese domestic foundry, for example, SMIC, is just not at the same level. They're two or three generations behind leaders, like TSMC, Samsung, and Intel. And the US has also acted to cut off their ability to acquire advanced lithography equipment, for example, so they can move to those more advanced nodes in semiconductor manufacturing. So Huawei has nowhere to turn here, right? There's no domestic champion that's going to come to Huawei's rescue on the semiconductor side. So that's existential to them. I mean, their company-- my sense is they're going to have to reorganize, potentially spin off parts of the company. They're still competitive, of course, in things like software, cloud services. But all those things still require semiconductors at some level. So all parts of their business are eventually going to be affected. CLAY CHANDLER: Boy, the stakes here are enormous. It's almost like sort of the nuclear option for the US to exploit that technological monopoly that it has and threaten the existence of-- Huawei's a $100 billion company. It's enormous. It's the largest chip manufacturer. Again, this is a multibillion-dollar business that is not only important for the functioning of China's economy, but there are a lot of issues of national pride and face at stake here. For policymakers in Beijing, what are the-- what are the options? I mean, are there tools in-- weapons in their arsenal that they can deploy as well against American firms that would act as a deterrent? PAUL TRIOLO: Beijing's policy response, I think, has been evolving over the last year, as they have sort of come to grips with the fact that the US is really, and seems to be intent on eroding Huawei's ability to continue to function in the way it had been as a company. So I think on the one hand, Beijing wants to-- senior leaders in Beijing are sort of trying to run the clock out, you get the sense, on this administration, hoping that if they got a change of administration in November that some of these policies would be re-examined under a Biden administration. So they're being very careful and disciplined in responding to this, to sort of directly to the Huawei actions. On the other hand, of course, they're taking a lot of steps domestically to shore up the industry. Already, of course, there's a huge national [? ICU ?] development fund, investment fund, which has been providing a lot of subsidies to Chinese semiconductor companies. In May, there was a big announcement of the new infrastructure initiative, which is designed to focus on 5G and mobile edge computing and try to encourage, again, domestic companies to take part in that, and a lot of subsidies involved with that. And then, of course, they've been beefing up the stock market, the STAR Market in Shanghai, the high-tech market, encouraging semiconductor companies to list on the market, changing some of the IPO requirements, and trying to get companies in China to raise funding through both the STAR Market and the Hong Kong Stock Exchange, as you know. So there's sort of a two-fisted policy here. One is try to, as much as possible, channel capital to the domestic industry, hoping that their semiconductor industry will get better. The problem is these are tough technologies to master. And so in some sense, the semiconductor industry domestically has unlimited capital available to it. I mean, there's so much funding out there. But it's not really a function so much of funding as it is of talent and sort of technology know-how. And that's going to take time. Certainly, China has come a long way since-- for the last five years, even, in terms of design and manufacturing of semiconductors. But this is a global industry that's taken 20 or 30 years to develop some of the division of labour. And it's just really hard for China and Chinese companies to recreate these global value chains that took so long to develop and are really cutting-edge kinds of things in the software services side or in the semiconductor manufacturing side. And so it's a real-- China faces a real uphill battle. But, again, very capable companies and very capable industrial planners in Beijing. But if they're really going to-- if they're really going to try to recreate the whole semiconductor industry in China, that's going to take a decade or more. So there'll be places where they can make progress. But it's going to be a long struggle if they're going to really wean themselves off of US technology in that arena. It's going to take a long time. CLAY CHANDLER: You talk in your report about the emergence of a red chain and a blue chain in the global supply chain. Can you say a little bit more about that and what that means? PAUL TRIOLO: Yeah. I think what we're seeing as a result of particularly the recent series of US government policies here is an attempt to really-- to force countries and companies to try to choose sides in this conflict. So we've seen this very clearly, for example, with this new Clean Initiative that the Trump administration is pursuing. Secretary Pompeo has been [INAUDIBLE] us. And again, in August, he announced an expansion of this, the so-called clean network, which really includes things like 5G, includes cloud services now, it includes application-- mobile application stores. And clean means really free of Chinese technology. And so we saw this initially with Huawei, which was-- which was a path that the US followed over the last two years, which is to convince allies, particularly in Europe and in Asia, to exclude Huawei from their 5G network rollouts. And initially, that looked like it wasn't going to gain a lot of traction. But over the last two years-- over the last year in particular, it's really gotten traction, in part because the US has also implemented these other restrictions on Huawei, casting doubt over the ability of that company to go forward, to succeed in those markets going forward. And so the Clean Initiative has really now been expanded into just about every part of the technology stack. And so that really is an attempt to sort of force the world into either the blue supply chain, which is the US and other Western democracies, Europe and in Asia, and a red supply chain, which would be one that China would lead. And right now, countries, for example, in Africa, Latin America are still using Chinese equipment and would probably not sign up to any kind of effort to exclude Chinese companies from operating in their markets. So that sort of red chain-- red supply chain, blue supply chain paradigm, I think, is definitely operative, particularly with this-- in the latter days of this administration. CLAY CHANDLER: That's so interesting, because the way the US-China conflict is often positioned in these discussions is that it's a clash of rival superpowers. But in the technology sphere, it's not clear in every area that China really is a superpower, or even perhaps ever will be. PAUL TRIOLO: Well, yeah, again, I think you have to take each sector separately. I think, as you mentioned, there are really two main areas where China has historically been behind the US, and that's semiconductors and semiconductor manufacturing and in software, sort of operating systems, enterprise software. So if you look at the top 10 companies in the world in enterprise software, there aren't any Chinese companies there. So those two areas have been-- have been a known source of concern in Beijing for a long time. Right, they talk about as core technologies are in the hands of others. This is what you hear from Chinese officials all the time. And again, as I said, it's sort of this continuum. They've made tremendous progress in all of these areas in the last 10 years. If you go 20 years ago, there was no Chinese semiconductor industry imagined. There was no Chinese software industry. So now they're farther along. But in a sense, the US-China tech Cold War has come at a really bad time, where the dependence of key Chinese companies on US technology remains very high. And the US has been willing to use this, as you said, this sort of nuclear option to cut off Chinese companies selectively from having access to key parts of the US technology supply chain. So China is gonna-- is gonna have to really sort of alter course and try to reproduce those global value chains within China. Now, the advantage China has is it's a huge market, right? So China's 5G market is bigger than most of the rest of the world combined. So they have the advantage of a really big captive domestic market. But those areas that I mentioned, like technology and sort of trained personnel who know how to run an advanced fabrication facility, like TSMC, those are things you can't change overnight. But based on the progress that they've made so far, I think that given a five-year timeframe, it's possible that China and Chinese companies could still make major, major gains, even if they're focused domestically. But again, it's an uneven-- it's also an uneven-- a little bit of an uneven field. ZTE, for example, is not subject to any of these export control regulations. So they're still able to acquire US technology. Now in AI, I think, China has a big advantage, because there, it's not so-- if you get access to the hardware, which China has been able to do [INAUDIBLE] Chinese companies-- it hasn't been as restricted as in some other areas, except for companies involved in [INAUDIBLE],, ironically. Then there's-- it's more software. As you say, it's more-- they're very good at leveraging AI for commercial and consumer-facing kinds of applications. And they're doing much better basic research on AI. So China, no matter what happens, I think, in the hardware side, China will be very competitive. Chinese companies will be very competitive in using AI and AI applications. So each of these areas sort of has a different-- there's a different level of dependence and a different sort of trajectory for Chinese companies to go to also to reduce their dependence on the US. I think that's going to be the general trajectory at this point. I mean, I think we are going to see a real strong move domestically to just keep reducing dependence on foreign technology, and particularly US technology. 

Eastworld Spotlight: China’s ‘uphill battle’ to reach semiconductor self-sufficiency

Can Huawei survive challenges in the semiconductor industry?

China’s struggle to reach semiconductor self-sufficiency

Eurasia Group’s Paul Triolo on Huawei’s survivability and China’s challenges in the semiconductor industry

[MUSIC] CLAY CHANDLER: Welcome to another East World. Our guest today is Jesper Koll, senior advisor to Wisdom Tree Investments. Jesper is based in Tokyo, and is one of the best known observance of the Japanese economy in the West. Longtime resident of Japan. Well, he'll talk a little bit today about the surprise announcement last week that Japanese Prime Minister, Shinzo Abe, has decided to step down, and what implications that has for Japan and its economy. Jesper, welcome. Thanks for being with us. JESPER KOLL: Thank you for having me. CLAY CHANDLER: Were you caught off guard by this announcement last week, that Abe would resign? JESPER KOLL: Look, I mean, there's no question that the timing was a big surprise. Now, Prime Minister Abe himself had become a little bit of a lame duck over the last four or five months. And really, you're kind of hard pressed over the last four or five months, he seem to have lost his mojo; not just because of the complications of policy forced by the COVID, but really in terms of having forward looking visions. So yes it's a surprise, but after eight years-- after basically eight years in power, and we knew he was going to leave anyways at some point over the next 12 months. And it leaves the LDP, the ruling Liberal Democratic Party in a very interesting position, because after eight years of a very strong grip on power that Prime Minister Abe had, now it's back to the old world of smoky backroom dealings trying to pick a successor. CLAY CHANDLER: Talk about these successors in a minute. But I wonder if we could just look back on his legacy and what he's accomplished. Do you rate him as one of Japan's better prime ministers, more effective prime ministers? JESPER KOLL: Oh, absolutely. I think he's done a tremendous amount of good in Japan, not just by the stability and consistency of the grip of power, but by really coordinating policy very well. And you remember, Abenomics was about the three arrows And you think about that's monetary, fiscal, and structural policy, 1, 2, 3, but as you know in Japanese history and Japanese sort of mythology, the analogy of the three arrows is a very different. One arrow you can break, two arrows you can still break, but three arrows you cannot break anymore. And we know that Japan has a lot of-- has a myriad of structural issues and problems that it needs to get through. There is not one magic bullet, there is not one monetary policy, there is not one fiscal policy, there is not one regulatory policy that gets the thing going again, it's the coordination. And that's where Prime Minister Abe over the last eight years was unbelievably strong. His group of basically 12 core ministers, which he kept very, very consistently over the last eight years, ruled Japan with an iron grip extremely coordinated, whether it's the monetary and fiscal policy, or whether it is the regulatory policy, whether it's the coordination with the business community, even the coordination with the GPIF, the Government Pension Fund. Unbelievably powerful and well coordinated grip on power. CLAY CHANDLER: One of the tools that he used to do this obviously is creating this new personnel agency that's controlled through the prime minister's office. How effective do you think that was in getting some leverage over bureaucrats that traditionally in Japan have been quite powerful in making economic policy? JESPER KOLL: No, absolutely. You you've put your finger on the key accomplishment. In 2014, they set up this new personnel agency under the cabinet office, and they are responsible for the appointment of the 600 senior most bureaucrats in Japan. And this is actually where the Chief Cabinet Spokesman, Mr Suga, one of the likely successors, that's how he exercised this power. So all of a sudden, you don't have the legacy and the institutional history of METI, off the Ministry of Finance, of the Ministry of Health and Welfare, sort of on its own little autopilot juggernaut; all of a sudden you've got political directives. And I've actually been in the room when some of these bureaucrats got fired for not following the directives given by the prime minister's office. So huge change. The balance of power has definitely shifted to what's the prime minister's office, away from the bureaucracy. CLAY CHANDLER: Criticism of Abenomics has been that while. Monetary policy has been very loose and very effective, and that there's been a great deal of government spending to prop up the economy has Struggled, that both of those things were really designed to be temporary stock gaps and to remove some of the pain of doing this third thing, which was regulatory reform to make Japanese companies more competitive; and especially fixing the problem of the shrinking and aging labor force, getting more women into the labor force. How has he done on that third count? JESPER KOLL: Look, I think the answer is it's a work in progress. You mentioned womenomics, certainly, there's been an enormous amount of progress. If you look at the female participation rate in Japan, it's now surged above that of the United States. And even some of the Scandinavian countries. And as you know very well, having a genuine conversation about female empowerment before Prime Minister Abe was basically impossible in Japan. Now, even the most established and conservative companies are engaging in this. Structural reform, I mean, what is it that you should be doing? You need more innovation, you need more entrepreneurship, all these things are starting to happen. Even-- like when you look at some of the data, when you look at foreign labor, I mean, the number of foreign workers in Japan has basically doubled during Abe's tenure. It's still relatively low compared to some of the European or the United States countries, but the overall mind shift that has been engineered, I think is actually a very, very powerful one. CLAY CHANDLER: I want to come back to the election and this question of Prime Minister Abe's successors. There is a very crowded field now. I think it sounds like they are debating still whether to put this to a party wide election or whether to have this be decided by a much smaller group of members of parliament in the heads of the LDP chapters in the various prefectures. But do you have a sense of which process they'll take to choose a successor? JESPER KOLL: It's interesting, Clay. I think, first and foremost for the world, what's important is that actually the candidates are very similar. Of the current candidates who've raised their hands, if you ask me what's the difference in terms of the policy outlook, I mean, it really is splitting hair trying to come up with a difference. So it's about personality. It's not about policy. And I think that in the end, sort of a brokered convention type of outcome, r sort of classic LDP Japanese style is most likely. Now, the interesting thing is that, in my personal opinion, whoever is going to run the country is going to be relatively short lived, because there is a younger generation of LDP politicians. And for example, the current Defense Minister, Kono, who is Georgetown educated, is a very global person. He's definitely a contender. Not this time around, but the next time around. Really sort of leading Japan into the future, it's not the immediate successor, but the one afterwards the 2022-2023 guy, that's when Japan is going to get interesting again, because the generational change actually happens. CLAY CHANDLER: Can I ask you about these two or three front runner contenders for this interim tenure as you see it? We have emergence Suga, he's the chief cabinet secretary, has been, sort of Abe's right hand man. The other two, tell us a little bit about them. JESPER KOLL: So it's interesting. I mean, Suga is really the power politician, like I mentioned. Everybody is afraid of him because he exercises power and he gets things done. And Hishiba is a very interesting character, in the sense of that he's got very strong feelings about national defense. And you know he definitely is focused on defense spending. When you go to his office, you'll find there's at least 10 little model ships of the Yamato and the other sort of big ships of the Japanese Navy. He's very passionate about it. At the same time, Hishiba is a man of the rural districts. Every Friday, he leaves Tokyo and comes back only Tuesday mornings, and he spends time in the regional parts of Japan figuring out who does what to whom and why in each of the little villages, in each of the little districts. And so ironically, he is liked by the people in the regions because he looks after them, But the people here in Tokyo, the people who deal with the big business community, who deal with the financial community, who deal with the media, they don't really like him. They think he's a bit of a country bumpkin, so to speak. Right? CLAY CHANDLER: Right. JESPER KOLL: And then you've got Mr. Kishida who for intents and purposes, I don't really know that well. But for intents and purposes, he's always there. He wants to be considered a contender, but are hard pressed to figure out what he actually stands for or what he has been doing. And so he's sort of the youngest boy brother, so to speak. Right? The power politician, just to repeat, is Mr Suga. CLAY CHANDLER: We have a very important leadership election coming up in the United States in November. So there could be some pretty dramatic changes in the nature of the US-Japan relationship very quickly. What are the kind of scenarios you see for that? JESPER KOLL: It's very interesting, I mean, there's no question that Prime Minister Abe was a standout. I mean, literally, within 10 minutes of Trump being declared the winner, Prime Minister Abe rolled up his sleeves and made sure that he became the first foreign dignitary to visit with what was then the President-elect. And obviously the relationship between Abe and Trump has been a very, very strong one. In fact, John Bolton, whom you've seen as Abe piece, he says Abe was the only foreign dignitary who kept Trump accountable, which is kind of interesting. Right? And so that's obviously going to change either way. I think from a Japanese perspective, a victory of a Democratic candidate opens the door for greater multilateral activity. Right? And as you know, Japan has been pushing for a multilateral approach, particularly here in Asia. And so I think from that perspective, sort of a Democratic victory would be a little bit easier for the Japanese to handle rather than the sort of unilateral, slightly erratic and personality driven policy that you've got under the current president in the United States. CLAY CHANDLER: Well, that's quite interesting. It's also interesting that Abe was so proactive in visiting all the ASEAN countries early in his administration as well. JESPER KOLL: Yeah. And this is, again, when you look at the-- who should be succeeding Prime Minister Abe, I mean, one big part of his legacy is that, certainly, for the first six years of his reign, once a month, he was outside of Japan promoting Japan. Right? And he wasn't just sort of going for cocktail parties, he came armed with business people, they had an industrial policy, got more Japan, in particular, the ASEAN world, but also, Clay, in the Middle East, and as you know to some extent, even in Africa. CLAY CHANDLER: Jesper, we don't often get a chance to talk to people who can give us a detailed-- such a detailed briefing about the world's third largest economy. I think we often don't cover it enough. This has been fascinating, and I really want to thank you for sparing your time to share your insights. JESPER KOLL: No, thank you very much for having me. And prosperity to all. 

Eastworld Spotlight: The Abe Legacy and the future of a post-Abe Japan

How Shinzo Abe’s legacy will affect Japan's future.

The Abe Legacy and the future of a post-Abe Japan

WisdomTree Investments’s Jesper Koll on Japanese Prime Minister Shinzo Abe’s legacy, potential successor, and the future of the nation.

Watch: The Abe Legacy and the future of a post-Abe Japan

 [PENSIVE MUSIC] CLAY CHANDLER: Paul Scanlan is the chief technology officer of the Huawei Carrier Business Group. Huawei, the world's largest telecommunications manufacturer. And Paul, were delighted to have you join us to talk a little bit about 5G, this amazing new technology that you're working with so directly. I wonder if we could just start quickly, though, with a general question about where we are, where Huawei is, where the US-China relationship is. Are we creating a digital Iron Curtain between these two countries now? And how does that restrict Huawei's ability to do business? PAUL SCANLAN: For 32 years, we have demonstrated that our customers can trust us. They trust us to improve their business through technological innovation. That's what Huawei has done through and through. And it's unfortunate that this geopolitical war that's going around the world, and nationalism in many countries, fails to understand that we've got a virus at the moment. And the only way you fix those things is through collaboration, not through isolation. Personally, the way I feel and the way Huawei feels is that collaboration is far better than isolation or division. And to share information, to share experiences, to share where I'm heading to is to share use cases and experiences of what can be done with this technology called 5G in collaboration with clinical and AI based solutions. And that's not something that Huawei does alone. These things need to be done with a broader ecosystem not just within a country, but across the globe. That's how you fix problems, right, Clay? And one of the questions that you asked me, what really is 5G? Well, 5G is a platform, Clay-- a platform for transformation. The first thing it does is it helps transform a telecom operator's operating point. And that means its cash flow, it's efficiencies. That's what it does first. And the second area then, of course, is as I mentioned-- it helps reduce the carbon footprint. And that's before we start moving into areas of industrial, I'll say, transformation or industry transformation where the predominant component in that is really about collaboration. CLAY CHANDLER: Can we talk maybe a little bit about some of the plans and the targets, or how rapidly this network will be rolled out in China? PAUL SCANLAN: As of earlier this year, Huawei had shipped about 600,000 of the 5G base. If you were to compare, say, 4G back in 2014-- yes, I can recall that in Europe they spent about 18 billion euros on 4G spectrum. And in China, it was a couple of hundred million. Just laying the foundation here for a moment, Clay-- at the end of the first year, China had 720,000 4G base stations. The combined total of Europe was about 60,000. You're seeing something of the same order now in China. And I'm trying to put that in some numbers. One city here in Guangdong Province has more 5G base stations than Europe. But does that matter? You could do us say, we're rolling out this, we're rolling out that. Well, how many to measure? You can measure it where people think about the traditional standards of 2, 3, and 4G. Governments were always measuring population coverage. That was a typical measurement over, say, three years. And because the objective then was to provide a mobile service, that was the target at the time. And as I just mentioned just now, if you look at what's the real use cases for 5G, then deployment to a coverage area or to coverage of population density and things like that may not necessarily be the targets you're looking for. Telecom operators are rolling it out in what we call macro sites outdoors-- the big cell towers. And that's to get coverage of population. The frequencies we're using in 5G initially don't penetrate buildings very well, if at all. You can see that if I wanted to measure 5G industrially-- in other words, in its ability to transform industries, then those metrics are not really suitable. I would rather measure 5G really by, what's their contribution? How many telcos have achieved zero carbon emissions or being 100% green, for example. Just like Apple announced their targets, and Telefónica have announced targets from different industry sectors. Another measure might be, well, how many industries have we successfully started to transform? How many hospitals are using the benefits, or getting the benefits, demonstrate the benefits of 5G? How many manufacturing facilities have demonstrated the ability to be transformed? I think that would be great with metrics. CLAY CHANDLER: That's fascinating. And is your sense that Chinese companies are approaching this challenge very proactively, and that compared to global competitors they're ahead of the curve? Or, is this something that they still struggle with? PAUL SCANLAN: I believe, from what I've seen-- I've been working in Huawei for now 12 years, and just my experience in certain countries, and it's not just China. But I really do believe that China is-- personally, I believe China is ahead of the game. And what metric would I use? I would just use the COVID-19 experience of the last, say, five months, and just look at a couple of facilities that have been constructed. Over here in Wuhan, it's been well documented that 1,000-bed hospitals have been built within 10 days. We built 5G networks-- proper 5G networks, not just a quick and dirty. We build proper 5G networks in these hospitals within two or three days. We've built advanced cloud based AI solutions within a couple of weeks. And we didn't just do that today. Since 2018-- I think it's been mentioned that in 2018, some of the hospital collaboration that China has been doing allowed up to about 40,000 remote diagnoses of patients in Morocco and in other parts of Africa and in Asia. So that embryonic learning back in 2018, together with the pointy end of the stick that came with COVID-19 in February, led to, I think, or accelerated the thinking not just in China, but we demonstrated it here in China. That really showed the rest of the world spectrum something that's been in the pockets of regulators. It's better deployed. It's better given away cheaply or inexpensively-- freely, almost, with the caveat that we want you to fix some of these problems. Because they understood the value of broadband. But prior to that, they thought it's just a cash cow. But in China, you can see it in universities-- anywhere relating to education. You can see it in manufacturing industries. And Huawei is one of the ones that are doing this in manufacturing. They're largely led by health, understanding that if we can connect and get census devices, collect information, analyze this, we can fix problems. We can improve life. We can improve society. And I really believe that that's what China has done. CLAY CHANDLER: And can you give us a sense of the relative progress of the two largest economies on all these fronts? Is your sense that China is far ahead of the United States and moving towards this kind of world? Or are they-- I hear some estimates that they're neck and neck. Others say the US is going to come from behind later. What's your read of this? PAUL SCANLAN: Well, that's tricky. I'll just give you observations and let your listeners decide what's the right answer. But I just read that the US is releasing another 100 megahertz a spectrum, more spectrum in this thing called C-band. Well, I could probably cite dozens of other countries that have had C-band available for a year or two. The US launched millimeter wave, and it has it had challenges. Why? We won't go into why somebody is better or whatever. It launched millimeter wave based 5G solutions. But it targeted the fixed wireless access, which is largely providing fixed broadband solutions over wireless using 5G. That's not really industry transformation. That's sort of taking that competition between mobile operators and cable operators. But I gave you examples in the Middle East where the governments want to transform industries, and in China where they want to transform industries, and discussions in developing countries where they want to leapfrog so they don't get caught up in the bottlenecks or the challenges that the West has had in stepping step by step. They want to leapfrog all of those. You have many different ways to measure this. But countries like China have 100 megahertz and more for operators for some time. And if countries like the US are only starting to allocate more spectrum, then that's one of the challenges that operators will have in trying to deploy broadly. And deployment is the key to making all this work, Clay. The second area is in China. It's quite normal for us to deploy 5G. Not in big cell towers, but on lamp posts, to share lamp posts. Every second, or third, or fifth lamp post has 5G solutions built on them. And that's because the government understands that you need to share infrastructure. And if you want to have anything along the streets, the footpath or the cars, and you want autonomous or you want connected anything along there-- connected ambulances, et cetera, then you need to have the connectivity along the streets. They're deployment considerations, and some countries understand this better than other countries. I'm not really sure how the US is deploying or sharing a lot of the street furniture. But these are observations that I see here. More spectrum available, more timely. CLAY CHANDLER: As you know, there is a greater awareness of the competitive significance of 5G in the United States. In Washington, there's been quite a lot of talk lately about strengthening the government's involvement in rolling out some kind of 5G operation. But as you're aware, a lot of that recently has been focused on trying to use the government to put together an alternative in the United States to Huawei. How practical does that seem to you from a technical standpoint? PAUL SCANLAN: What I would advise-- what the US does really well is analytics. Have a look at Google and Amazon and the other guys. Work to your strengths. Personal opinion-- work to your strengths. How much are you going to make, or get, or improve by having a 5G piece of hardware? The floor price of a 5G radio is probably going to head towards a commodity based price in the near future. By the time you try to build up any alternative technology, it doesn't matter how good your software and hardware engineering capabilities are. You still have to go through proof of concepts. You still have to do interoperability testing. You still have to comply with standards. If you want to write a new standard, it's going to take years to get that agreed. You still have to have a product that is mature, and stable, and reliable, with the right go to market price. Those things don't happen in a year, or two, or three years. By then, a lot of the infrastructure globally will have been built out. A lot of the opportunities will be well underway. I've been to the US a number of times, and I've said in forums I would have thought the US had turned around and said this equipment from Huawei is terrific. Let's deploy it faster because we know how to do that in the US. Let's connect everything. Let's get all the information, the data. Let's analyze it and let's improve industry and develop our economy, grow. That's where the strengths, really, and that's where the business opportunity, I think, really lies, rather than trying to build up an alternative 5G technology supplier. CLAY CHANDLER: Last September, Alan Murray the "Fortune" CEO and I visited Mr. Ren. And he outlined for us this extraordinary offer for Huawei to license its technology to any American company who would ask for it, and to support it for quite a significant period of time to make sure that all the technical capabilities were there and it was up and running. And to just essentially turn that over to an American vendor. Have there been any takers for that offer yet? Anybody inquired? PAUL SCANLAN: Beyond my level of discussion, I'm afraid, unfortunately, Clay. But I think Mr. Ren would not have said those things lightly without-- he's a very big picture thinking gentleman from everywhere from architecture, to tuition and training, to thinking collaboratively. He's always said that we should never take too much market share. He's always said we should collaborate with Western companies, we should always make room for Western ideas, because that's where through competition comes innovation. This sort of OEM is quite a reasonable way to go, right? It gives you a head start. It could be in the software. It could be in the hardware. If you don't like the way we do our software, then please modify it, improve it. And if you think you do better in the way of the base stations, or the hardware, or the chips, or the material science, or the power management, then, of course you could take that and you'd have you'd have a product. Could be manufactured in the US, could be manufactured anywhere. That's not really the importance of the discussion. It was really to give the US the opportunity to have a head start, I believe. And if that was the real concern of the US, it could have been a very good way. And it could still be a good way for the US to get a product to maturity very quickly, which I think is what one of the administration's targets was. CLAY CHANDLER: You mentioned the possibility that the price would be driven down by competition over time. What does that imply for Huawei? What's next after 5G for where Huawei finds an ample profit margin? PAUL SCANLAN: We've understood for some time that all the other industries are using similar technology to what we're deploying in telecom networks. Telecom is just one vertical industry, one industry sector. We took a decision many years ago to start diversifying. We rolled all the R&Ds into one, and we started having different go-to markets, an energy sector, a manufacturing sector, in financial sector, et cetera-- in education, all of these. And we, I won't say dabbled, but we went ahead according to the strategy of the CEOs at the time. That has taught us a couple of things as we also see about this concept called platform. And cloud is a good example of a platform, just as a telecom network is a platform for an operator, a cloud, a marketplace, or a cloud of solutions, et cetera. We understood that. We could also see networks becoming terribly complicated. And the information within a network just to run it as we went from 2, 3, 4, now to 5G-- the amount of data just to run it and optimize it, make it better for users was enormous. We understood that some AI capability would be better. And that's why we ended up hitting-- that's one of the reasons why we head towards the AI chips that we were developing. Huawei isn't just focusing on 5G. Certainly, my business group that I work for, yes, we focus on building and optimizing the best networks in the world. But just look at beyond that. AI-- Huawei has capability AI. Huawei has capability in cloud. We are diversifying to a lot of these areas where we can understand, we can see what's happening in different industry sectors. And then we try to provide them cost effective, reliable, and innovative solutions to customers in those sectors. CLAY CHANDLER: Fascinating. Paul, you've been very generous with your time. This is a great conversation. Thank you for joining us. PAUL SCANLAN: My pleasure, Clay. 

Eastworld Spotlight: Huawei CTO says ‘collaboration is far better than isolation or division’

Tech

Paul Scanlan thinks developing 5G should be a global effort.

Huawei CTO on collaboration vs. division

Paul Scanlan on why the world should work together developing 5G.

Watch: Huawei CTO on collaboration vs. division

[MUSIC PLAYING] SPEAKER 1: Anthony Tan is the founder and CEO of Grab, the leading everyday super app in Southeast Asia. And we're delighted that he would take some time to speak with us. You're at home now, Anthony, is that right? Tell us a little bit about what your work situation is like at Grab. SPEAKER 2: This is my new normal. First of all, Clay, thank you to you, and thank you to Fortune for giving me this chance. I really appreciate it. And as you can tell, this is home. This is as home as it gets. That's literally the children's playroom where they spend most of their day. So all of us, even though we have the ability to go to the office because we're seen as an essential service, somewhat, we've taken the call to ensure that our guys, our fellow teammates are all as safe as possible. So we've implemented, right now in Singapore where I'm calling from is literally 100%, or close to maybe 99% work from home. SPEAKER 1: Grab is a remarkable company in that it has so many different business units, and it's engaged at so many different points in ordinary people's lives. What sort of measures have you taken to promote hygiene and assure the health and safety of those team members? SPEAKER 2: Well, as you correctly said, hygiene is tremendously important right now. Straight off the top of my mind, number one, we would have first introduced Grab Protect. So imagine you jump in a car. There is hands sanitizers, there's the plastic shield, there's the-- every time you jump on the app, you can verify that I agree to all these terms. And a driver can even choose to-- when he comes in and he sees that you're not wearing a mask, he can choose to reject you as a customer, even you, Clay. So that would be something that we would never have accepted before. But today, we will prioritize safety and hygiene even above customers. And customers actually appreciate that. We've seen how that's really helped the business, not just in rides, but also in food delivery. So for example, we have all the contactless. We make sure we do temperature checks for our merchants, our drivers. We have to submit temperature checks in the app constantly throughout the day before they can take certain parts of the day to retrigger their work activity. So we've done really-- and the good news, if I may share, is that when they did a survey, Grab is seen across the industry as the safest and most hygienic platformer. SPEAKER 1: In the United States, Uber and Lyft have faced some real difficulties in having customers have enough confidence to come back and actually ride in their services. Whereas in China, for the most part, DiDi seems to have been a little bit more successful in persuading people that it was safe and they could get back in the car. What's been the response of Grab customers? SPEAKER 2: The difference you mentioned about Uber and Lyft, and those are great peer groups. For us, we have a diversified business from rides, transport, mobility, all the way to food delivery, mart delivery, so groceries, things like that, all the way to social, e-commerce. So we facilitate, we're one of the largest, if not the largest in same day and instant deliveries that supports the e-commerce-- the bustling activity of e-commerce right now taking place in the region. So what we see is one, diversity is playing out. Because as the pandemic hit, our rides of course, came down, naturally, as cities went into lockdown. But our deliveries business shot up really, really fast. We were-- I mean, on some weeks, we were registering 20%, 30% growth. That's one. I think two is, what we're also seeing, the difference-- and you talked about this in the states and Southeast Asia-- is that, because car ownership is also much lower in this part of the world than in the US, we see that people tend to be more willing. As long as you can give them that assurance of safety and hygiene. SPEAKER 1: That's really interesting. Does it suggest to you that one legacy-- sort of long-term legacy of the pandemic is that people are much more habituated to the idea of shopping online and e-commerce, and that that's a permanent shift? SPEAKER 2: That's exactly right. There has been a permanent shift. What we see is customers including-- I would say we probably have a-- the core segment would be, for example, on food delivery, a lot of our customers are female between the ages from say, 20 to say, 18, 20, all the way to say, 35, 40 years old. And this idea of complete cashless, food arrives, my e-commerce arrives, my groceries arrive was a novelty. But now it's become a real deal. SPEAKER 1: Really interesting. I wonder if we could talk a little bit about how this feels from the vantage point of many of the vendors. I mean, you work a lot with small businesses, whether it's people that are supplying food, or groceries, or really any kinds of different products and services. This is a very difficult time for people that are in the small business space, is it not? SPEAKER 2: That's exactly right. It's tremendously difficult for some of them. Some of them have-- many of them who weren't on Grab had to close. So this is where, I believe, that Grab food, the likes of Grab Pay, a lot of these services that were seen as maybe at one point in the early days, nice to have. Today, they were the primary source of business for many of these guys. So in many of the governments around the region, they classified us as essential service. So even more important than a straight out public transport, because people weren't going to work, it was a must have to get food into homes during lockdown. SPEAKER 1: Fascinating. Have you been surprised by how successful most of the Southeast Asian economies have been in coping with the pandemic? I think initially, there was a fear that this was something that, once it really got started in Southeast Asia, was going to rage through the entire region very quickly. SPEAKER 2: I would say, I can't speak for all. I think I wouldn't make generalized comments. But you're right to say that most of Southeast Asians' businesses right now, something like 90%, are small medium enterprises, SMEs, that really are a major part of the region's business. Now, a lot of it was also, I would say, traditional. Meaning in the sense that they were mostly offline. So the penetration of the food e-commerce, or grocery e-commerce, or mobile payments, were still very low-- or cashless-- are very low compared to, say, the US or China. So I think that COVID obviously took what was clear, that is from the future and just brought it forward by years. Second, I would say, it's safer in Singapore. I think in Singapore, they executed this, if you don't wear a mask, there's this ability to self police. If I walk out my apartment and I don't wear a mask, you don't need a police man to find you. I know people, your neighbour will just stare you down until you-- and even if the mask was below your nose, they will make sure that it has to go above your nose. People stare you down. So I think that ability to-- this region or at least Singapore and many of the other countries can be quite disciplined when it came to wearing masks, for example. They were quite disciplined to make sure, hey, I'm an emerging market. I need this, and I need to embrace whatever it takes to survive. And that hunger was there. So they just quickly pivoted to online very quickly. SPEAKER 1: What's the kind of baselines that you're using for business planning and sort of mapping out where all these economies are-- how did I know-- in the US, a lot of people are hanging on, waiting for the vaccine. Because they kind of figure that things will not really be back to normal until a significant number of the population has been vaccinated. Do you see approaching a kind of more of a normal economic outlook even before there is a vaccine? And what's your expectation for having a vaccine? SPEAKER 2: The reality is, every city in the region is going to have a day that they will feel like it's nearly solved. And then, there's going to be another day that they will feel like doom and gloom. So what we are seeing is these waves. It's not going to be this permanent sense that, oh, we're out of the danger zone and that's it. And I think it's good. None of us should, in fact, we should be on our toes to ensure that we prevent the next wave from happening or delay it as long as possible. So when we plan our business as we said, for example, one advantage we had was because we had a lot of say Grab car, Grab bike drivers. And the minute that transport came down, they were available. Grab food came and saw a massive spike in volume. We could move these drivers. So we moved something like 149,000 drivers in a period of two months-- 149,000 drivers in two months. Can you imagine? That's like an army. And we're talking about like moving them from what they were used to every day to bringing people to work now, going upstairs, picking up the food from the restaurant, or shopping from a grocery store, and then delivering that. We also saw how our GrabMart scaled to about 50 different cities in a period of 2 and 1/2 months and fewer cities in eight countries. So now we have partners with 3,000 or more stores in this short period. Again, all this literally came up during COVID. We've also seen how Grab Pay-- and again, people-- so imagine this, we thought that people would be-- you know, if it's a card, but people don't even want to have somebody else touch their card. This idea of touching my card is now seen as non-kosher. So the idea that I can just QR code pay, the idea that I can just tap this idea. So for example, if you have a Grab Pay card put in your phone, you can tap it for MRT, for mass rapid train. You can QR code to many thousands of our stores across the region. And because most of the people in this region, say 70%, are underbanked in some shape or form. So that, to us, was a great boost. SPEAKER 1: That's really quite a thing. Because we're talking about a group of economies where-- there is some variation, obviously. But where you've got many people, who as you say, are underbanked. That they're used to just using cash all the time. Cash that gets passed from one hand to another, to another, to another-- that's a very fundamental transformation on consumer psychology. SPEAKER 2: Fundamental, right? I mean, cash was one. But imagine, I thought cards-- like you wouldn't have thought a cards economy that bad. People don't even want to pass a card on. So it's so pervasive from a customer behavior change. And merchants don't even want to-- they actually encourage their cash bearer not to take it. Because they don't want a sick staff and then passing it on. So they say, please, I encourage you, use your phone-- QR code pay, please. SPEAKER 1: And you think that's going to be a lasting shift? SPEAKER 2: Oh, yeah. There are stores that I see today don't even accept cash anymore. They say no cash accepted here. That's a new reality. SPEAKER 1: Fascinating. You've been very generous with your time. These are wonderful insights in a very fascinating and diverse market. Thank you for sharing them with us. And we hope that you'll come back and fill us in again later on your progress. And in the meantime, stay safe. SPEAKER 2: Thanks so much, Clay. Please stay safe in Hong Kong. And my best regards to your family as well. 

Eastworld Spotlight: Grab CEO talks digitization and diversification

Anthony Tan on how Grab is adapting under COVID-19.

Watch: Grab CEO talks digitization and diversification

Anthony Tan shares how Grab and other businesses are adapting during the COVID-19 pandemic.

[SOUND EFFECT] CLAY CHANDLER: Lucy Gazmararian is the co-chair of the blockchain committee of the Fintech Association of Hong Kong. And we're delighted to have her with us here today to talk about China's digital currency. Let's start by just talking about some of these acronyms that have been thrown around to describe whatever this thing is. I hear both Central Bank Digital Currency, CBDC, but also I hear this Digital Currency and Electronic Payment. What is the acronym of choice for this particular thing? And then tell us what it is. LUCY GAZMARARIAN: The DCEP is China's version of the CBDC, which is a central bank digital currency. So they have chosen to call their version of the CBDC a Digital Currency Electronic Payment. Actually, when it comes to central bank digital currencies, there is no set definition around the world. So many central banks are researching central bank digital currencies. In fact, the Bank for International Settlements says 80% of central banks around the world are researching this. So this is China's version of a central bank digital currency. CLAY CHANDLER: Tell us a little bit about what it is and what it would do, how it would work for an ordinary consumer or a company. LUCY GAZMARARIAN: It's essentially a digital currency. So the central bank, rather than minting physical cash and coins, they're going to "mint" a digital currency. And so really what we're talking about is an upgrade to cash, physical cash. And that is the use case, the first use case that China is going to have for their digital currency. It's going to be a retail central bank digital currency. So it's targeted at the retail sector primarily in China. And it's cash is getting an upgrade. CLAY CHANDLER: So would it be primarily targeted at consumers, or would it be more useful for more firms, or would be the main user? LUCY GAZMARARIAN: So when we say retail, retail actually encompasses individuals, it encompasses SMEs and corporates in China. So it's quite a wide-ranging category, actually. And the idea is that it's going to replace physical cash in China. Because the central bank is the one minting these digital tokens, this digital currency, it's legal tender. So it differs from other digital currencies people may be familiar with, such as Bitcoin or Libra Coin, other digital currencies. But this will be government-backed, legal tender in digital form. CLAY CHANDLER: China already has a quite advanced mobile and digital payment system, using Alipay or using WeChat Pay. How would this dovetail with those platforms? LUCY GAZMARARIAN: So importantly, the way that this new digital currency is going to get into the hands of the retail sector is via the existing financial services ecosystem. That is made up of the four state-owned banks, but it's also made up of non-banks, and that is Alibaba's Alipay and Tencent's WeChat Pay. So they are part of the distribution model. What the People's Bank of China, the PBoC, is not going to do, it's not going to hand over, or transfer, the digital tokens directly to retail. They're going to go via the banks and non-bank intermediaries, and then you download the digital wallet with these intermediaries, and that's the way you're going to be able to access new digital currency. So they're very integral to this new distribution model. CLAY CHANDLER: Why is that, I mean this is an extraordinary undertaking takes a lot of effort and manpower, obviously, to roll out. Why is it that the government sees that there's value in doing this? I mean, you mentioned efficiency, but are there other benefits that the government obtains from this? LUCY GAZMARARIAN: I mean, it's become as, China itself has said, it's a technological inevitability. It's not about whether they should embark on this undertaking, it's an absolute necessity. And it makes sense, because we look at our lives, increasingly we live our lives online. We have tech-enabled lives. And we're moving at breakneck speed towards a digital economy. And a digital economy, which includes tokenization, which is really leading in that new digital economy, needs digital money. It needs fiat money in a digital format. So otherwise, you're having the threat of Bitcoin or Libra Coin or other coins that have the technology that can integrate into the new digital economy. So it's an absolute necessity that China, as well as every other central bank, upgrades their currency. CLAY CHANDLER: Hmm, amazing. So all this data that will be available to central bank authorities, how will it be used, and then how will the central bank reassure people about the privacy of their data? LUCY GAZMARARIAN: So that's the really big question that's out there, and that's the big question that central banks really need to get their heads together and figure out how they are going to design this money. The data you are going to collect, there are two sides to it. On one side, the data that they're going to collect, given they are going to be able to gauge complete economic activity of a country in real time, and that data will be recorded on the blockchain-type network, distributed ledger, we don't know exactly. So the government will have access to all of that. On the one hand, it will just enable a central bank to be able to do their job more effectively. Because rather than having a lag in economic data, they're monitoring all the spending, the transactions, money supply, inflation implications, all in real time. With the ability to track all of that data that falls naturally into the lap of a central bank is all the other data. So every person's spending history, every person's bank account balance, tracking where they go in the world, because DCEP won't be available to Chinese as they do business in other countries and they visit other countries. So it's almost a sort of a way to track an individual as well. So there are big, alarming questions that need to be properly considered when it comes to privacy and anonymity. And the technology is there to enforce anonymity. So you can do, you can transact anonymously, there is the technology there. But it's a question of are they going to implement that? Is that something that they're going to build into their currency? And time will only tell, as different central banks come up with their versions of digital currency, as I say, there is no one size fits all. They're all going to be different, and likely to reflect the values and culture of their citizens. So we'll see if the different governments have a different approach to these critical questions. Which is the currency we're all going to end up using the most, what are we going to move towards? Or are all governments, we're just going to accept that all governments get to have this data, like we've kind of accepted with tech giants like Facebook? No one's really done anything about it. CLAY CHANDLER: That's fascinating, I mean, China's digital giants, particularly Tencent and Alibaba, are big players in other markets. India, of course, also Southeast Asia, whether as owners of tech companies in those markets, or whether as venture investors in some of the local players. Would it be easy for them to roll this out in local companies in Southeast Asia and India as well? LUCY GAZMARARIAN: I mean, absolutely, as much as it makes sense, there's someone else that needs to agree to that on the other side of the trade. So yes, they can, and it depends. At the moment, RMB is a tightly-controlled currency. So there's also that element. But if they do want to have currency flowing more freely outside of their own borders, they will have the technological capability to do that. And the other use cases brought up many times is the whole Belt and Road Initiative. There's so much trade happening in the Belt and Road, 60 plus cities, and there is not a universal currency. The US dollar is still the currency that needs to be transited, most huge transactions need to flow through the US dollar. So there is a case for the DCEP to become a universal payment instrument in emerging countries as part of the Belt and Road. And then there is talk that it could rise up as the world's reserve currency for emerging countries. CLAY CHANDLER: One complaint from China, that the US takes advantage of the fact that the dollar reigns supreme to try to enforce sanctions and other types of punishments on countries that go beyond just financial transactions and creating a market. Does this give China a way of buffering itself from those types of reprisals? LUCY GAZMARARIAN: Potentially. I think that we are so early in this journey. At the end of the day, user adoption of any currency is going to take time. We need all these currencies to be developed and launched. It's very difficult to say that a digital currency from China is going to be the new world's reserve currency, because the others have not launched yet. And let's take a look at how they are designed, what utility people see in them. I don't think the race is on. I don't think that if you move first, you get all the network effects. So really, we'll have to wait and see on that front. But we know that the central banks are also going to launch their own currency. And the US dollar has dominated global trade since the end of World War II. It is so integral to our world economy. I don't see that changing any time soon. And even if it is a case of a mismatch in technology innovation, i.e. China is streaming ahead and the US is lagging, the US now has a digital dollar project. They are very aware of what is necessary. They know in a digital economy, you need a digital currency. So it's a matter of time. CLAY CHANDLER: Well, this is fascinating. And it will be really interesting to see how rapidly this can be rolled out and will be accepted by consumers in the different markets. And it's extraordinary that China has been really at the vanguard of this, and thinking about it for so long, and now really coming into fruition. Lucy, thank you very much for sharing your thoughts and insights on what this new trend will look like, and we hope to welcome you again. LUCY GAZMARARIAN: Great thank you so much, Clay. 

Eastworld Spotlight: The inevitable rise of the digital yuan

This expert breaks down China's need for a digital currency.

The inevitable rise of the digital yuan

FinTech Association of Hong Kong’s Lucy Gazmararian discusses China’s central bank digital currency.

Watch: The inevitable rise of the digital yuan

[SOUND EFFECT] CLAY CHANDLER: Stephen Roach is one of Wall Street's most distinguished and most influential economists. He is a senior fellow and lecturer at Yale University, he has been the chief economist of Morgan Stanley for many years, and was also the chairman of Morgan Stanley in Asia, serving right here in Hong Kong. Stephen, it's a pleasure to have you with us today. Thanks for joining us. STEPHEN ROACH: Thank you, Clay, it's always a pleasure to talk to you. CLAY CHANDLER: You've been warning for nearly a month now that the dollar is in danger of a rather severe weakening. Tell us about that outlook and the sources of your concern. STEPHEN ROACH: Well, the dollar had a strong run. Since 2011, a broad dollar index up close to 30% in inflation-adjusted terms, and looking out over the next couple of years, Clay, I think the dollar is going to undergo a sharp correction to the downside. I look for the broad dollar index to decline by 35% on an inflation-adjusted basis for two sets of reasons. One, US macro imbalances are going to be building as never before. And by that, I mean a sharp, sharp decline in domestic saving that will trigger a record current account deficit. We entered the pandemic with a very low domestic savings rate, 1.4% of national income, courtesy of these gigantic budget deficits. We're going to see a negative savings rate to the tune of minus 5% to minus 10%. That's going to happen very, very quickly. And so that will lead to the current account issues that I alluded to, will break our prior current account deficit record of 6.3% set in 2005. And currencies are designed to be the sort of correction mechanism for current account imbalances, and the US is no exception. The second set of reasons behind the dollar call is that America has squandered its global leadership in so many ways, it's hard to really keep track of them. But we've led the charge in deglobalization, decoupling, a trade war, trade protectionism, we've had an unbelievably abysmal performance in addressing the coronavirus relative to other nations. And we have a racial catharsis going on in the United States, the likes of which we have never seen, even for somebody as old as me who lived through the late 60s. So from both standpoints, the leadership piece as well as the macroeconomic beast, the dollar is headed down. 35% is not unprecedented. CLAY CHANDLER: What emerges as an alternative to the dollar in that scenario? If you're an investor, what options do you have? STEPHEN ROACH: Well, that's for a long time been the dollar's greatest defense. The acronym for it is TINA, and TINA is not a young woman, but it stands for There Is No Alternative. Turns out there are plenty of alternatives, Clay. The most unloved major currency in the world right now is the euro, it's the most undervalued. It's been moving up recently, and I think if the European political leaders can get their act together and pass this package that funds a 750 billion EU Next Generation fund and endorses the issuance of a sovereign pan-European bond to go along with it, the euro will move up, continue to move up, sharply. I think the Chinese renminbi can also continue to move up, on a broad trade-weighted basis, it's up about 50% over the last 15 years. But if China stays the course on reform, there is more to go there, and investors speculate in exotic alternatives. But you have to look seriously at cryptocurrencies, like Bitcoin, and precious metals, like gold. So I think the idea that there is no alternative to the dollar is really going to be tested during this COVID crisis. CLAY CHANDLER: One of the things that China is working on right now, obviously, is a centralized central bank digital currency. Some people have suggested that that might in some way erode the status of the dollar as a reserve currency if China is able to roll that out on a large scale. Do you see that as a possibility? STEPHEN ROACH: Not in the near term. I think that there is no question that China, the world's global leader in fintech, is also stepping up, but the dollar today still accounts for a little bit less than 60% of official foreign exchange reserves. While that's down from a little over 70% in 2000, it's still about three times the share of the second-largest reserve holding, which is the euro, at about 20%. Over time, who knows? The dollar has been in a secular decline in terms of share of global reserves. It's still the largest by a wide margin. I think it's almost mathematically impossible for cryptocurrencies, even though they're growing at phenomenal rates, they're coming off such a small base that they're unlikely to pose any serious threat to the dollar, over the foreseeable future, as the world's dominant reserve currency. CLAY CHANDLER: You mentioned that for China to be able to play a larger role as a reserve currency, it's got to stay the course on economic reforms. Tell us a little bit more about that, and how do you think China is doing in terms of economic reforms, and what additional reform work is necessary. STEPHEN ROACH: China has pushed ahead on reforms in the past because its economy was growing so rapidly, it could afford to take the heat, but when it's undergoing a record shortfall, the appetite to do that is diminished. Nevertheless, China still has a huge reform agenda. I'd highlight three things in particular that are really critical. State-owned enterprise reform, where the progress has been very disappointing. The capital markets reforms, which have been an ongoing process, but which have slowed down, and more needs to be done, especially in the area of currency and capital market convertibility. And thirdly, as glaringly pointed out by the novel coronavirus, social safety net is still porous, and much more needs to be done investing in retirement and in health care infrastructure. And so there's plenty for China to do. The question is do they have the will to do it, and do they have the growth cushion that would enable them to exercise that will? CLAY CHANDLER: The Trump administration seems very determined in trying to prevent China from getting a hold of cutting-edge American technologies, Western technologies, certainly as they pertain to national security, but in other areas as well, and has reached out to other US allies to join this effort to keep China from becoming part of the global techno-ecosystem. Does that effort, can it succeed in slowing the pace of innovation in China. Could it even shut it down? STEPHEN ROACH: The Trump administration has moved to put Huawei and its suppliers on the so-called blacklist, or entity list, in the US. And lacking in the domestic chips that Huawei needs to be self-sufficient, this is a threat to China's greatest technology company, and it's something to take very seriously. The US has a view that China is a threat and should be contained from achieving the type of technological dominance that America has long enjoyed post-World War II. And I think that this technology battle is really at the heart of what could well be a Cold War 2.0 that we might well be in right at this moment. CLAY CHANDLER: In the case of a Biden victory, do you see a lot of scope for a significant reset? Because I have heard some people say that they think that Biden will more or less take the same hard line on China that Trump has done. STEPHEN ROACH: There are a lot of tough issues that have been put on the table in the last 2 and 1/2 years that are not going to be yanked off the table. But I think you're going to see a very different approach. Without caving into China, but one that really focuses much more on finding common ground through compromise, rather than utilizing the so-called art of the deal strategy to punish and bully a supposed economic adversary, as the Trump administration has done. On the big issues, the structural issues, of technology transfer, innovation policy, intellectual property rights, and cyber, I think Vice President Biden, if he's elected, will be very tough on those issues. But I think it'll be, again, as I said, a process that will be easier to understand, more transparent in its objectives and its tactics. 

Eastworld Spotlight: The dollar crash and the rise of alternative currencies

Yale's Stephen Roach on challenging the dollar hegemony.

The dollar crash and the rise of alternative currencies

Yale University’s Stephen Roach talks about challenging the dollar hegemony.

Watch: The dollar crash and rise of alternative currencies

[SOUND EFFECT] CLAY CHANDLER: Tara Joseph is the president of the American Chamber of Commerce in Hong Kong. She's joining us today from Washington, DC to talk a little bit about Hong Kong and the American business community's reaction to the new National Security Law that's been imposed in Hong Kong. Tara, thank you for joining us. TARA JOSEPH: Thanks for having me. CLAY CHANDLER: So we have this new security law, and I guess my first question is just generally, is this different? I mean what's new about all this? TARA JOSEPH: It is different, and people are calling this now the "new normal" in terms of the National Security Law that's been passed. In my view, it's anything but normal in terms of what we've been used to in terms of how we've lived under One Country, Two Systems in Hong Kong. If you look at just the values of the American Chamber of Commerce, the values are to foster trade between the United States and Hong Kong, that's our main mission. But it's also rule of law, transparency, and free flow of information. And also to help and promote Hong Kong as an international business center. The new National Security Law brings a lot of issues to the floor in terms of those values, and it's a big change from how Hong Kong has operated before. There are areas that companies haven't had to deal with before that they may have to contend with, and they'll be looking at areas like data security, about what their employees say, about what does it mean to have foreign collusion. A lot of areas where people didn't feel uncomfortable before in what was a dynamic gateway city. So it's a different tune, for sure. CLAY CHANDLER: This is actually the second survey that you've conducted about the new National Security Law. Talk to us a little bit about some of the headline findings of what AmCham members told you. TARA JOSEPH: This survey is interesting in that the level of concern since we did our original survey a month ago, the level of concern has risen with the enactment of the National Security Law. So 3/4 of those that we surveyed were remotely concerned or very extremely concerned about the new National Security Law. The main reasons were the ambiguity of the law. Another aspect is there is a feeling that parts of this National Security Law undo the rule of law in Hong Kong, which is actually the key and the main factor while many international companies operate in Hong Kong. CLAY CHANDLER: In terms of what this means for what business does with capital and their assets, their people in Hong Kong, what did we learn from the survey? TARA JOSEPH: That's the interesting side of it is that more than half said they weren't planning to leave Hong Kong yet. There's so much going on in the world right now between the US-China geopolitical issues, a trade war, COVID, and recession, we're not exactly at a point where people are going to make snap decisions to begin with. And then there's another really important aspect of this, Clay, that people just can't figure out how to deal with. And that is there's no real replacement for Asia, for Hong Kong, in the rest of Asia. People might look at Singapore and say well, rule of law, colonial system, a system that we understand because it's in English. But actually, the size of the capital markets in Hong Kong, the flow of money that takes place here, is one of the largest in the world. Singapore can't just pick that up in a heartbeat. Shanghai was supposed to become a major financial center for the world. That hasn't happened. And Hong Kong is really important as a financial center. So this is an issue that may keep companies here for a while to come. CLAY CHANDLER: You mentioned data security concerns. I'd be interested in just hearing from you what the discussion is like about kind of hypothetical scenarios. Could you maybe walk us through the two or three hypotheticals that the people might be most concerned about as a foreign business person in Hong Kong under this new law? TARA JOSEPH: Yes so just at its base, we have especially international financial institutions here with a lot of client data. And Hong Kong is a place where there is free flow of information. People were pretty comfortable setting up their systems here, etc. Now the question is is that data at risk? We do not have the cybersecurity law in Hong Kong the way it's been passed in mainland China, but with this new National Security Law, could someone walk into a major corporation's office and say, I'd like to see that data now, please? Or is it possible for someone to actually take that data one way or another? These are issues that maybe have been thought of, but are suddenly being explored in depth and in detail. CLAY CHANDLER: There have been these very strict limits imposed on certain forms of expression. The police have indicated that protesters that carry placards that call for Hong Kong independence are in violation of the law. If you're an employer and your employees are found to be in violation of these kind of red line offenses of expression, can you forbid them as a condition of their employment not to engage in these kind of activities? TARA JOSEPH: Well, herein lies the question again with the new National Security Law. All the senses of what was right and allowed suddenly come up to question about what people can do, where you draw the line, how you draw the line, and how you're going to get into trouble, and that's what some companies might think. They have to follow the law in terms of dealing with their employees, and that could get a little bit sticky as well. I do want to point out that an interesting aspect of the survey showed how divided society is as well. While we have that clear majority who are concerned or very concerned about the new law, there is a slice of folks who feel the National Security Law was necessary because of the protests we saw last year, because of a sense that Hong Kong was no longer safe. People think this is going to bring some sort of safety to Hong Kong as well. CLAY CHANDLER: One thing that I've heard people raise is the question of sanctions. If the US Congress, the US Congress has already adopted some targeted sanctions against certain members of the Chinese leadership. If the US Congress extends that to, perhaps, mainland authorities who've have been appointed to oversee Hong Kong, banks are required not to deal with them and threatened with sanctions on the US side. How, then, do, especially financial institutions, but businesses across the board respond to that? Because the law does say very explicitly that any individuals or organizations who are supporting sanctions against China will be found in violation of the law. What do you do as a businessperson in that situation? TARA JOSEPH: It's very difficult and this puts businesses really in between a rock and a hard place, smack in the middle of the trade war and growing confrontation between the US and China. Under rules and laws where they have to look in two directions and really be careful about how they're handling different peoples' money, and maybe causing them to, in a sense, take sides based around whether they're an American company or a Chinese company. Another aspect of the National Security Law that worries people is the extraterritorial aspect of the law. Which means if you're a company operating in Hong Kong, and something happens in Hong Kong that's deemed to affect the national security of Hong Kong, your company could be liable outside of Hong Kong. Hong Kong used to essentially feel like it was no risk, a no risk zone. That's changed in the so-called new normal, and if that happened, as it has, almost overnight, it's going to take a while for people to digest it, and recognize how difficult or worrying it actually will be. CLAY CHANDLER: That's fascinating. So you're in Washington right now and have been having conversations with policymakers, people in Congress. What's your sense of what's in store for the Hong Kong issue as it figures in US-China relations? Is there a sense that people feel like they've come up to the brink and they want to de-escalate a little bit, or is this confrontation only getting started? TARA JOSEPH: I really have not heard a de-escalation at all. I think Hong Kong is fully caught up in the US-China relationship. I think there is a very strong sense here that China has stepped over its bounds in terms of Hong Kong, and encroached on Hong Kong in a way that's not acceptable. It would not be surprising to see further actions take place very soon. Sanctions on Chinese, potentially Hong Kong officials, other types of areas that take away what has been a very special economic and cultural relationship over many years. That is quite sad, and that's quite difficult to digest, especially for people like you and me, who have lived in Hong Kong for many years, for the people of Hong Kong, and for a center that's just a dynamic and amazing business city. Can we crawl back from it at this point? The jury is still out. But the way in which the US China relationship is going right now, whether it's a Trump presidency or a Biden presidency, I think it's becoming more and more difficult every day. 

Eastworld Spotlight: The “new normal” for businesses in Hong Kong

Businesses are concerned about the new national security law

The "new normal" for businesses in Hong Kong

American Chamber of Commerce in Hong Kong’s Tara Joseph shares concerns voiced by the business community over the new national security law imposed by Beijing.

Watch: The "new normal" for businesses in Hong Kong

 [MUSIC PLAYING] - Gary Rochelle is the founding partner of [INAUDIBLE] Venture, a firm he launched in Shanghai in 2006. [INAUDIBLE] has over $5 billion in assets under management, portfolio companies include [INAUDIBLE] into being one of the world's leading health venture capitalists. CanSino is one of your firms and they have just received clearance from Beijing to proceed to the next step of testing for their vaccine. What can you tell us about what's next for CanSino? - So I think the key with CanSino was the Chinese government approached them in January and said, we would like your help on working on this. And there was a precedent for that, because they worked with the Chinese government to develop an Ebola vaccine several years ago. So they had a very good reputation, very good relationships within the medical infrastructure in China. And so what I've been a little bit frustrated with is this idea that there's a race between China and the US to develop a vaccine. And maybe in some circles, there is. But the real key thing is you want multiple shots on goal on this, because there's not going to be one vaccine. It is going to be ideal for everybody. And there's risk in literally every single vaccine. I think that what you're seeing with CanSino is having done Ebola, having done COVID, they clearly have a platform and an approach that can handle multiple different viral families in terms of looking at vaccines. So I think over the last five or 10 years in the pharmaceutical industry, there has not been a great deal of attention paid to vaccines. Because even with Ebola, the number of cases was so small it was hard to build a multibillion-dollar business out of that. So vaccines were really kind of a niche. I think what you're going to see now is a serious rethinking of that, because all it takes is one example of COVID with millions of cases and potentially hundreds of millions of vaccinations every year to have that be more of not only a need of humanity, but also maybe a more profitable business. We are in the very early stages with COVID, or this coronavirus, woth understanding which vaccine will be most effective for which patient population. So I think you're going to have multiple companies in the market for an extended period of time. We may very well wind up needing to have a yearly COVID vaccine. - That's really interesting. You know, pharmaceuticals and semiconductors have long been the two areas where people have said that China really is unlikely to be able to innovate and catch up with the West? Do you see that as kind of an outmoded view of the pharma sector? - I would suggest that anyone who's ever competed with Chinese entrepreneurs probably has many stories on how they underestimated what they're capable of doing. So you have to realize-- so back before 2005, I think it was either 2004 or 2005, there was exactly one novel compound approved in China in the pharmaceutical industry. Last year there were several hundred. And in semiconductors you had a couple, 10-20, investments being made at some scale back in 2009 and '10. Last year you had 216. I would say what we feel internally, now it's the state of the art in China's semiconductor industry is not as advanced, or in pharmaceuticals is still not as advanced, as the US. But the strides it's made in catch-up in the last 10 years are extraordinary. So they were 15 years behind 10 years ago. Now they are three years behind. - The number of cases is really spiked up dramatically recently in the United States again, leading many people to worry that there really is no prospect of flattening the curve through social distancing and other kinds of measures, that the only solution for us is to have a vaccine. What's your outlook on how far away we are from having a vaccine or multiple vaccines that are ready to actually return us to something that's a little bit closer to normal? - Well so there are vaccines being available for a small group of people. So CanSino's vaccine going into the PLA trials in China, huge step forward. So I think they'll be advanced human trials in the fall. So I think the earliest that you're going to see volumes of vaccine that would be able to deal with populations like where people in Hong Kong can generally have it available, that's probably not till next spring. A significant percentage of the vaccine capacity in the world is in China. A fair amount in India. So those two countries have a pretty large ability to manufacture vaccines at scale. So I think that can ramp up relatively quickly. The interesting thing in China will be can CanSino find other places that would license and enter into business relationships to the manufacture? If it's left to just doing everything itself, I think that'll maybe be a challenge for it to scale that quickly. That's one of the things I've seen in the US that I'm actually very happy about, where Pfizer is willing to let another company use its manufacturing capacity, because they don't have an internal program that's going to be there on time. So they're going to let someone else. J&J appears to be doing the same thing. That type of collaboration needs to be applauded. That's extremely unusual to see that. - You have any thought as to how much cross-border sharing there is going to be in the different vaccines as they're developed? - I think-- Well, this will depend largely on what the fall looks like with the virus. If the next-- right now the US really never got rid of the first wave, so it's kind of hard to talk about a second wave. But let's say the US trends down and Brazil, India start to trend down by the fall, if you have that situation, then I think you'll get a relatively broad distribution of the vaccine. - [INAUDIBLE] US-China investment landscape. What does it look like on the venture funding side? Do we see a lot less activity? - So activity is down. But I think they just published some numbers that the first half of the year, they're saying it's down significantly from last year. The Chinese Venture Capital Community, yes, it's a little muted from where it was, but it's still pretty active. I mean we're on pace to do 25 to 30 investments this year. And that's a very healthy number of investments-- not the peak, but a very healthy number of investments. One of the interesting things is quite a few of our LPs have talked to us in the last year. Every single one of their investment committees, every single one of their boards is asking the question, should we still be as aggressive in investing in China? There's more uncertainty. So it's a question to be asked. But so far in our LP base, we've not had anyone pull out because they're not doing China anymore. - Fascinating perspective. Gary, it's always wonderful to talk with you. And thank you for taking the time to share your insights today. - Thanks for giving me the opportunity. 

Eastworld Spotlight: Next steps for China’s leading COVID-19 vaccine candidate

CanSino Biologics is developing the vaccine.

Next steps for China’s leading COVID-19 vaccine

Qiming Venture Partners’ Gary Rieschel discusses the path forward for CanSino Biologics' vaccine.

Watch: Next steps for China’s leading COVID-19 vaccine

[MUSIC PLAYING] CLAY CHANDLER: Jennifer Zhu Scott is the founder of Radian Partners, and has been a co-chair of our Fortune Global Forum in Guangzhou. And is an expert on all things related to China tech. But we're particularly interested today in talking a little bit about China's Central Bank digital currency. And what do we call this thing that China is working on? JENNIFER ZHU SCOTT: The Chinese digital currency, the Central Bank backed currency, is essentially a digital form of existing sovereign currency, which is RMB. The Central Bank has been working on this for a long time. And China has already long become the largest cashless economy in the world for quite a few years now. When we are using WeChat pay or Alipay, that's still directly associated to our bank account or directly associated to our debit cards or credit cards. CLAY CHANDLER: So it would be similar to WeChat pay and Alipay, except that it would be operated by the Central Bank? Is that correct? JENNIFER ZHU SCOTT: For individual users on the front end, I would expect that the difference for them would be very few, right? They will still scan a QR code, or go to a shopping mall. Their action of the process of the payment would still be quite similar. But the difference is the back end-- the back end-- is the ledger controlled by basically two companies linked to the existing financial system, or is it a ledger controlled by Central Bank? CLAY CHANDLER: When people think about digital currencies, perhaps in the United States at least, a lot of people what comes to mind is Libra, the proposal that Facebook has put forward. How would what China is discussing be similar or different from Libra? JENNIFER ZHU SCOTT: Libra is fundamentally different from previous digital currencies. Where PBOC's digital currency is an extension of a fiat currency coming from a central bank. Whereas Libra is coming from a private corporation, and trying to promote this international cross-border payment system. CLAY CHANDLER: Help us understand a little bit about the timing for some of these discussions-- why the PBOC might be so interested in rolling this out now? JENNIFER ZHU SCOTT: There are two major factors-- one is domestic and one is international. We still have about 60 million people living under poverty in China, and a lot of them are really spread out in the very rural areas in China. It's not because the central government doesn't have money to send to the local government, but the layers of the bureaucracy, inefficiency, and corruption really became a cost and a barrier for the central government to do this very effectively. So if the Central Bank starts to have digital currency, then in theory, all the central government need to do is to give every single family a phone. And that has a built in digital wallet in it. And with that, not only you can you directly send aid from Beijing to all of the rural area families in China. And you can also track how much of their money is actually used to buy fertilizers or agriculture needs or education? And be able to not only just elevate that the last batch of people in China living under poverty efficiently, but also with intelligence. Understand their behavior, and what they actually need. China, as it's expanding its global role, especially in developing countries, and relying on the resources and relying on those countries. And China, with a lot of those countries, even with bilateral trade, they still rely on US dollars, right? So we've seen how much the US dollar trade became-- the US government's sanction has been weaponized. And with this kind of weaponization, even without a trade war, even without our own political climate, a sensible question to ask is how much I am exposing my trade in this political risk, when this bilateral trade doesn't actually involve the US? So a sensible thing for China to do is to find a way to trade without the US dollar. So if Central Bank can issue a digital currency, then you could even write it into the code which part of the money can go outside and become part of the aid or loans going to build in rural countries. And they can in return use that infrastructure related to projects with China. And in fact, that kind of displaces the US dollar in those bilateral spaces between China and those countries. CLAY CHANDLER: Digital currencies is currently being rolled out, as of a month ago, in four or five Chinese cities, right? JENNIFER ZHU SCOTT: Correct. CLAY CHANDLER: What do we know about those cities so far? JENNIFER ZHU SCOTT: The short answer is not much. I think the trial process has been somewhat separative. And we don't really know what's the result in funding. We're probably quite close to seeing a launch of digital currency in China. But I do think there are some hesitations and concerns within China. As we all know, the Chinese banking system is not very well established. There are a lot of problems with the existing banking system. So when Central Bank issues digital currency, in theory small businesses and individuals will be able to directly have an account with Central Bank. And what will leave all of the commercial banks and all the retail banks, especially local banks, too. And would that bring a total overhaul of the existing banking system? It's very hard to-- it's a very difficult task to assess, to carry out. CLAY CHANDLER: So the way to think about this is that right now they're still in the trial phase, and they're still deciding whether-- when to formally launch it nationwide. JENNIFER ZHU SCOTT: I bet it's not very long from now. I think-- yeah, we're probably talking about months. No more than one or two years. Because the infrastructure is already there. The relationship between Tencent and Alibaba probably will become facilitators. And I would not be surprised if there are already agreements in place between Alibaba and Tencent between Central Bank. CLAY CHANDLER: I just want to ask about the privacy issues associated with creating a digital currency in China. I mean, this obviously has been a concern for Libra discussions as well. JENNIFER ZHU SCOTT: We must all recognize that a society is bigger than individual existence. Of course, as an individual I prefer my privacy is protected and I prefer my personal freedom. But when the public health, and from a public security issue, and the entire society is threatened by the same disease, I think every individual will have to deal with the trade off. CLAY CHANDLER: Wow. Fascinating. Jennifer, always great to talk with you about the latest trends on China's technologies. We learned a lot. Thanks very much for your time. JENNIFER ZHU SCOTT: Thank you very much for having me. 

Eastworld Spotlight: Unpacking China’s central bank digital currency

Then innovation it brings, and the challenges it faces.

Unpacking China’s central bank digital currency

Radian Partners' Jennifer Zhu Scott discusses the CBDC's innovations and challenges.

Watch: Unpacking China’s central bank digital currency

Eastworld Spotlight: Hong Kong national security bill explained

Politics

And what a U.S./China relationship could look like.


Hong Kong national security bill explained

And what a U.S./China relationship could look like moving forward.



And what a U.S./China relationship could look like.



[MUSIC PLAYING] CLAY CHANDLER: Michael Dunne is the CEO of ZoZo Go, an investment advisory firm that advises automaker suppliers and investors on doing business in Asia. And we are thrilled to see you, Michael. We've invited you to have a chat about the auto industry in China and the rest of Asia. But let's start with China, the world's biggest auto market. How do you see the coronavirus affecting the market in China? MICHAEL DUNNE: Well, the comeback has been remarkable. If we go back to February, the entire industry and the market came to an absolute standstill. Factories weren't building cars. And no consumer was going to a dealership. Sales tanked 80%, 80% in the world's largest market. CLAY CHANDLER: Wow. MICHAEL DUNNE: They usually move 2 million cars a year. So, suddenly, just everything stopped. April, V- shape came back to level with 2019. So you really had a tremendous recover after that standstill. And in May, sales are up again, not by a lot. But, hey, we'll take it. CLAY CHANDLER: So what's your outlook for the second half? MICHAEL DUNNE: If you look at the full year, we think between 10% and 15% down. Keep in mind that at the beginning of this year, the estimates were that the market would be down 5%. So if China can get out of this down 10%, 15%, I think we're all going to be happy in the industry. CLAY CHANDLER: So the larger context for this is that auto sales in China peaked in 2017, is that correct? MICHAEL DUNNE: They call it the golden era. From 2000 to 2017, there was nothing but growth and profits, growth, and profits. And then, in 2017, a couple of things changed. One of the things that hit was exports to the United States started to wobble as the trade war escalated. So export industries were not the cash cow that they used to-- the cash driver that they used to. But more importantly, consumers weren't able to get access to that easy financing to buy new cars. And without those third, fourth, and fifth-tier cities as engines of growth, the market has really sputtered CLAY CHANDLER: Let's talk, instead of about the supply side of this and the demand side of it, in turn. Supply-side factories in China, auto factories production lines, have all, more or less, swung back into action, is that right? MICHAEL DUNNE: They have. Production is not a problem in China. Workers are back. Supply chains are more or less in order. And because China is largely an industry in which the supply chains are here, inside China, it's not an issue of relying on a lot of parts coming from overseas. So factories are up and running. Supply chains are intact. Production is not a big issue in China. The question mark remains, where is demand going to be in these coming months? There is a cloud of uncertainty that's hanging over the Chinese economy. US trying to trade tensions. There are job losses in the economy. People are unsure. And they're being quite careful about the way they spend. The confidence level just isn't the same as two, three years ago. CLAY CHANDLER: I've heard some suggestion that, actually, there's a new kind of phobia of mass transit in China that maybe has been sparking some of the recent demand. MICHAEL DUNNE: Yeah, that's a great point. That's a great point. In fact, much of what we see in April and May, we think, is attributable to the fact that Chinese families at the dinner table would say, are you crazy? You're going to take mass transportation to work? No, no, no, you're going to take a DiDi to work? No, go get a car. Go get a second-hand car. Get anything that's private and safer. So, short term, we believe there is a kick from that. Again, do the consumers have the income and the confidence to sustain that demand? Really, we're in uncharted territory. Nobody knows. CLAY CHANDLER: You mentioned DiDi. This is China's equivalent of Uber, of course, and ride-sharing-- huge phenomenon in China before the outbreak. MICHAEL DUNNE: You know what? There's a little bit of a disconnect here in the United States. Uber and Lyft, no question-- they have taken a huge hit. Because consumers individuals are unwilling to get in that vehicle. Who's been in it just before me? Is it clean? How do I know it's clean? In contrast, and to my surprise, DiDi has really gotten out in front of this. They have protocol within the car. As you've seen, the taxis have the plastic wrap that separates the front and the back. And they'll have these stickers showing that we've actually sanitized the car. Who knows? But, at least, they're taking proactive steps. And to hear DiDi tell it, yes, they have. Rides are down, but not by a lot. And they're still very bullish that they'll deliver-- get this number-- 10 billion rides this year, in China. So it's not growth, but it isn't the freefall that Uber and Lyft have experienced here in the US. CLAY CHANDLER: If we could talk a little bit about the implications of this for global auto manufacturers. I mean, obviously, GM, Ford, Volkswagen, Renault, everybody has big automakers that have got alliances, partnerships in China. MICHAEL DUNNE: Yes they do. CLAY CHANDLER: How important do you see the China market as being in the wake of the pandemic to the big global manufacturers? MICHAEL DUNNE: What I'd like to do here is carve out China's car market into two parts. And the first part is luxury cars. That's your Mercedes, Audis, BMWs, Porsches, Lexuses. They've never slowed down. Even the last couple of years, they're still growing. And this year, they're growing again. So if your brand is in luxury in China and your business is cars, you're still in very good shape. And you will be for years to come. Now, where things get sticky is in the mass market and tougher. You have a case of the Chinese brands much improved over just a few years ago. So names like Great Wall, BYD, Geely, in particular, are coming up from below and taking market share from traditional mass-market brands like Ford, like Chevy, like Hyundai. If we look across, by country of origin, the Germans are solid. The Japanese, led by Toyota and Honda, are still doing quite well. It's Ford, GM, and Chrysler that are really taking it on the chin. Their market share in China, since 2017, has fallen by about half. That equates to millions of lost vehicles. They're really under pressure like never before. CLAY CHANDLER: And how is the outlook for the likes of Ford and GM then do you think? MICHAEL DUNNE: Well, they've got to come up with something inventive or creative or innovative moving into electrics or connected or autonomous vehicles. The business of manufacturing and putting together vehicles is old hat, old school-- simple stuff. The game has moved to digits, to connectivity, to autonomy. And here is where the US automakers must lead if they hope to remain competitive in the People's Republic. CLAY CHANDLER: In the United States, there continues to be a lot of discussion about this idea of decoupling, that the world's two largest economies, after becoming more and more dependent on each other-- see that in the auto industry, can US carmakers afford to shift supply lines out of China or stop selling into the China market? MICHAEL DUNNE: You can't ignore the world's largest car market. No one can. And you can't move supply chains easily outside of China because you have tariffs to contend with. China still taxes those parts when they come in. So if you are game, if you want to play the game inside China, you need to have a supply chain intact inside China. There's no second China. There's no junior China. We'd all love to think that Vietnam is a miniature China. But it's really hard-- no, it's impossible to match China's scale. CLAY CHANDLER: Contrast for us, if you will, the outlook right now for the US market. Because it, I think, maybe helps us to understand why the growth in China is so important for our global manufacturers. MICHAEL DUNNE: If we step way back and look at the global automotive market demand in a given year, the US and China account for almost half of total production and sales. So they're the dominant players by far. US was humming along doing really nicely up until about January of this year, building and selling about 17 million cars. Everyone's making profits. But now we were hit by this hurricane of a storm, COVID 19, and everything's been thrown up in the air in disarray. And no one genuinely knows how quickly things will recover. There is reason to be optimistic because the economy heading into the COVID 19 storm, which was running nicely-- sales were doing well. And profits were good. So the optimists think, maybe by the fourth quarter, we'll return to something that resembles fourth quarter of last year. Factories are reopening. They're being very careful. They have learned a lot from reopening in China-- protocols, temperature checks, spacing. Now it comes down to how disciplined are North Americans at following those rules. That's the question mark. CLAY CHANDLER: Well, so let's come to this topic and some of these new vehicles and new technologies that will be used in autos. Obviously, one area that's really fascinating in China is the electric vehicle. What's your outlook for electric vehicle sales in China in the wake of the pandemic? MICHAEL DUNNE: China will get to about a million electric vehicle sales this year, which is more or less in line, a little bit down from last year. But given COVID, it's still pretty good. And one million will account for almost 50% of global EV sales. So China is number one in terms of production and consumption of the EVs. If you look at the market, it's almost all Chinese brands. That its top 10 models on the market are all China-- BYB, SAIC, BAIC, and others. But sitting atop all those brands is Tesla. Tesla is now the best-selling electric vehicle in the China market. They've had a phenomenal run since opening their Gigafactory in Shanghai in January. They sold about 20,000 Model 3s in the first quarter. Just killing it. Really doing exceptionally well. And I think an important thing to share with people worldwide is what's behind Tesla's success. Well, on the one hand, they have the support of the Shanghai government and the central government to build this Gigafactory. On the other hand, they have this massive luxury car market, with consumers ready to spend big bucks on what they see as an exclusive brand. That's where Tesla's magic comes in. CLAY CHANDLER: So this is a very crowded sector. Something like 450 different electric vehicles in China. That's pretty cutthroat. Can it-- MICHAEL DUNNE: That is insane. CLAY CHANDLER: --keep that many producers much longer? And how does it shake out? MICHAEL DUNNE: I think the founder from NIO and XPeng, both of them agreed on one point. Of all those 450 EV startups that have blossomed in the last few years in China, maybe one or two will survive. One or two, that's it. They will all come under massive funding pressures. Because, after all, no one really makes, aside from Tesla's start-- very difficult to make a profit on electric vehicles still. Because the battery costs remain high. So you have companies that are startups, like Tesla, who burn through cash for years and years and years before they can really get going. Tesla seems to have crossed that river, but EV startups remain enormously fragile. CLAY CHANDLER: The interesting variables in this equation has been, obviously, government subsidies for the industry that has put a floor under a lot of these players. MICHAEL DUNNE: They were supposed to end this year. They've been extended for two more years to 2022. But at the same time, and importantly, the government has substituted a new measure to sustain electric vehicle demand and production into the future. And that is quotas. So while they're taking down subsidies, the Chinese government has said, basically, if you want to sell cars in the China market going forward, 10% of what you sell should be electric. If it's not, you'll face penalties and fines similar to what California has done with the carbon footprint quotas. CLAY CHANDLER: [INAUDIBLE] MICHAEL DUNNE: As subsidies go away, these quotas are kicking in. And global automakers really-- this time there's no workaround. There's nowhere to run. They really have to comply. CLAY CHANDLER: In the US, obviously, a lot of the pioneer purchasers of electric vehicles were affluent celebrities, techies-- that sort of thing-- that wanted to demonstrate their concern for the environment and sustainability. My sense is that Chinese drivers are not that romantic about the environment when they come to making a purchase. MICHAEL DUNNE: You're absolutely right. Different story in China, very pragmatic consumer. One of the biggest consumers of electric vehicles, of course, are taxi fleets. For example, in the city of Shenzhen, all taxis and all buses are now electric by mandate. So that's government top-down decision. China has, by far, the largest network of electric car chargers of any country. And Tesla, for example, has a huge network that goes North, Southeast, and West, not only between cities but inside cities-- a supercharger network. So look for China, come hell or high water, to be number one electrics, to remain number one, and be the export hub globally for electric vehicles. That's the vision from Beijing. CLAY CHANDLER: There has been a lot of discussion, obviously, about when China would become a major auto exporter. When do you foresee China being a significant export player in the global auto market. MICHAEL DUNNE: Well, they're sitting on so much capacity now. As the market declines, they've got capacity of up to 40 million vehicles a year, with demand at home at about 20 million. So do the math, and you think there's just enormous pressure for them to push out. And they will push out, starting not with the United States or Europe-- maybe in small volumes-- but with a-- really have their eyes on Southeast Asia, Africa, and South America. Those are markets where the consumer is more price-sensitive, is willing to have a, it gets me there, it's fine, it's functional type low-priced car. That's where supply will meet demand for these Chinese automakers. So in terms of United States and Europe, it'll be another five years before we really see Chinese cars on American roads. It's going to be a while. CLAY CHANDLER: Let's talk about, also, Chinese investment and alliances beyond China's borders. We've seen a little bit of that activity. The most notable, of course, is Geely's investment in the Volvo. MICHAEL DUNNE: It will be difficult for Chinese to build their own transplants in other markets. But the approach that Geely took with Volvo has been phenomenally successful. Volvo has record sales, record profits. They now have built a plant in South Carolina where they build first-class sedans-- gorgeous sedans. They're firing on all cylinders. And the key there is that, rather than trying to build their own brand, which in many consumers' minds might be tarnished, to begin with, let's just acquire another brand. So SAIC has acquired the MG brand. Geely has acquired, not only Volvo, but also Lotus and Proton in Malaysia. And remember that Geely is also a 10% shareholder in Daimler, arguably the most prestigious car brand in the world. So acquisition is going to be a key tool for Chinese as they go abroad. CLAY CHANDLER: Do you expect that there will be some backlash to that politically-- there will be some restrictions placed on Chinese investment? MICHAEL DUNNE: No question about that, especially here in the United States. For the last three years, my company, ZoZo Go, has done research where we identify how many Chinese auto parts makers, tech companies, and automakers are actually operating here in the US? And when we first did this study in 2017, we were stunned to discover that there were over 100 Chinese-owned firms operating in the United States. Most of them are parts makers. Most of them came in through acquisition. But, whoa, who would have guessed there is so many Chinese companies operating in the US? Since 2017, that needle has not moved. We're still at 100. They haven't gone home yet. But we're not seeing new investments into the automotive space. And that's largely due to the fact that there's perceptions that US is no longer an easy and friendly place to step into. 

Eastworld Spotlight: The Chinese auto industry bounces back

Auto sales in China fell 80% in February due to COVID-19.

The Chinese auto industry bounces back

Watch: The Chinese auto industry bounces back

 CLAY CHANDLER: Welcome to Eastworld. Our guest today is Kishore Mahbubani. Kishore is one of Singapore's most respected diplomats and strategic thinkers. He served as Singapore's Permanent Representative to the United Nations. He's held the position of President of the Security Council. He's the former dean of the National University of Singapore's Lee Kuan Yew School of Public Policy and the author of numerous books, including Can Asians Think?, Has the West Lost?, and most recently, Has China Won? We want to talk about all those questions in our conversation. And he joins us from Singapore. Kishore, thank you so much for being with us here on Eastworld. KISHORE MAHBUBANI: My pleasure. CLAY CHANDLER: Let's start with Singapore, if we could. Can you describe for us what the condition is in Singapore these days? Has Singapore flattened the curve? KISHORE MAHBUBANI: Well, I think we have flattened the curve in terms of the numbers. I think they are more or less stabilized. But as you know, in Singapore we have two sets of numbers-- one for the population at large, which is almost over 5 million. And the cases from that is now down to three or four a day. And then you have a small group of 300,000 foreign workers who live, I guess, in a community of their own. And they have been very highly infected. So the large numbers you see from Singapore are not from the Singapore population, but from the foreign worker population. And I would say Singapore is doing an extremely good job of managing that. And the Prime Minister of Singapore very generously sent a message to the families of these foreign workers in India and Bangladesh saying, please don't worry. We will take care of your husband, your brother, your father, and so on and forth. CLAY CHANDLER: In the United States right now, there is a big debate about how much of the success of particularly the major Asian economies has to do with having more centrally controlled authoritarian political systems. And there are a lot of people that say that, oh, the reason that China was able to get a handle on this thing so quickly and contain it to Wuhan and the surrounding Hubei province was that they were able to crack down in a much more kind of relentless way, keep people from moving, use these kind of color-coded health apps on mobile phones in a way that would have been completely impossible in a liberal democracy like the United States. Do you buy that analysis? Or do you think that that's perhaps not fully reflecting all the different factors at play? KISHORE MAHBUBANI: Yeah. I mean, if you don't mind me being a bit candid in my reply, it's an easy cop-out. It's an easy way of saying, oh, of course, it's only these authoritarian, dictatorial, communist systems that can do well. But of course, as you know, East Asia is not uniform. And South Korea has done well. It is a robust democracy. Australia and New Zealand have done well. They're liberal democracies. So it is absolutely a cop-out. But I think the more fundamental reason why East Asian countries seem to be coping better is that, unlike the United States, where the institutions of government, as you know, became sort of delegitimized, defunded, demoralized after the Reagan-Thatcher Revolution, after Ronald Reagan famously said, government is not the solution, government is the problem-- CLAY CHANDLER: [CHUCKLES] Yeah. KISHORE MAHBUBANI: --I mean, East Asia, by contrast, there's always been a deep respect for institutions of government and a realization that if you undermine institutions of government, society will suffer. So in the United States, as you know, the standing of the Federal Aviation Administration went down after the Boeing 787 crisis. The standing of FDA and CDC has gone down over the way they mismanaged this crisis. So I think that the more fundamental turn that America, United States, needs to make is to understand that societies succeed when they combine the invisible hand of free markets with the visible hand of good governance. And United States has been fighting a one-handed battle against COVID-19. We've been fighting a two-handed battle. CLAY CHANDLER: Oh. Let me ask you, if I can, about China's experience with the virus. On one hand, China has had extraordinary success in containing it. It's kept total cases down below 85,000, compared to 1.6 million now in the United States, and still clocking over in the US at a very high rate. New cases in China are just about eliminated. They're down in the single digits. And they largely were able to contain this to a single geographic area rather than let it spread nationwide. So that's the success. On the other hand, right now in the United States and in Europe, there's a lot of criticism about China. They let the virus originate there in the first place. There is criticism about the effort at the provincial level to silence the whistleblowers who were first warning of it. And then there's been a lot written in the Western media about the two-week delay in January between when the central government knew of the seriousness of the virus and when they actually swung into public action and were transparent about it. How on balance should we regard and interpret China's response? Is it a success, or is it a failure? KISHORE MAHBUBANI: The reaction in the United States to China is not necessarily being driven by reason and analysis, but also driven by emotion and a geopolitical desire to bring down China. So that dimension is also in play. And as you know, they say truth is the first casualty in war. And that's also happening in the geopolitical contest within US and China, which frankly, actually, both sides, logically-- United States and China-- should have said, the enemy of my enemy is my enemy. So for United States, enemy number one today is COVID-19. And China is also an enemy of COVID-19. United States and China should be coming together, logically speaking, to fight a common enemy. But instead, as we know, the contest between the US and China has been heightened by COVID-19. And the fact that it's been heightened confirms the thesis of my book that this contest is being driven by deep structural forces and not necessarily affected by personalities. You've got to understand the structural forces to understand why this contest is so deep. CLAY CHANDLER: Perhaps it's too extreme to kind of talk about winners and losers. But is it possible to draw some conclusions about whether China or the United States, which of these two of the world's two largest economies, have emerged relatively either better off or less worse off, I guess, from the pandemic? KISHORE MAHBUBANI: The paradoxical answer I'll give to your question is that the United States might win best by not trying to win. And I say this because, as I explain in my book, the United States is so focused on preserving its primacy in the global system. It is doing so by actually not paying attention to the well-being of its people. And with the United States spending so much on defense and fighting unnecessary wars-- we see $5 trillion in the Iraq war-- at a time when the average income of the bottom 50% in America has gone down over a 30-year period. Now, just imagine if the United States had taken that $5 trillion, instead of burning it in Iraq, and given it to the bottom 50%, each person in the bottom 50% would have received a check for $30,000. CLAY CHANDLER: As the severity of the virus became known, and as it spread, it has really polarized the two economies. You talk about this kind of potential of the two countries sliding into another cold war in your book. Do you see that as inevitable? And do you share Dean Alison's view in that sense? KISHORE MAHBUBANI: I think the term "cold war" is misleading. Because within the United States and Soviet Union, there was no trade. You didn't have 300,000 young Soviet students studying in the United States from the Soviet Union. So the relationship within the United States and China is far more dense and interlinked and much more complex. And you can't have a simple separation as you did in the Cold War. But what makes it even harder is that, in the case of the relationship between the United States and China, I agree with [INAUDIBLE]. And one of the structural forces driving it is always, who is number one and number two? That's primacy. But in addition to that-- and this is the sensitive part-- this is the first time a non-Western world is emerging as the number one power. And in the Western psyche, there's always been a fear of the "Yellow Peril." And at then end of the 19th century, the United States had Chinese racial exclusion acts. So the fear of what I call the "Yellow Peril" it is real. So there's an emotional dimension to it. And then thirdly, United States expect maybe reasonably, unreasonably, that the more they engaged China, China would open up its economy and open up its political system and become a democracy like United States. That hasn't happened. But future historians will be puzzled that a country that is less than 250 years old like the United States expected that when you engage a 4,000-year-old civilization, the 4,000-year-old civilization will become like a 250-year-old country. These are the strange aspects of the US-China relationship. And the complexity of that is what I tried to bring out in my book, Has China Won? CLAY CHANDLER: In a way, for many decades, the US did have a strategy. And that was the strategy of engagement with China, as you mentioned just now, was predicated on this idea that China would eventually change and become more like the United States and the other Western democracies. Part of what's precipitated this shift in view, I guess, is a growing consensus in Washington that, as you point out in your book, now also includes many members of the business community who were once great allies of China, that the old engagement policy wasn't working and that the US was being taken advantage of. How do you answer to people who claim that that coherent strategy was a failed strategy, and that although we may not have one now, at least it's better than the old flawed consensus? KISHORE MAHBUBANI: China's alienation of the American business community-- and I devote a whole chapter to that-- was a serious mistake on their part because they lost the biggest constituency that was, in a sense, applying the brakes to any kind of negative policies towards China. But at the same time, I don't agree with the view that the engagement policy has failed. It has failed to create a liberal democracy in China. There's absolutely no question about that. CLAY CHANDLER: Mm-hmm. The dissatisfaction and the frustration of the global and particularly the US business community, what do you see as the primary source of that? KISHORE MAHBUBANI: I believe that after the 2008-2009 financial crisis, a little bit of arrogance crept into the minds of Chinese policymakers. And it wasn't helped by the fact that the US Treasury, as you know, sent emissaries to China at the height of the crisis telling China, please don't stop buying US Treasury bills. Because if you stop buying US Treasury bills, the markets will go down even more. And China, as you know, cooperated with the United States in that area. But it also gives the Chinese the sense, we have arrived. And therefore, they began to be a bit more assertive and pushy towards businessmen-- and gradually, as you know, arrogance. Just as the arrogance in the West after the Cold War was a factor that really damaged the West, as I documented in Has the West Lost? And similarly, arrogance in China after the 2008-2009 financial crisis also led, in part, to the alienation of the American business community. CLAY CHANDLER: We're headed for a turbulent period in American politics right now as we approach the November election. Do you see the US-China relationship deteriorating further as we near the election? And if, for whatever reason, President Trump is not successful in being reelected, do you see the chance that that relationship could improve? KISHORE MAHBUBANI: I can confidently predict that between now and November for the elections, relations between US and China will get worse. Because the easiest way to win votes in the United States is to bash China. Normally after the elections, things get better. But this time around, things may get superficially better under Joe Biden because he'll definitely be more courteous in the way that he speaks to China. But paradoxically, in the case of China's interests, it may actually be best served by the reelection of Donald Trump, because Donald Trump has done so much to reduce America's standing in the world. By reducing America's standing in the world, he has opened geopolitical space for China. So four more years of Trump may actually be good for China, even though it'll be painful in the short-term to give them long-run [INAUDIBLE] dividends. CLAY CHANDLER: I mean, there doesn't seem to be that kind of leadership that enjoys the mandate of the general public here in Hong Kong. It seems to me that, inevitably, the reaction to this legislation-- we'll see it later this evening, I suspect-- KISHORE MAHBUBANI: Yeah. CLAY CHANDLER: --will be further protests, further demonstrations, a great deal of unrest. That comes at a very sensitive time when there have been numerous pieces of legislation introduced in the United States to strip Hong Kong of its special trade status. Do you see that as a possible outcome of the announcement from last week? Could the United States take that course of action against Hong Kong. KISHORE MAHBUBANI: Sadly, I hate to say this, but Hong Kong is going to become a political football in the new geopolitical contest that is broken up between the United States and China. The sad part about being a football is that the players enjoy kicking the ball, but the ball is the one that gets damaged and broken at the end. So that's the danger that Hong Kong faces. It is very sad that many people in Hong Kong are not even aware of how, when a new geopolitical contest like this breaks out, they must understand the geopolitics to avoid becoming a victim. CLAY CHANDLER: Can we think forward to kind of, if there is that sort of response from the US government, the Congress, what the Chinese countermeasure to that might be, is there a range of actions that they might take against the United States? KISHORE MAHBUBANI: The levers that China has against the United States are very, very few. The United States is still, by far, the much stronger power. But at the same time, I must add, if the United States takes any measures against Hong Kong, the people of China will not suffer. The 1.4 billion people in China will not suffer. But the 7 million people in Hong Kong will suffer. So as you know, Hong Kong enjoys some preferential access to the United States. It loses that preferential access. It doesn't affect China. It affects Hong Kong. CLAY CHANDLER: I wanted to ask you about one of the most, I guess, important arguments in your book, which has to do with the global supremacy of the US dollar. You describe this as potentially being an Achilles heel for the United States. Can you talk to us a little bit about what you mean by that and what the risks there are? KISHORE MAHBUBANI: It is amazing privilege that the United States has. And it is a privilege because the rest of the world trusts the US dollar as a neutral, effective public good that they can utilize. But now when you weaponize the US dollar and then you use it against a people who actually use it as a public good, the US dollar becomes like a razor blade. You can use the razor blade to shave yourself. But the razor blade can also cut your own fingers. So everybody is now going to be a bit more cautious, and although right now, there's absolutely no threat to the US dollar in the short-term-- no threat at all. But I can confidently predict that, over time, things will change. And it is actually in the interest of the United States to prolong the global reserve crisis in this as long as possible. CLAY CHANDLER: Kishore, I want to thank you so much. This has been a fascinating conversation. We look forward to checking in with you again in the future. Until then, stay safe. And then thank you very much. KISHORE MAHBUBANI: And thank you for asking such good questions. CLAY CHANDLER: [CHUCKLES] KISHORE MAHBUBANI: [CHUCKLES] 

Eastworld Spotlight: China vs. U.S. response to pandemic

‘Has China Won?’ author Kishore Mahbubani discusses.

Comparing China vs. U.S. response to coronavirus pandemic

‘Has China Won?’ author Kishore Mahbubani joins Fortune’s Clay Chandler.

Watch: Comparing the China vs. U.S. response to COVID-19

 CLAY CHANDLER: Restarting the economy will be the top item on China's National People's Congress which convenes in Beijing today. China's GDP collapsed last quarter by 6.8%, its worst performance since Mao's Cultural Revolution. How quickly can China recover? How will it cope with rising unemployment and increased trade tensions with its most important trading partner, the United States? Has the global pandemic transformed the Chinese economy, and in what way? For the answer to these and other questions, we're joined today by Andy Rothman who is the Investment Strategist for Matthews Asia. He's joining us from San Francisco and he has lived and worked in China for more than 20 years, and is one of the savviest China hands we know. Andy, thank you for joining us. ANDY ROTHMAN: Thanks, Clay. Great to be here. CLAY CHANDLER: Here in Hong Kong, we're all watching the movement of the government in Beijing as they convene for the National People's Congress. What's your take on the health of China's economy as they convene this policy meeting? ANDY ROTHMAN: I've been calling this the worst economic numbers since the Tang Dynasty. [LAUGHTER] And the recovery has been considerable. China's economy clearly is not back to normal and probably won't get back to normal this year, but we're in the early stages of a V-shaped recovery right now. And I think the real challenge is going to be for the last 20%. How long is it going to take us to get back to normal? So it won't be a complete V. I think the last part of the upper section of the V is going to be a bit of a struggle and might not come until next year. But you know, things are picking up at a really good clip, much better than I would have expected a few months ago. CLAY CHANDLER: Do you have a target for the GDP figures for the end of the year? What sort of range are you looking at? ANDY ROTHMAN: No. You know, I really don't care. I've been arguing for years that the GDP growth rate in China is not only the least accurate economic statistic but also, especially for investors, the least important statistic. You know, if you were to tell me what the real GDP growth rate is going to be three quarters from now, that wouldn't change the way that I think about the economy or the way that we invest. So I'm much more focused on the more micro numbers-- what's happening to consumer spending, fixed asset investment, industrial production, housing sales, auto sales, things like that. CLAY CHANDLER: So let's talk about some of those numbers. What are you seeing in each of those categories? ANDY ROTHMAN: Well, what we're seeing is the Chinese consumer is back and we are well on our way towards a pretty broad consumer recovery. And I think on a relative basis, compared to the rest of the world, China is going to continue to be the world's best consumer story. So let's take a look at autos, for example. We had a really steep collapse earlier this year, but it's come back dramatically. In fact, autos are the one category where the growth rate in April was actually faster than it's been for about 18 months. New home sales are not back to normal, but pretty close to that. Those are big-ticket items. That indicates that the middle class and wealthy Chinese-- which is a big part of the country-- have not only enough money to buy a new car or a new home, but enough confidence in the future that they're willing to make a purchase like that. And on top of that, less expensive things like smartphones. Sales really picked up in April and we're up about 20%, I think, year over year. CLAY CHANDLER: You know, there's a lot of political debate about pulling out of the Chinese market and decoupling in the United States right now, but can multinationals afford to just sacrifice the growth that they could get in China? ANDY ROTHMAN: No. [LAUGHTER] This whole conversation about decoupling is, in my mind, just nuts. We're talking about the two largest economies in the world decoupling? How does that make sense for either economy? How does that make sense for any company that's going to be asked, for political reasons, to do that? I mean, if a company is in China, they've done it for business reasons. Isn't that kind of a bedrock foundation of how we work here in the United States, that companies should make decisions based on what's good for business? Now, if you talk about investment by major American companies in China, the vast majority of them are investing in China to produce goods to sell to Chinese people. So if they bring that production back here, what does that do to them selling, let's say, cars for GM? Which, by the way, sells more cars every year in China than it does in the United States. Apple produces in China, both to sell around the world, but also in China. So I think that decoupling is just not a realistic option. CLAY CHANDLER: Let's talk a little bit about investors and what this all means from their perspective. Do you see any sentiment among investors that it's time now to pull back from China? ANDY ROTHMAN: Over the last decade, every year on average, China has accounted for about one third of global economic growth. That's a larger share of global growth than from the US, Europe, and Japan, combined. The vast majority of American investors are, I think, significantly underweighing exposure to that driver of global growth. In terms of how investors are looking at it now, we're coming off a year, last year, where the Chinese economy and Chinese-listed companies in general performed really well. And this year, the Chinese stock market has been significantly outperforming the S&P. And so, I think a lot of investors are taking another look at whether they or their clients have enough exposure to that engine of global growth. So I have two recommendations for investors. First is you really need to probably spend a little bit more time understanding the dynamics of the Chinese economy beyond what's in the headlines. Because even if you or your clients don't own any Chinese equities, what happens in China has a big impact on your portfolio because companies like GM, Apple, Tesla, Nike, Nvidia, Qualcomm, Intel, Dolby-- it's a long list-- get 20% or more of their global revenue from China. So understanding that support. If you want to understand what Jay Powell is going to do next, understanding what's happening in China is important. So that's the first point that I emphasize. The second is, with China accounting for about a third of global growth every year-- and that share might well go up right now because of what's happening with the pandemic-- do you and your clients have enough exposure to that driver of global growth, especially to what I've been calling for, like, a decade now the world's best consumer story. CLAY CHANDLER: Let's talk for a second about these trade tensions because they seem to be heating up again. Is there a risk that the trade agreement will come unstuck as a result of all this? ANDY ROTHMAN: Let's go back to mid-January when the trade deal was signed. At that time, it was clear that this was more of a political deal rather than a trade deal. It was a political deal in the sense that, in President Trump's campaign to win the presidency, he made a big deal about reducing the deficit, and this was all about trying to focus on those numbers. Now the deal that the Chinese government signed in January had purchasing targets from the United States that were completely unrealistic from the get-go, even if the pandemic had not come. The increases that they were agreeing to make were totally unrealistic. And now with the pandemic, there is absolutely no way they could get there. If you look at the data so far this year, it's really clear-- to me, at least-- that Xi Jinping really wants the deal politically to work. He has significantly increased Chinese purchases of agricultural products from the United States. Pork, soybeans, cotton, for example, are up significantly over last year, and up over 2017, which is the base year. So I think this is a message from the Chinese side that they'd like this deal to work as best as it can in the current circumstances. And I think those numbers give the President optionality. He can say, yeah, OK, because of COVID-19 they weren't able to meet the targets but they've been doing their best. Or he can say, they're not even close to meeting their targets and therefore I'm going to break the deal because they haven't lived up to their end. CLAY CHANDLER: And do you have a sense of which of those two options he's likely to choose? ANDY ROTHMAN: It's difficult to predict. I'm a little bit nervous because a few weeks ago was the first time I heard the President express some doubts about the deal, but he hasn't gone beyond that. So what I'd be looking for is what the President says and what he tweets. I'm especially going to be keeping an eye out for whether the President speaks harshly about Xi Jinping as an individual, because right now Xi is one of the few world leaders who, I think, hasn't gotten a kind of schoolyard dictate from the President so far. CLAY CHANDLER: [LAUGHING] Yeah. ANDY ROTHMAN: If that happens, that might be an indicator that things are not going well on the trade deal. CLAY CHANDLER: Unemployment has to be somewhat of a concern right now for Xi Jinping. The latest numbers from the Statistics Bureau indicated 6% for urban unemployment. That figure isn't very representative, obviously, of the full picture in China. It doesn't tell us what's happening with all these migrant workers. What's your guess as to what the actual unemployment rate is now in China, and how many people are out of work and not able to find a job? ANDY ROTHMAN: Yeah, unemployment is a significant issue. And, you know, there are two things that I worry about as risks which could derail the economic recovery that's in its earliest stages now. One would be a second wave of the virus. And I was much more worried about that, actually, about six weeks ago when they started opening up. But over that period of time, they've been able to manage to keep the number of new cases and deaths quite low. So that seems less of a problem. The bigger problem right now is unemployment and especially what's happening to very small, privately owned companies, which are the engine of growth in China just like they are here in the United States. The unemployment problem has been significant. I think, my best estimate is that back in February at the peak of the virus outbreak in China, there were probably 70 to 80 million urban workers who had either lost their job or were unable to return to their job. So that's an unemployment rate of close to 20%. But I think today that's come down by about half, so maybe 35, 40 million unemployed or unable to return to work? Let's say they're working for a restaurant that hasn't reopened yet because there aren't enough customers. So that's an unemployment rate of maybe 8% to 10%. That is significant. It's not so bad when you compare it to the rate in the United States right now. But it seems that the government's done enough to cushion the impact of that because we're not reading about social unrest, social instability. CLAY CHANDLER: Does this imply that China needs to embark on a very ambitious stimulus program that needs to ease monetary policy in some way? Or is it able to stay the course? ANDY ROTHMAN: I'm not expecting a dramatic stimulus because right now, the organic recovery seems to be holding up. The Chinese government's certainly capable of doing a dramatic stimulus but I think they won't do that unless it's really necessary. At the same time, they have to do a little bit more than they have been doing right now. CLAY CHANDLER: I wonder if we could talk for just a second about the tensions in the tech sector between the US and China. How do you see this standoff over national security and technology with some of China big tech giants playing out? Is there an endgame here where we reach a solution? Or does it just continue to get worse? ANDY ROTHMAN: I think it's likely to continue to get worse over the next six months, at least, through the US presidential election. CLAY CHANDLER: Mm-hmm. ANDY ROTHMAN: Frankly, I'm a little bit puzzled about what the objectives are here. From one perspective, you're right that China is very dependent on semiconductors either produced by American companies or with American intellectual property, IP. China imports, by value, more semiconductors than they import oil. So one question to ask is, is this actually a net positive for our national security in the United States for China to continue to be dependent on American semiconductors? Or is it better for US national security to force them into a rapid plunge, into building their own semiconductor production and design facilities? The engineers here in California who don't have an interest in Huawei way tell me that as long as Huawei gear and 5G is installed on the periphery of the network, and that Nokia and Ericsson equipment are at the central core, that the risks are not that great and can be significantly mitigated. Then you have to think about what the impact will be on American technology companies that are getting a significant share of their revenue from China. So Qualcomm, for example, I believe gets about 2/3 of its global revenue from China. Intel's is about 25%. TI's is a significant share. If they were to lose those markets, what would that do to the R&D budgets of those companies and their overall financial health? CLAY CHANDLER: Do you see one kind of impact of the pandemic being that it actually encourages Asia to trade more with itself and perhaps less with the United States? ANDY ROTHMAN: Oh, that's already happening. In the first quarter of this year, ASEAN became China's largest trading partner and the share going to Europe and the US went down a little bit. If I was a policymaker in Washington right now and I was worried about the race to global superiority in economic terms between China and the United States, I think the biggest risk of the US falling behind China right now is related to the virus. If the US opens too soon and opens without the same kind of preparation that is being undertaken in the Asian countries, then we risk a second wave or even a third wave, which is going to delay the economic recovery considerably. And that would give China time to catch up in some ways. And so, if I'm thinking longer-term, reopening in a smart way in the United States is probably more important to our economic competitiveness vis-a-vis China and the rest of the world than worrying about semiconductor sales to Huawei. CLAY CHANDLER: Although the virus didn't start in the United States, China has managed to cope with it in a more efficient way. And it's done greater damage than almost any of the things that we've been discussing about China in terms of undermining US competitiveness. ANDY ROTHMAN: Yes, I agree, and let me add two points to that. One is that, while China has done a remarkable job of containing the virus and dealing with it in general after January 23, which is when they locked down Wuhan. CLAY CHANDLER: Yeah. ANDY ROTHMAN: But this is not just the success of an authoritarian, one-party regime. Look at what South Korea has done. Singapore, New Zealand, Japan. So this can be done in democracies. The other point I'd make is that China did make major mistakes early on. There is compelling evidence of cover-ups by local officials in Wuhan and Hubei province in late December and early January. And at some point, there needs to be a reckoning for that, but that should come after the virus is contained globally. CLAY CHANDLER: Andy, I want to thank you for sharing your insights with us. This has been a fascinating discussion and very illuminating about some of the most important trends in the global economy today. We look forward to staying in touch with you and having further conversations in the future. Thank you, Andy Rothman. 

Eastworld Spotlight

Eastworld Spotlight: China’s digital yuan is not going to displace the U.S. dollar

Latest episode

Eswar Prasad says the digital yuan will play “a marginal role” in increasing the renminbi’s global presence.

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Eastworld Spotlight: China vs. U.S. response to pandemic

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