18 April 2019
John Mulcahy says China has become a big player in renewable energy. Photo: Bloomberg
John Mulcahy says China has become a big player in renewable energy. Photo: Bloomberg

Why China needs a new chapter

In the second and concluding part of an interview (the first part is here), John Mulcahy, head of research at China Galaxy Securities, shares his views on China’s politics and economy and the hot brokerage sector.

EJ: How do you see the economic development of China in the past 30 years?

JM: There have been three major inflection points in China since the Cultural Revolution.

The first was when Deng Xiaoping came to power and decided the market should be opened. Later on, he walked around Shenzhen and endorsed the open market policy. 

Second was when [then premier] Zhu Rongji said the market was no longer an experiment and that it had become the cornerstone of an open market strategy.

I believe we are in the process of seeing the third inflection point. That is the rise to power of [President] Xi Jinping and [Premier] Li Keqiang. I think it is a very important stage in China’s history.

EJ: Why so?

JM: The combination of those two is very important.

Xi is kind of Communist Party aristocracy, if you will. He has no fear of the communist structure; he was brought up in that environment. So he didn’t have any fear of Zhongnanhai and all the forces that go on.

He knew those people. He has a very strong association with the leadership, and he can trace his connection back to the Long March.

His ability to manage the political process is almost unique in recent history, certainly much more capable than the previous government of understanding and managing his way in the difficulties of the Communist Party.

Li Keqiang is essentially a technocrat, a highly skilled economist who understands the challenges as China is coming out of 30 years of double-digit expansion in the economy.

We can argue whether the calculation is accurate, but no one would deny China took 30 years to industrialize, whereas Europe took 100 years.

EJ: What issues are they dealing with?

JM: It is not realistic to expect that would continue indefinitely. You can see the growing pains: huge pollution, overbuilding of infrastructure, beginnings of social upheaval — why don’t workers have more?

Going into the next phase is inescapable. In other words, it needs another chapter.

How is China going to find a structure that will give stability in the long term: a low growth rate and a different type of political and economic structure?

That’s why I think the current leadership is very important. Look back in 15 years, and this will be an important period.

You can see now people are uncomfortable after getting used to the high growth rate. You get people thinking the Chinese economy is about to collapse when, in fact, it is probably not about to collapse.

What we see is an engineering of a descent to a lower growth rate. As the leadership says, this is the new normal — probably a good term.

Maybe the growth rate is not 7 percent but is 5 percent — does it really matter? There is an engine working in China, and a massive reform process is required.

EJ: What are the political issues?

JM: On the political side, you have seen an anti-corruption drive. So initially, it seems to be the case with any new leadership that the first thing they have to do is to have control of the party.

Rivals in the party are under control. Taking out people like the big “tigers” is very important, but it continues as a process that is much longer and much wider.

So you now have mid-level officials wondering if they caught up in the campaign.

At the Mid-autumn Festival, people producing mooncakes found sales were down at the high end. Earlier in the year, [Kweichow] Moutai shares were off because officials no longer get a box of maotai.

So the anti-corruption drive is going very far, very deep and very wide.

The argument is it fits with reforming the state-owned enterprises and reforming the mid-tier bureaucracy.

This leadership is the most important since Zhu Rongji, who was the most important since Deng Xiaoping.

You have to drive through unpopular policies that have to be the right policies to bring the country forward.

So I think these are interesting times and also challenging times.

EJ: What are the economic challenges?

JM: In the process of the transition to domestic consumption, domestic consumers are quite cautious, with everyone else.

When they are ready to buy, their power is enormous.

One company, Alibaba, can double last year’s Black Friday turnover in one day. So the power of China’s consumers is very significant.

China still has a high savings ratio. We see reforms in health care and pension provision releasing some of that savings. Still a lot of liquidity at the consumer level.

People talk about China facing a Japan-style long period in the desert. But from my experience with the Chinese character, that is unlikely.

I cannot see Chinese consumers sitting watching money in the bank for 10 years not doing anything. It is more likely that there will be faster changes.

EJ: What happens if asset values follow the rate of economic growth?

JM: It is a big challenge, because as soon as you succeed in doing one thing to slow down the economy, say in the property market, it reaches a point where other problems become more important than the property market.

But on the other hand, you don’t want speculative activity in the market.

It is always a challenge to maintain the property market at a level where the price is not rising so quickly that speculators are interested but on the other hand not allowing the market to drop to a level where genuine buyers are not interested.

The problem now is that the genuine buyers are less interested.

We have all seen the picture of ghost cities, but actually there is still pent-up demand in urban areas.

In China, 200 million people are unofficial urban dwellers and do not own their own homes. Stabilize the urban population, and that is likely to trigger massive demand for housing again.

EJ: Is there a trade-off?

JM: On the other side, big cities say, “We don’t want too many people. Hospitals, schools — who will give us money to pay for them? If we can’t sell property, we can’t raise revenue from taxes.” So there are challenges.

Big cities are saying we don’t want more people, so the government’s strategy is to make small towns into big towns, big cities into bigger cities.

There is an efficiency argument for creating super cities, and Beijing-Hebei is an interesting example. We see similar moves in Shanghai, because you get infrastructure to support a much bigger population.

The reality is all of these things will happen, but there is not one solution. I think it was Li Keqiang who said when you have a population of 1.3 billion, every move has to be big. If you are going to make changes, and you have that kind of population, you have to do it on a big scale.

EJ: What is the biggest issue now?

JM: If you take each issue in China, it becomes a complex problem — there is no simple issue.

Suddenly, the leadership gets worried about pollution, because Beijing is bothered by the issue. In Shanxi there has always been a pollution problem, but it is far from Beijing, so it doesn’t get noticed. If the capital is polluted, there is huge attention.

China has become a big player in renewable energy. I believe that process is genuine and not related to the global discussion. I don’t think China cares. 

It is domestic, so I see more investment in nuclear, solar, wind, hydro. Reducing [fossil fuels] is the only way to go.

EJ: How do you see the competition in Hong Kong’s securities industry?

JM: It has always been competitive. This is not new. In the 1970s to early ’90s, the European houses dominated. Then they were completely shifted aside by US banks.

You need to watch the mainland brokerages. I am not talking about China Galaxy, but Citic has a very good business. Haitong also has a good business. So does Guotai Junan. These companies are becoming more important.

If you have more interaction between Hong Kong and China, those mainland investment banks have a bigger advantage of scale in their domestic customer base.

We [China Galaxy Securities] have 6.5 million mainland customers – that’s the population of Hong Kong. That’s a huge foundation and platform. It is very difficult to imagine the momentum behind that is not going to have significance.

EJ: Will mainland brokerages dominate in Hong Kong and elsewhere?

JM: For China Galaxy, Hong Kong is the first overseas office. Over time it will change. As it becomes more confident of its ability, it will establish a wider international base.

Look at Citic. Some people argued paid it too much for CLSA. But if you want something good, you pay for it. Competitors always argue their rivals are not worth that much.

But CLSA is a great brand. Go for the top brand, you pay a premium. That’s why Rupert Murdoch bought the Wall Street Journal. If he did not pay that much, he would not have got it.

I think it is clever if you look at the long term. Long term, it is good strategy from Citic’s point of view. I think it gives them access to the world.

Other Chinese companies will think if you want to go to Japan or Europe, it will probably be by acquisition.

If you have a domestic base like what you have in China, it gives you a lot of muscle to go international.

Johnson Sze contributed to this story.

[Go to Part I]

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[Chinese version中文版]

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EJ Insight writer

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