Jack Ma is retiring. Is China’s economy losing steam? – Yasheng Huang

MIT Sloan Professor Yasheng Huang

MIT Sloan Professor Yasheng Huang

From New York Times 

GUANGZHOU, China — Earlier this month, Jack Ma announced that he was stepping down as executive chairman of Alibaba Group Holding Ltd, the world’s largest e-commerce company. His decision caught many by surprise. At an economic forum in Russia, President Vladimir V. Putin reportedly asked him, “You are still so young. Why are you retiring?”

Maybe Mr. Ma, 54, knows something that Mr. Putin does not. Two of the three forces, globalization and marketization, that have propelled Alibaba to its current $500 billion valuation are dissipating. The third force, technology, is mired in the trade war between China and the United States, and its prospects in China are now uncertain.

Alibaba didn’t just transform e-commerce in China; it transformed the entire economy by helping build up the private sector. Mr. Ma’s departure from the company now — though he claims to have been planning it for a while — adds to a gathering sense that China’s private sector, the engine of the economy, is losing steam — and faith.

Alibaba is China’s globalization story par excellenceFounded in 1999, the company created a website that allowed people outside China to buy directly from Chinese exporters. At that time, China was opening up but foreign buyers were hampered by their lack of knowledge of Chinese suppliers. Alibaba set up a program called TrustPass, allowing third parties to verify the quality and trustworthiness of Chinese suppliers. This system enabled foreign buyers to bypass the slow and often bureaucratic state-owned intermediaries that typically performed verification, and it eased Chinese companies’ access to the global marketplace.

Alibaba also tapped international capital markets. The company’s founders hailed from modest backgrounds and had little capital, but they benefited from liberal policies that China had put in place as it was negotiating to join the World Trade Organization (which it did join, in 2001). During the company’s early years, its leaders turned to foreign suppliers of capital, such as Goldman Sachs, SoftBank and Fidelity Investments. Later on, Yahoo also provided funding.

In the early 2000s, Alibaba structured its investment arrangements via what are known as “variable interest entities.” V.I.E.s are intermediary structures in which foreign firms can invest to acquire contractual rights over revenues generated by Alibaba. They were an innovative solution to help foreigners navigate China’s murky legal system while bringing critical financing to Chinese high-tech entrepreneurs.

But today globalization is under assault. The Chinese government is enforcing more strictly regulations over V.I.E.s that it had long ignored, creating uncertainty for foreign investors. And the trade war between the United States and China is disrupting Chinese exports, threatening the supply chains of which Alibaba is an integral component.

Alibaba has elevated China’s private entrepreneurs in another way: by providing direct financing to them. China has a massive banking system, but it is almost entirely organized to support the less efficient state-owned enterprises, leaving China’s dynamic private sector chronically short of capital and credit. Alibaba, through its financing operations, has stepped in to provide much-needed capital, especially to China’s very small businesses.

Read the full post at New York Times.

Yasheng Huang is the International Program Professor in Chinese Economy and Business and a Professor of Global Economics and Management at the MIT Sloan School of Management. 

America should respond to China with a ‘second Sputnik moment – Yasheng Huang

MIT Sloan Professor Yasheng Huang

MIT Sloan Professor Yasheng Huang

From MarketWatch

The burgeoning trade war between the United States and China has as much to do with technology as with the balance of trade. Reports have surfaced that the Treasury Department is drafting rules to block Chinese firms from investing in American companies doing business in so-called industrially significant technology, while the Commerce Department is planning new export controls to keep such technologies out of Chinese hands.

These moves follow President Donald Trump’s proposal to impose tariffs on $50 billion worth of Chinese products, many of which are on the priority list for “Made in China 2025,” President Xi Jinping’s blueprint to transform China into a global leader in high-tech industries like aerospace, robotics, pharmaceuticals, and machinery. Although the Chinese government has refused to modify its initiative, the U.S. is demanding that China end all government subsidies and grants under the program. Trade talks have stumbled on this point.

America’s concern with Made in China 2025 is understandable; China’s approach to technology development has been controversial, to say the least.But there are better ways to respond to China’s policies. Two ways, to be precise. Read More »

Making economic sanctions on North Korea work – Yasheng Huang

MIT Sloan Professor Yasheng Huang

MIT Sloan Professor Yasheng Huang

From Project Syndicate

China is the only country with the power to compel North Korea to change its nuclear policy. Convincing Chinese leaders to wield that power, by fully isolating the regime economically, must be the international community’s top priority.

Last week, in a brazen rebuff to tough new United Nations sanctions, North Korean leader Kim Jong-un’s regime fired a ballistic missile over the northern Japanese island of Hokkaido – its second launch over Japan in less than three weeks. But, far from indicating that sanctions don’t work, Kim’s move shows that they still aren’t tough enough.

The latest sanctions cap oil imports, ban textile exports, and penalize designated North Korean government entities. Following Kim’s response, sanctions should be tightened even further, to stop all trade with North Korea, including halting all fuel imports.

North Korea is one of the most insular countries in the world. That insularity is a curse for the long-suffering North Korean people, but an advantage for a sanction-based strategy, because only one country is needed to make it work: China.

From an economic perspective, China is the only country that really matters to North Korea, as it controls about 90% of the North’s foreign trade and supplies almost all of its fuel. Yet China’s economy would barely register the effect of new sanctions: North Korea’s annual GDP, at a meager $28 billion, constitutes little more than a rounding error for its giant neighbor.

Read More »

Israeli model holds the answers to China’s quest for technology and innovation — Yasheng Huang

MIT Sloan Prof. Yasheng Huang

MIT Sloan Prof. Yasheng Huang

From South China Morning Post

It is widely understood that China needs to move from an investment-intensive growth model to one based on science, technology and innovation. But before I take up this subject, let me take a detour to tell a tale of two countries.

Both countries are small. One has a population of 5.5 million people; the other has a population of 8 million. In both countries, the dominant ethnic group is about 75 per cent of the population and minority groups make up the rest.

Both countries are rich. One country has a per capita gross domestic product of US$52,000 and the other country has a per capita GDP of US$35,000.

Both countries have faced existential security threats from the outside and armies in both countries have mandatory conscriptions. One country was actually kicked out and evicted by its now much larger neighbour, because the union would have threatened the political dominance of the main ethnic group. The second country is located in a region surrounded by hostile nations.

Read More »

A presidential truthfulness oath – Yasheng Huang

MIT Sloan Prof. Yasheng Huang

MIT Sloan Prof. Yasheng Huang

From Project Syndicate

On January 20, 2017, Donald Trump will be sworn in as the 45th president of the United States. I say “sworn in,” rather than “assume the presidency,” because, under Section I of Article II of the US Constitution, Trump cannot actually become president unless he takes an oath of office, publicly committing himself to uphold the Constitution and perform to the best of his ability while in office. That is, of course, the case for all presidents. But, given how Trump comported himself during the campaign, it is particularly meaningful in his case.

Until now, Trump has made no effort to behave in an honest or reliable way. Technically, he didn’t have to. The US does not require any sworn statements from the men and women who run for president, nor does it have any enforceable code of behavior or constraints on the kind of rhetoric that can be used. Candidates may conduct themselves however they see fit.

This approach is based on the assumption that we can trust the candidates’ judgment. People seeking the country’s highest office should know how to balance the political imperative of winning votes with a sense of responsibility for the feasibility of – and reasoning behind – their policy promises.

By and large, experience has vindicated this view. The US has had the good fortune of choosing largely from among presidential aspirants who adhere to generally accepted norms. With Trump, it seems that fortune has turned into bankruptcy.

Read More »