Huang Qifan, “Three Thoughts on the Reconstruction of World Supply Chains"

Huang Qifan, “Three Thoughts on the Reconstruction of World Supply Chains in the wake of the Spread of the Coronavirus[1]”

Introduction and Translation by David Ownby

Introduction

Huang Qifan (b. 1952) is a Chinese technocrat and politician, having served in the Shanghai Municipal Government between 1993 and 2001, before being transferred to Chongqing, where he served as Deputy-Mayor between 2001 and 2009, and then as Mayor of Chongqing until 2016, after which he became Vice-Chair of the National People's Congress Financial and Economic Affairs Committee.  He has also been a member of China’s Central Committee.  He is best known as a talented financial technocrat responsible both for the construction of Pudong and the reconstruction of Chongqing.  One measure of his ability is that he survived Bo Xilai’s removal from his position in Chongqing in 2013, despite having been one of Bo’s allies.

Although delivered in the inelegant tones of MBA-speak, Huang’s message in this text is clear and simple:  China will be ready for business before the rest of the world, and should prepare to use the vast sums of capital moving China’s way (i.e., the bailout money that will flow through banks and international corporations throughout the world) to rebuild and expand Chinese supply chains in such a way as to enhance China’s position in global industry and manufacturing.  In other words, Huang says that if China plays its cards right, the pandemic will not have hurt China’s position in the world economy, but will instead propel it to new heights.  We should note as well his presumably "liberal" plug to deepen the reforms (a theme developed at greater length in this Caixin editorial).

I have no idea of the value of Huang’s vision of the future.  I include his text here because of the stark contrast between Huang’s confidence, grounded in what looks to be a profound understanding of China’s and the world’s economy, and nationalistic calls from the United States and elsewhere in the world to “bring industry home,” particularly in light of the problems of supply in medical goods during the pandemic in many Western countries.  I have no doubt that these calls are heart-felt, but suspect that the money-managers handling the bailout funds will think more like Huang Qifan than like Donald Trump.

Translation     

As of March 29, there are more than 660,000 cases of coronavirus throughout the world in 199 countries, of which more than 60 have announced a state of emergency.  Hot zones have sprung up one after the other in Asia, Europe and the Americas.  Factories have shut down, stores and schools are closed, and the world economy is facing an unprecedented challenge.  This is the greatest threat faced by the world economy since the end of WWII in 1945.

In today’s globalized economy, any commodity can be the product of international collaboration, an embodiment of the value of global supply chains.  At the current moment, it is inevitable that global supply chains have been affected and even damaged by the epidemic. Faced with this severe economic situation, we must on the one hand actively fight the epidemic, sharing China’s experience to contain its global spread as soon as possible; and on the other, we must also seek out opportunities created by the epidemic to restructure the supply chains, and as a great power,  take an active role in the post-pandemic economic development, making China's contribution in restructuring the global value chain and restoring the world economic order.

First, China’s achievements in bringing the coronavirus under control are currently moving world supply chains toward China

Two months ago, the coronavirus epidemic broke out in China, and the Chinese government attacked the virus throughout the country, achieving remarkable results.  As of March 29, the disease’s growth rate in China is approaching zero.  What was once the most contaminated part of the world is now the safest place in what has gradually become a world pandemic.

This great change has not only earned China kudos for the experience of having brought the virus under control, even more important is that it will win markets for China and will provide an opportunity for China to reconstruct world supply chains.

Since February, Chinese enterprises have been actively returning to work and production. According to a report in the Securities Daily 证券日报, as of March 22, more than 98% of listed companies had resumed production. The Chinese market has gradually recovered from the shock of the epidemic, which is a very good thing for the world pandemic.

Many companies originally thought that China's industrial chain would be abandoned by other countries because of the epidemic, and that China would be passively decoupled from the world economy. However, with the spread of the global pandemic, other countries have experienced large-scale shutdowns, and by contrast China has become the world's most stable region in terms of productive capacity, a safe haven for the world’s manufacturing industry, which will surely bring additional opportunities for development.

The scale of China's manufacturing now accounts for 30% of China's GDP, and also accounts for nearly 30% of global manufacturing. Although China has been called the world's factory, the development of the quality of its manufacturing sector has been constrained by the global supply chain, because China’s position in this chain has not been very high.

Since the beginning of March, the resumption in China's manufacturing has been uneven. Many companies have been unable to resume production due to the loss of European and American orders, and some are even facing the possibility of failure.  Yet we have also seen that in some sectors, such as in the electronics manufacturing industry in Suzhou, Chongqing, and other places, orders have not only not declined, but have greatly increased.

The reason for this is that supply chain clusters have formed in these places, meaning that more than 80% of components for electronics manufacturing are produced locally. This clustered production model reduces the risks posed by sourcing parts from around the world, and its competitiveness stands out even more during the epidemic.

In other words, only those industries with a relatively complete supply chain clusters in China will see orders increase during the epidemic, and some multinational companies will also transfer orders originally destined for Europe and Asia to these factories in China. Industrial supply chain clustering is thus an important feature of the global supply chain restructuring in this epidemic. The supply chain clusters that China’s industry has constructed or will soon construct are the basis for attracting high-end global manufacturing supply chains to China.

We must seize the strategic window of opportunity, opening up over the next two or three years as world supply chains are rebuilt, to deepen our reform and use the occasion to “attract capital to mend the supply chain” and “attract capital to expand the supply chain,” using the “flowing water” of world capital markets to irrigate the “rich soil” of China’s high-end manufacturing supply chain.  In the Guangdong-Hong Kong-Macao Greater Bay Area, in the Yangtze River Delta, in the Beijing-Tianjin-Hebei area, in the Two-City Chengdu-Chongqing Economic Circle and in other regions, we must strive to build a number of regional supply chain clusters around the country's nine strategic emerging industries.

These supply chain clusters aim to concentrate various components of global supply chains into a specific area. Within these areas, the horizontal division of labor of global suppliers will remain, but at the same time, vertical integration will occur within the regional industrial chains, which insulates the supply chains from risk. At the same time, due to the huge scale of the market attracted by the supply chain clusters, their voices will carry more weight in the global industrial ecology, so that market size can be used to effectively avoid the operational risks that may be caused by the strangling effects of the availability of key technologies.

Two.  Efforts around the world to combat the virus and restore production will push resources into the Chinese market

Beginning in March, faced with the huge adjustments in US financial markets caused by the epidemic, the Federal Reserve has pulled out its crisis toolbox and taken steps such as sharp interest rate cuts, quantitative easing (QE), and repurchase agreement operations (repos).  On March 13th, the Federal carried out huge repos; on March 15th, it lowered interest rates again by 100 basis points, while reducing the deposit reserve ratio to 0%, and launched a $ 700 billion QE program; on March 23rd, it further announced a broad package of policies to support the economy, including the implementation of unlimited QE, the expansion of the existing collateral scope in MMLF (money market mutual fund liquidity) and CPFF (commercial paper financing), the establishment of new projects to support credit, etc.  Many countries in Europe and Asia have adopted similar policies. In other words, in order to save their economies, governments of various countries are releasing various resources one after the other, and continuously injecting liquidity into the market.

When large amounts of capital enter global markets, with the exception of certain administrative financing used to purchase anti-epidemic materials and solve the living problems of the people of the affected countries, most of the capital is in the form of financial funds, linked to industry, and expecting returns of between 5 and 10%. From a global perspective, there are not many markets that can meet the expectations of these funds in terms of returns. At present, the Chinese market has achieved the best control of the epidemic and is the environment with the least investment risk. Therefore, the influx of global liquidity into the Chinese market is highly probable in the near future.

Liquidity flowing into China is an opportunity, but it is also a huge challenge that must be carefully managed.  From the perspective of the real economy, it means that the process of China’s absorption of global supply chains and construction of supply chain clusters will receive the support of a great deal of low-cost international capital, enabling us to truly “attract capital to mend the supply chain” and “attract capital to expand the supply chain,”and thus to accelerate the construction the supply chain clusters necessary to China’s Four Great Economic Regions and Nine New Strategic Industries.  From the perspective of the financial markets, the rational interjection of foreign capital can stimulate the development potential of China's financial markets, especially the Chinese stock market, which will receive more attention from international capital.  This in turn will lend international financial support to the development of Chinese listed companies, which will speed the construction of supply chain clusters.
In the immediate future, as the pandemic unfolds, more foreign investors will see the development prospects of China's supply chain market, and will want to invest in enterprises preparing to join China’s supply chain clusters. This trend will present a once in a lifetime historical opportunity in the development of China’s capital markets and the construction of her supply chain clusters. 

However, it should be noted that this flood of capital will require China's real economy to be strong, and her relevant policy-making and implementation capabilities to be innovative. In the current state of the world, China does not have much experience to draw on, and we need to embark on our own new development path. As far as Chinese companies are concerned, they need to remain focused on technological innovation and model innovation, developing their core competitiveness to navigate with agility in the tide of international capital, otherwise it will only hurt the enterprise itself as well as the Chinese investors in general.

Third, governments at all levels in China should uphold the policy of reform and opening, accelerate the optimization of the business environment, and systematically and actively participate in the reconstruction of the global supply chain

Opportunities are always for those who are prepared. In the face of the historical opportunities brought about by the pandemic in terms of capital market development and the reconstruction of the supply chains, we should continue, in accord with the instructions of General Secretary Xi Jinping, to implement proactive fiscal policies and prudent monetary policies, and unswervingly expand our policy of reform and opening. Under the current situation, it is necessary to expand access to foreign capital markets to a wider area. We must accelerate the pace at which our financial institutions open up to foreign capital, and policies already announced that are heading in that direction must be brought up to speed even sooner, so that foreign financial institutions can move the capital released onto world markets into China.

At present, China already employs a management model of pre-negative entry treatment  with a negative list.[2] In the four major economic regions and other places where conditions permit, the negative list should be significantly reduced as soon as possible to promote all-round development of modern service industries, advanced manufacturing, modern agriculture and other high-end industries to open to outside capital, allowing foreign-owned holdings or sole proprietorships to attract more global supply chain-related companies to settle in China and join regional supply chain clusters.

Investment in supply chain clusters is an important driving force for the future growth of China's GDP. Each supply chain cluster formed in the four major regions and nine strategic emerging industries is likely to bring hundreds of billions or trillions of investment in RMB, and in turn, these trillions of RMB of industrial added value will have a huge driving effect on the development of the national economy. Areas outside of the four major regions should also create supply chain clusters that are in line with the characteristics of local economic development and vary in size according to their own characteristics, in order to improve the quality of regional economic development.

Governments at all levels should boldly carry out policy innovations under the unified direction of the central government, and accelerate the optimization of business software and hardware environments through various means, such as the establishment of free trade pilot zones. In terms of hardware, in addition to the construction of traditional high-tech zones and economic development zones, it is also necessary to accelerate the construction of new infrastructure represented by 5G, big data, and the Internet of Things, to provide a first-class business hardware environment for attracting the global industrial chain.  In terms of  software, we must improve the digital services of government departments, attracting more global enterprises to join Chinese supply chain clusters through honesty, efficiency, fair competition, open cooperation, and a transparent and safe business environment.  We must also carry out a substantial improvement of the quality and efficiency of the domestic supply system.

Local governments should continue to develop supply chain clusters, support the introduction of global leading companies as the core of supply chain clusters, and strive to create an industrial mini-cycle driven by local demand and domestic demand when foreign demand is still too weak to sustain the supply chain cluster. When the foreign market recovers, we must further strengthen international cooperation, expand the scale of supply chain clusters and the quality of development, and become the great driver of the global industrial chain.

On March 26, at the G20 Leaders' Special Summit on Novel Coronavirus, President Xi Jinping emphasized that all countries should work together to jointly maintain global supply chain stability. His speech fully embodies China's role as an important country in the global fight against the epidemic, and also illustrates China's self-confidence in maintaining the stability of the global supply chain.

The epidemic is a disaster for mankind, but it is also an opportunity for the transformation and upgrading of global supply chains. China should seize the opportunity created by the shutdown of some European and American industries and the subsequent economic recession, to speed up the process of “attracting capital to mend the supply chain,” and focus on creating space in the Guangdong-Hong Kong-Macao Greater Bay Area, Beijing-Tianjin-Hebei, Yangtze River Delta, Two-City Chengdu-Chongqing Economic Region and other regions for the creation of highly agglomerated, tightly coordinated, upstream and downstream, strategic emerging supply chain clusters worth hundreds of billions or trillions of RMB.

Once we have built open supply chain clusters containing both a horizontal division of labor and vertical integration, this will not only help to diminish the risk of global supply chain collapse caused by natural and human disasters like the coronavirus pandemic, but also the huge market share formed by the cluster itself can effectively avoid the risk of the sourcing of key technologies, and help to grow innovation capacity in creating key technologies in the supply chain cluster.

China's regional supply chain clusters are also the world's supply chain clusters, which reflects China's contribution to global social and economic governance, and will play an important role in reducing operating risks to the entire human economy, and serve as an important measure effectively resisting new important viral epidemics.
 
Notes

[1] 黄奇帆, “新冠肺炎疫情蔓延下全球产业链重构的三点思考,” published March 29, 2020, available online at https://www.yicai.com/news/100570404.html.
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[2] This means that China allows foreign firms access to China’s market on the same terms as Chinese firms, with the exception of certain excluded sectors which are found on “negative lists.”