Screen Shot 2016-01-22 at 4.44.47 AM.pngEconomy Talking Policy 

Talking Policy: Ben Simpfendorfer

This week marked the 9th Annual Asian Financial Forum, which was themed, “Asia: Shaping the New Paradigm for Growth.” World Policy Journal Managing Editor Yaffa Fredrick attended the Forum and sat down with one of the keynote speakers, Ben Simpfendorfer, managing director and founder of Silk Road Associates, to discuss China’s prospects for economic expansion both regionally and globally. With 20 years of experience supporting multinational companies with strategic planning in Asia and the Middle East, Simpfendorfer is uniquely positioned to address the challenges China is likely to face in the forthcoming year.

WORLD POLICY JOURNAL: In your 2009 book, The New Silk Road, you talked about how China and the Middle East were rising together—how they were looking to each other for assistance in their rise. But today it appears the two may be struggling—the Middle East with the falling price of oil and China with a developing economic crisis. Might the two now be falling together?

BEN SIMPFENDORFER: I wouldn’t say China or the Middle East are either rising or falling. Perhaps a better way of phrasing it is that they continue to emerge. But the complexities are very different today than what they were five years ago. When I wrote the first book the global crisis erupted just as I went to publish. And I thought, ‘Wow this is a worry. What if my thesis is basically predicated on a big global credit binge that supported growth in China and the Middle East, but these two regions now disappear off the face of the commercial map?” Yet it never happened. They continued to grow strongly. But no country can sustain high growth rates growth forever without reform. At some point you need to rebalance, and I think policy makers in China and the Middle East would agree that more structural reform is needed. And so correction is inevitable. But I’m also not overly worried and the region’s share of global growth will continue to rise over the long-term. In fact, the IMF’s calculations would suggest that the Silk Road’s share of global GDP will reach near 50 percent by 2020.

It’s also not all about GDP figures. There’s a tendency to look at the region only in terms of national GDP, but to me the region’s GDP figures have less relevance than ever. What really matters is the performance of specific regions or sectors. China’s national GDP growth, for instance, tells you very little about the performance of the country’s better performing regions where growth rates might be five percentage points faster than in other parts of the country, especially the northeast regions. That matters for an investor as it means there are still strong sources of growth in the country even if the national growth rate has slowed. It’s much the same in the Middle East. Sure, there’s instability, but the real issue is how investors are engaging with the more dynamic parts of the Middle East—that’s the more interesting story. It’s a bottom-up story rather than the top down, but it’s the more helpful way to look at the two regions, especially China.

WPJ: That’s a fascinating way of looking at it. Building off of that, China’s at the beginning of what looks like a difficult transition—one few other middle-income emerging economies have made successfully. As China tries to transition to a more balanced economy, what kinds of problems might it encounter? What could the potential impact of that transition be? And perhaps more importantly, can China successfully transition?

BS: This will be an extension of what I’ve just argued. I would rather ask which China are we talking about? Will China trigger its middle-income trap? Parts of China, absolutely; parts of China, no way. In the Pearl River Delta, will China trigger its middle-income trap? Probably not, because the region’s private sector activity is very robust. There is also good connectivity with near neighbors in the Greater Mekong region. The Pearl River Delta also has wonderful sources of productivity growth. Shenzhen, for instance, is a city of high-tech startups. There is also huge opportunity in the leisure sector. Stayaction resorts are a good example. They aren’t many options for families looking to relax over the weekend and so the Chinese equivalents of a Six Flags resort are flourishing. These are the sort of growth sectors that can help a country overcome its middle-income trap. But then you could equally go further west or north across the country and you’re almost guaranteed to find Chinese cities that will trigger the same middle-income trap. I just think tying a national GDP figure today really tells you very little, especially if you’re thinking from a multinational perspective.

WPJ: Shifting gears to China’s One Belt, One Road development plan (focused on connectivity and cooperation among countries primarily in Eurasia)—how does this plan fit into a strategy for A) a smoother economic transition and B) expanding China’s political influence worldwide, one of the stated goals of Xi Jinping?

BS: There are two very different ways of looking at it—one is strategic and the other is commercial. The strategic angle is to think of it in terms of a global rebalancing of power. That’s not unreasonable, but it provides a lot of ammunition for the critics because you can look at the policy and say, ‘It’s overly ambitious. It’s designed by policymakers who are trying to design a policy to fit 60 different emerging markets.’

But from a commercial perspective, the story plays out very differently because we are instead asking what are leading companies doing; what are small private equity outfits doing? And there you see a lot of traction. To me, the commercial angle is the more important. It’s about following the money because ultimately the strategy will only work if it’s identifying sustainable, profitable opportunities.

A good test is to ask ‘Do you believe that the belt and road region will account for a growing share of world’s GDP? The answer, of course, is yes. Do you believe that China’s commercial engagement with the belt and road countries will intensify? Yes again.’ So even if the Belt and Road strategy results in some policy failures, it’s a bet on existing and powerful trends. And it’s difficult to see what would knock those two dynamics off in a way that the region’s share of global GDP would shrink or China’s commercial engagement would start to retreat. They’re really two unlikely scenarios.

WPJ: Well perhaps my next question is through more of a strategic lens. China’s One Belt, One Road has provoked fears of a new great game in Central Asia—rising conflict among China, India, Russia, Turkey, and the U.S. Is this a prescription for more economic conflict, or could it be a strategy of positive sum cooperation in Central Asia?

BS: If what I’m arguing is that Belt and Road has to provide sustainable, profitable opportunities, then it should be a win-win for everyone, at least from a commercial angle. American firms should be able to say, ‘We’re going to collaborate with Chinese state owned firms because we can provide them with good legal advice or be part of their supply-chain in India or Indonesia, for example.’

And yet governments will also inevitably bump heads in this part of the world—that’s only likely. To anyone who is surprised by this you’ve got to step back and say, well China is the world’s second-largest economy and we’re talking about its policy towards countries that are near neighbors. Even if China didn’t have a belt and road strategy, its regional expansion was inevitable.

China also isn’t the only country with a Silk Road strategy. Japan, Korea, Turkey all have their own undeclared strategies. They are all major commercial players in the Silk Road region. The Japanese comprise 95 percent of Indonesia’s auto market. There invest three times as much in ASEAN [Association of Southeast Asian Nations] as they do in China. Japan’s Ajinomoto, a global food giant, recently purchased a Turkish food-flavoring company. Korea’s biggest utilities provider, a few years ago, won a multi-billion nuclear deal in the United Arab Emirates. Turkish construction companies are also active across the region. China hasn’t created something that’s new. It’s just created something that’s very well defined, and it’s spooked a lot of people.

WPJ: One Belt, One Road promises considerable infrastructure and development in a troubled part of the world, but will it mutually advantageous for the Chinese and the ‘Stans? Or might it mirror Chinese development projects in Latin America and Africa, employing Chinese laborers and companies almost exclusively?

BS: I would suggest that China is learning from its mistakes in sub-Saharan Africa and Latin America—there’s a recognition that a lot of provincial-level state-owned companies went in too fast, and didn’t have the capability to deliver. There’s also recognition that China has a number leading state-owned companies, and that they can invest profitably, and that’s where the money should be channeled through.

Where there are risks is if you get foreign governments that say, ‘We would like to build a port. The Chinese will provide financing.’ The financing isn’t necessarily cheaper than what you can get on the market. It’s, of course, also tied to Chinese construction companies. The risk is that everyone goes ahead with that because on the Chinese side it’s a great deal and on the foreign side you get to build a port so your reelection prospects look pretty good. But an assessment isn’t done that says this actually makes sense. A good example of that is Hambantota Port in Sri Lanka, which is a competitor the Colombo Port, and is still struggling to make money.

But I would argue all sides need to take responsibility for such deals, not just China—it’s foreign governments getting overly ambitious and grabbing at an opportunity to build a big-ticket infrastructure item and its Chinese companies understandably seeing an opportunity to make some commercial profit out of the deal.

WPJ: Shifting gears, China has been slow to accept international responsibilities in the Middle East. That said, it’s now the largest purchaser of Persian Gulf Oil; and the U.S. continues to primarily handle security issues in that region. Will it change? Should it change?

BS: I’m thinking of my Middle East contacts and many, to be blunt, would push back and say, “We don’t really need the U.S. to handle our issues.’ But my point is that China understands that and also asks what has the U.S. has gained out of its intervention in the region. Where is the upside because there’s plenty of downside? And just because China buys a large amount oil from the Middle East, why is there an obligation for it to guarantee the region’s security? China’s oil policy is itself shifting. For a period, there was a strong belief that you needed to secure oil assets. You wanted to be the guy who digs it out of the ground. And that was never really realistic because we all drink from the same oil well. If China extracts more oil from Angola, it increases overall oil supply, which benefits everyone, no matter where you buy it from. It’s no surprise then China is coming around to the idea that it’s ultimately a market solution that best guarantees their oil security.

When you look at China’s international priorities, you have to start with America, then look at Europe, Japan, ASEAN, and Russia. The Middle East is important, but it’s not at the top of the list. And so more often than not China’s Middle East policy is a residual of what it’s doing in the rest of the world– particularly its relations with America. So there’s really no clear-cut reason to get more involved.

WPJ: It’s an interesting point to say that China’s looking to its relations with other markets before it determines its behavior in the Middle East. China seems to have good economic relations with both Iran and Saudi Arabia. How is China going to now navigate the sectarian tensions between the two countries? It’s tended to side with Russia on the Syria issue, which has been a low key endorsement of Iran, but then again Saudi is China’s top crude oil supplier.

BS: Much like any power, China will struggle to navigate the region because of the sheer complexity of the issues. It’s also very difficult to see the senior leadership regularly discussing how best to handle Iran and Saudi Arabia because there’s so much else to deal with.

You know, at the end of the day their success will really depend on whether we are living in a very mercantilist world—at the end of the day is it money that counts? The fact that China is one of the world’s largest oil buyers, well if that’s the only thing that matters, then the country will probably be able to navigate its way through.

I would say there is room for China to continue to play a broker role. Whether it’ll be successful, I don’t know, but there’s hope.



Special thanks to the Hong Kong Trade Development Council for helping to organize the interview.

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[Photo courtesy of Asian Financial Forum]

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