Professor Zhou, who has previously worked at the US Federal Reserve Board and the China Securities Regulatory Commission, is a student of the development of the financial market in China. Although he remains confident in its long-term future, in the short term he sees risks.
The government recently raised the transaction tax or 'Stamp Tax' on stock purchases from RMB 1 for a stock worth RMB 1000 to RMB 3, in an effort to cool the market and prevent what is widely seen as a bubble. The Shanghai stock index was a little over 1,000 at the start of last year, and even after the recent correction, it is in the range of 4,000.
Professor Zhou says there may be more government intervention to prevent either overheating or a precipitous market slump: "The key point is to take measures that stabilize the markets, rather than making the market crash."
Professor Zhou sees one of the challenges facing the economy, still growing at 10% a year, as high growth in fixed asset investments, such as real estate, infrastructure, and factories. He says: "This could lead to overheating. More than 50% of China's GDP is contributed by investment rather than by consumption demand.
"China's consumption ratio (consumption divided by total GDP) has been falling steadily, and is much lower than that of the US and other countries, but it is consumer demand that is central to long term growth. If consumption is not growing fast enough, why should anyone invest?"
The export market has helped to justify high levels of investment, but China cannot rely on exports to drive consumption year after year, he says. China already has a huge trade surplus and foreign exchange reserves. "The Chinese government has noted this issue and is working to slow down investment rates and stimulate domestic demand, but now that China has shifted toward a market economy the government is limited in its ability to make this happen," the Professor says.
"Although fixed asset investment is a driver of economic growth, the government can give up some investment and target 8% growth, rather than current growth rates over 10%. Aside from investment, the government is encouraging Chinese people to consume more, but instead they are saving because they worry about rising costs for healthcare, education and apartments, and see problems in the pension and welfare systems. They also save for cultural reasons."
Professor Zhou sees another weakness of the Chinese economy as a lack of great private companies, and an excess of small companies - more than 40 million in total. He says: "The US government worries about companies becoming too big and powerful, so they take anti-trust measures to break them down. China, by contrast, is filled with small companies - China has more than 40 million enterprises, a number larger than the population of most European nations." He adds: "The larger Chinese companies such as Sinopec and China Mobile are state-owned, built using government resources, and operate in protected market segments. Companies built by entrepreneurs, by contrast, are small and not competitive by international standards."
Private business in China needs to change its mindset and find ways to integrate companies into large and efficient multinationals, he believes. "In China we have a saying, ‘People prefer to be the head of a chicken instead of the tail of a phoenix'. Everyone wants to be a boss in China, rather than a mid-level manager in a larger corporation. Chinese entrepreneurs also tend to focus on short-term profits, at the expense of long term planning."
On his return from the US in 2002, Professor Zhou became adjunct professor and then dean of the finance department at the Guanghua School of Management at Peking University. He contrasts the way he taught business in the US with the business culture in China. In the latter there is a lot more interaction with entrepreneurs, which he sees as a mixzed blessing. "As professors [in China] we can learn a lot from our students, which is good for teaching and research. But on the other hand we have less time to think about pure academic research and ideas. This is one reason that Chinese economists and business professors are not as active in publishing in academic journals.
"My students in China are mostly at the EMBA level, and they pay attention to business ideas and strategies, rather than just techniques. In China, business people are more interested in business connections or ‘guanxi', and so they often go out dining and for entertainment, whereas students in the US sometimes go out to bars, but not nearly as often."
Source: Zhang Liang
International communications at Cheung Kong GSB
Review by Joe Gill