x Abu Dhabi, UAEMonday 24 July 2017

China's change of fortune in focus

Building Brics: Business and government leaders make plans for continuing economic development while encouraging sustainable innovation. The question of how manage the impact of growth on the environment is a hot topic.

Citizens of Fuyang in Anhui province celebrate the Lantern Festival. China's 12th Five Year Plan has significant pollution reduction within its mandate. Reuters
Citizens of Fuyang in Anhui province celebrate the Lantern Festival. China's 12th Five Year Plan has significant pollution reduction within its mandate. Reuters

The changing pattern of Chinese economic growth was the theme of the Fortune Global Forum this month.

The event brought business leaders, government officials and chief executives from the world's top 500 firms to the Sichuan capital of Chengdu for three days of intensive brain-storming.

One of the hot topics in China these days is balancing the need for economic expansion while encouraging sustainable innovation. How do firms create a new set of tools that will permit economic growth without putting too much stress on the environment and on increasingly scarce natural resources?

Fu Chengyu, the chairman of China's oil giant Sinopec, said for his company sustainable innovation meant adapting the business model to a changing industry and world, while taking into account the demands of the market and particularly that of the Chinese market.

"We need to ensure sustainable energy supply in the future. And today an unprecedented challenge is tackling climate change, as well as our challenges related to environmental protection," says Mr Fu.

He says the right solution would not be found by just focusing on energy security without addressing climate change and environmental degradation.

"Today, environmental pollution is on the top agenda of the Chinese government, and also it is the most important issue that is followed by every Chinese citizen. The government has tabled a strategy of building a beautiful country, a beautiful environment for everyone," he says.

"So environmental sustainability is a key theme when we pursue corporate or business innovation."

He points out how China consumes about three times the amount of energy Europe does, so energy efficiency is key, and for this better technology is required.

Petrol corporations face the challenge of increasing their green standards to better balance the effects of their oil, gas and diesel extraction and supply processes with their environmental conservation efforts.

"We need technological breakthroughs, and technological innovation," says Mr Fu.

At the forum, there was intense discussion about fracking, or hydraulic fracturing technology, which involves the fracturing of various rock layers using pressurised liquid, which angers environmentalists.

"This has been going on on a massive scale in China right now. I believe in 10 years time great progress will be achieved, but we have to be very responsible," says Mr Fu.

"Every stakeholder has to be responsible. The consumers have to change their behaviour. The producers have also to change heir production model."

The General Electric chief executive Jeffrey Immelt says gas is a "game changer" that is plentiful around the world, and that penetration of gas in China is bound to grow over time. He agrees standards in the fracking business will come in time, and that gas and solar power is going to increase flexibility in the energy industry in future.

For China to realise the targets set out in the 12th Five Year Plan, which has significant pollution reduction within its mandate, Mr Immelt says economic growth needs to slow, China needs more reform, cleaner fuel is required for vehicles, inefficient coal has to be taken off the grid, while increasing energy efficiency, as well as setting standards for both water and pollution.

"And the thing about China is when both the national government and the provincial governments put their mind and their focus on something, this country has the ability to move at scale," says Mr Immelt.

The vice premier Zhang Gaoli told the delegates of how China was committed to speeding up economic reform and developing domestic consumption.

"We will do our very best to improve people's livelihood through development, make every effort to increase household income, deepen reform of income distribution system, re-adjust the relationship of income distribution and gradually achieve common prosperity," said Mr Zhang.

China will import US$10 trillion worth of goods globally in the next five years and invest $500 billion abroad, while Chinese tourists are expected to make 400 million trips overseas, he told the forum.

Muhtar Kent, the chairman and chief executive of the Coca-Cola Company, is bullish on China, describing it as a great market and one that is evolving at an incredible pace.

"You need to continue to innovate, and you need to continue to ensure that you can stay ahead of those trends around the world, whether it be in Africa or Latin America, or right here in China," he says.

The former US Treasury secretary and former Goldman Sachs chief executive Hank Paulson pointed out the need for reform if China is to keep expanding.

"What hits me right smack between the eyes is the same thing the Chinese government knows," he said at the forum.

"The current growth model is running out of gas. They're going to need to reinvigorate reform, it's clear. The good news is that expectations are high. The bad news is that it will be almost impossible to meet those expectations.

"They're strong leaders. They're going to need to be very strong," said Mr Paulson.

Despite slowing growth, China's growth trend is encouraging and the transformation of its economic structure will create significant opportunities for the world, the economist Stephen Roach says.

"There is too much focus on the overall rate of GDP growth. "

China's GDP grew 7.7 per cent year on year in the first quarter, feeding fears the economy is losing momentum. But Mr Roach says there were positive signs including the growth of the service sector.

"I am encouraged that this is the right path for China. China does not need to go back to 10 per-cent GDP growth. In fact, that would worry me."

By the end of 2015, the growth rate is likely to slow to about 7 per cent, which will actually benefit China, the economist adds.

He says China's consumption and service sector as a portion of GDP are still far below those of other major economies, creating a large opportunity for the country's major trade partners.

A major factor in this is urbanisation, and the consultancy McKinsey has long predicted China's urban population will reach one billion by 2030. The number is a "projection", not a certainty, McKinsey's global managing director Dominic Barton says, and the numbers coming from the countryside may be slowing. But China is still just at "the end of the beginning" of its urban transformation, he maintains.

"This thing will still move."

The former British prime minister Tony Blair gave the forum an insight into the UK's view of China's global relations. "The interdependence of our economy, with that of China, the fact that we now watch anxiously for the latest signs of how China is growing, its management of credit, its purchase of commodities, the development of its labour market … shows how crucial China has become to the global economy. And this crux will only get larger over time."