[Review of JD Capital · Future Forum] Zhu Ning: M&A Facilitates Transformation of China’s Economy


This is the speech delivered at the 2017 JD Capital · Future Forum by Deputy Chair Zhu Ning of National Institute of Financial Research at Tsinghua University. The draft has been reviewed by the speaker. 

Distinguished guests, my dear friends, I am pleased to meet all of you here at the forum. I would also like to thank JD Capital for offering us an opportunity to share our views on industry consolidation and economic transformation. Meanwhile, it is a great honor for me to be engaged as one of the first strategic advisors to JD Capital. For this speech, I want to convey an important idea: investment, though aiming to pursue for interests and benefits, is also a process of creating values and wealth for the society and economy. How will China’s industries consolidate in the next stage? How will such consolidations contribute to China’s economic transformation and social progress? All these problems are worth studying. 

Today, I am going to share with you three insights: firstly, the background of China’s economic development and transformation; secondly, the relationship between industry consolidation and economic transformation; thirdly, the reason why mergers and acquisitions (M&A), in practical terms, are of great importance to China’s economic transformation.

Background of China’s Economic Transformation

Over the past thirty years, all of us have witnessed the massive growth of China’s economy. China’s great leap in GDP, measures of industrial production, and per-capita income, along with the fact that it has become the biggest consumer market in the world, have demonstrated the miracles in China’s economic development. The opening-up policy serves as a critical factor, which enables China to be a significant order shaper and leader in the global financial system. 

Over the past three to five years, China has made significant efforts to lead the world’s economic development and shape its order by striving to reshape the global orders of trade and economy, advocating to establish cross-regional international organizations (e.g. New Development Bank BRICS and Asian Infrastructure Investment Bank), and the promotion of the Belt and Road Initiative. During globalization, China’s economy, with its giant population and enormous consumer markets, will embrace further development; meanwhile, China calls for building global communities of common interests that replace confrontation with dialogue, and alliance with partnership. Due to all these factors, China will continue to play a leading role in the future.

Over the past two to three years, however, we have noticed that China’s economic growth has decelerated and businesses are going through a difficult time. But these challenges and problems are definitely not anything peculiar to China alone. If you look around the world, you may find out that the trends of global politics and economy in post-crisis era are significantly different from those in the past. For one thing, as China’s economic development has entered a new normal, the supply-side reform is required to promote economic development and support it via its contribution to the growth of domestic consumer market. For another, the world economy is ushering into a new normal as well, in which the returns on investment are decreasing while investment risks are rising. Against this backdrop, pressure on global trade and finances is mounting, and all countries are faced with slower economic growth and intensified social conflicts, among other problems. In terms of investment, the gradually declining returns immediately stimulate the investment risks.

As the global economic development slows down, two trends become increasingly evident. The first one is that politics are taken to extremes. From last year’s Brexit vote, changes in political situations of Central Asia and Europe, to the growing tensions on the Korean Peninsula, all these events indicate that the mounting pressure on economic growth will be reflected in the political situation of various countries. Both Donald Trump’s victory in US’s presidential election and the UK’s decision to leave EU are inconceivable in the traditional sense. The reason is that, during a certain period after the financial crisis, people around the world are all discontented with the status quo; hence, their demands for domestic politics have witnessed fundamental changes. As the worldwide political situations change, international relations grow increasingly complicated and highly chaotic, and the regime changes are becoming more and more unpredictable.

Under such circumstances, the only highlights in global economic changes are technological advances and the new drives for economic development brought by them. An increasing number of economic sectors are relying more on accumulation of knowledge and the further integration of technologies and industrial landscape, rather than the input of capital and labor. Therefore, it is urgent to achieve economic transformation in China: the foundation of China’s economy should be shifted from cheap labor and huge exports to the enormous domestic consumer market. The investment areas of JD Capital, as well as those of many entrepreneurs here, all benefit from the emerging and expanding middle-class market in China, which has given birth to a wide array of business opportunities.

At the same time, many of us are wondering how China’s economy will achieve its transformation. Last year, the top leadership proposed the five priority tasks (cutting overcapacity, reducing excess inventory, deleveraging, lowering costs, and strengthening areas of weakness). Although the inventories of enterprises have decreased, the practice was actually seeking a temporary rise of prices through the administrative management of sectors with overcapacity. Inspiring as the short-term economic growth is, the model is not sustainable. Recently, Moody's downgraded China's rating, which to some extent can be interpreted as a doubt over the sustainability of this model.

In terms of business development, the manufacturing sector, especially the energy-consuming and heavy-polluting industries, is contributing less and less to the general economy. Instead, the emerging sectors, such as the service industry and high-end customization businesses, have begun a rapid ascent. Just look at companies like Alibaba, DJI and Tencent. Meanwhile, with the gradual accumulation of human capital, a number of great opportunities have emerged in China’s domestic market. Taking Tencent for example, many of its applications have become an integral part in people’s everyday life, and can even influence the business models of other countries and play a guiding role in the global IT industry. We can see that, China’s economy is no longer dominated by processing and manufacturing, and more and more Chinese enterprises are developing designed-in-China products and China-style business models – these are all massive changes in China’s economy.

To achieve economic transformation in China, we need to pay attention to several issues. Firstly, we need to promote the supply-side reform and work to satisfy the needs of the expanding emerging market, as the existing economic models cannot live up to the requirements arising from the current economic activities. This is a stage we cannot bypass in improving the general economy and incomes. Secondly, the Chinese government focused on the five priority tasks last year, so as to address the accumulated problems of overcapacity, debts, and financial risks in its economy. Hence, the five priority tasks are important initiatives to relieve economic risks and stabilize China’s economy. Moreover, since the second half of 2016, the central government has repeatedly called for controlling capital bubbles, preventing financial risks, and ensuring financial security. I have published a book titled The Guaranteed Bubble. In the book, I argued that, from the perspective of behavioral finance, we must pay attention to both the economic growth in the short term and the financial risks in the long run. It is a challenge for China’s economic transformation to maintain a balance between the two.

How does Industry Consolidation Facilitate Economic Transformation?

What is the role of industry consolidation in the process? The answer may be explained from several aspects. Firstly, we must realize that the concept of industry is different from what we firmly believed over the two to three decades. The deepening of globalization is having a major impact on developing countries, as well as some developed countries. Various economies, China’s included, have experienced every slightest change in the process. More and more products are going global, and more and more production sources are allocated more effectively on a global scale. For instance, Apple’s production and sales are conducted worldwide, while its brand, design and business models are subject to only its US office. Furthermore, as the global competitions intensify, only companies with global and diversified thinking can enjoy advantages in pricing and brand recognition. During the past several years, many Chinese enterprises have been striving to go global, which proves that, against the backdrop of globalization and China’s economy grown to its current level, this is a decision all Chinese enterprises have to consider. Therefore, industry consolidation is, during the process of global integration, more of an indication of consolidation and effective allocation of resources on the corporate level.

Secondly, over the past century, technological progress has gradually become the most important driving force for economic growth. From steam engines to Internet and artificial intelligence, all these seem to be simply technological advances. However, with steam engines, human beings are able to create trains, and achieve effective transport of people and bulks of cargo, which hence significantly expands the markets. Internet is one of the greatest inventions, which enables people to do a lot of things in the cyber space and changes the way people live, communicate, produce, and entertain themselves. In terms of its birth, it actually originated from a small experiment of two professors in a US college, in which they hoped to communicate in a more effective way. Such a simple experiment makes a huge difference in the whole world. Recently, people are talking about the games between Google’s AI AlphaGo and Chinese player Ke Jie, the global chess champ. As AlphaGo beat Ke Jie, should we feel sorry or proud for human beings? After all, AlphaGo is created by human beings. In this sense, we may also realize that, today’s auto makers are no longer simply manufacturers of automobiles, as they have become an indication of artificial intelligence; car-sharing businesses are no longer simply car rental companies, as they have been turned into unmanned car companies, which have dramatically upended the traditional transportation and manufacturing industries.

Hence, it can be seen that technological advances are of great importance, although their influences cannot be fully perceived yet. From the perspectives of internationalization, informationization, and capitalization, we can see that, with the technological advances and improvement of managerial capabilities, the whole development and institutional structure of enterprises will be overturned. With new economic theories, managerial practices, and modes of operation, we can manage to integrate new technologies with existing economic sectors. These changes will bring about either subversive benefits or disruptive effects to the whole industry.

Role of M&A in Economic Transformation

During the process of technological advances, M&A has brought along enormous possibilities and opportunities for the existing economies. The practices of M&A aim to, by using the markets, more effectively allocate various resources, combine various types of information together, and integrate managerial capabilities of different parties, so as to invest technologies and resources in areas that the market believes can make the biggest differences in the fate and life of human beings.

We are pleased that many local professional investment agencies in China have achieved great success, and they boast their own insights of M&A. These insights are established on both their professional knowledge of investment and finance and their profound understanding of China’s economy, consumers, cultures and businesses. The professional knowledge will not only help China enterprises to go global, but also serve as valuable assets for the industry consolidation on a global scale. Therefore, the future will offer unprecedentedly valuable opportunities for such professional agencies in M&A as JD Capital.

Through all this, I think it is necessary for finance professors to warn the risks. We must realize that the changes in the global economic order and geopolitical situations in the next stage will be nothing like those in the last days. Last week, I attended a meeting in the UK, during which both the former governor of Reserve Bank of India and the former chairman of the UK’s Financial Conduct Authority argued that there were two huge differences between China’s rise and the rise of developed economies in the past. First of all, when the western world was on the rise, fruits were easy to reach for these countries, which meant that they had plenty of opportunities to expand their power; however, China is now facing rather complicated international economic situations. Secondly, as the global order was reshaped, the West’s rise was established upon their advantages in technologies, without any resistance. In contrast, whatever emerging economies, such as China, are doing, the developed economies will always judge them with prejudice. Hence, the transformation and development of all emerging markets are hampered by the existing developed economies. It will be an important prerequisite for the future growth of M&A that China as a typical country among the emerging economies play a leading role in reshaping the global economic and financial order established by developed countries through better communications and dialogues.

Meanwhile, through the close cooperation with JD Capital, Tsinghua University is hoping to grasp the whole picture of changes in the international and domestic economic cycles, and understand the evolution of domestic policies on macro-economy and industries. In terms of practice, we will dig deeper and explore more in professional agencies and sectors. I also hope that everyone present here can hold an open mind and leverage the precious opportunities in the course of China’ globalization and economic development, enhance the industry consolidation, and create more, greater business opportunities.