[Turning Point Approaches] "China Must Escape Middle-Income Trap Through Innovation"

Asia Economy New Year Interview
Xiangbing Jiang, President of Changjiang Business School

[Asia Economy Beijing=Special Correspondent Kim Hyunjung] Xiang Bing, President of the Cheung Kong Graduate School of Business, known as China’s ‘business officer training school,’ emphasized ‘common prosperity’ while discussing China’s economic outlook for 2023. He predicted that common prosperity, presented by Chinese President Xi Jinping as a key term for Chinese-style modernization at last year’s 20th National Congress of the Communist Party of China, will become the driving force for the development of Chinese enterprises.

President Xiang stated, "Although China and other countries are currently experiencing turmoil, the economy should not be explained solely based on gross domestic product (GDP) or population size," adding, "Attention should be paid to the growth of global companies and unicorn companies to see signs of disruption." In particular, he pointed out, "China has competed globally on price using low costs as a weapon, and there are relatively few innovation-centered value-competition companies," and emphasized, "More companies need to increase added value and learn how to sell ‘at a higher price.’"

The following is a Q&A with President Xiang Bing.

-Many economists mention low birth rates, aging populations, and inequality issues, predicting that China will fall into the ‘middle-income trap’ in the mid to long term. Are there any concerns about this?

▲I understand that South Korea is one of the rare countries that has overcome the middle-income trap. It is also true that significant progress has been made over the past 20 years not only in income but also in social, health, cultural, and educational development indicators. However, all countries that escaped the middle-income trap since 1960 received substantial help and support from the United States. On the other hand, China is unlikely to expect such help and may even face obstacles to its leap forward. This is currently the biggest obstacle to the Chinese economy, and I believe it should not be underestimated. In China, where the market economy system and mechanisms are not yet mature, ultimately, the government’s redistribution role and corporate innovation are necessary. Chinese companies have mainly been low-cost price-competitive firms, with a minority of innovative companies competing on value. In the future, ways to create high value-added opportunities through engineering innovations such as artificial intelligence (AI) must be found.

-What changes should Chinese companies, which are at a turning point, seek?

▲Domestic corporate groups are mostly state-owned enterprises or family businesses. There are relatively few companies equipped with modern professional management systems like famous global companies. The management and ownership are not separated, and shareholders are often institutional investors rather than the general public. This structure needs to be changed. Also, more attention should be paid to social responsibility and social functions, which have been relatively neglected so far.

[Image source=AP Yonhap News]

-What is your evaluation of the unicorn company cultivation sector?

▲China has 173 unicorn companies (based on CB Insights data as of September last year), ranking second in the world after the United States (644). American companies have nurtured many followers through original innovation. In fact, Google, Facebook, Uber, and Netflix were subjects of imitation and learning. China is the second-largest unicorn company nation after the U.S., but it remains at the imitation and learning stage. Leading innovation that can create high-income jobs is needed.

-Income inequality is a common phenomenon in most countries. What solutions would you suggest for this issue?

▲Inequality is a problem faced by both China and the United States. As mentioned at the 20th National Congress of the Communist Party of China, China values common prosperity. Among advanced countries, Switzerland, Germany, France, Japan, Australia, and Canada can be cited as examples that have achieved common prosperity. These countries share two characteristics: a highly developed market economy and a socialist feature of a broad social security system. To realize common prosperity, China must steadily expand reform and opening-up and hasten market resource allocation. At the same time, it is necessary to establish a competitive system among companies and a new type of political-business relationship.

-There are also calls for China, considered a G2 alongside the United States, to contribute more to global economic growth.

▲Over the past 40 years, China and the United States have played the most decisive roles in the growth and development of the world economy. From 2013 to 2021, China’s contribution to global economic growth was 38.6%, while the U.S. was about 18.6%. The Group of Seven (G7) countries combined accounted for about 25.7%. It can be said that China has already played a decisive role.

[Image source=Reuters Yonhap News]

-Chinese President Xi Jinping also pointed out that ‘our country’s basic research still shows a clear gap compared to international advanced levels.’

▲The number of Nobel laureates can be used as an indicator to compare basic research. As of 2020, the U.S. produced 305 laureates in basic science fields. The numbers for the UK, Germany, France, and Japan were 89, 57, 35, and 18, respectively. Among major developing countries, Russia had 25, India 6, and China and Brazil only 1 each. China’s relatively slow development in basic research can be attributed to factors such as related investments, management of universities and research institutions, education systems for research talent, and the mindset of practitioners.

Editor's NotePresident Xiang Bing, Cheung Kong Graduate School of Business

▲Graduated from Xi’an Jiaotong University, Department of Mechanical Engineering

▲MBA and Ph.D. in Business Administration from the University of Alberta, Canada

▲Associate Professor at the University of Calgary, Canada

▲Professor at Guanghua School of Management (Business School), Peking University

▲Professor at China Europe International Business School (CEIBS), Shanghai

▲Professor at Hong Kong University of Science and Technology (HKUST)

▲Founding Dean (President) of CKGSB

▲2020 Boao Forum Speaker

Established in 2002 with support from the Li Ka Shing Foundation, CKGSB is China’s first non-profit private business school. It has produced leading Chinese entrepreneurs such as Jack Ma, Chairman of Alibaba; Chen Yidan, co-founder of Tencent; Li Dongsheng, Chairman of TCL Group; Liu Chuanzhi, Honorary Chairman of Lenovo; and Guo Guangchang, Chairman of Fosun Group. Domestically and internationally, it is known as a ‘business officer training school’ highly regarded in the field of management education.