The Global South: How Chinese firms can cash in and maintain their balance

In the early 1990s, John Ross was frequently questioned why he was interested in Chinese economic and social progress rather than that of Japan or Germany.

That question is no longer posed.

In 1992, the British economist wrote "Why the Economic Reform Succeeded in China and Will Fail in Russia and Eastern Europe." He remains proud of his prognosis that China's economic reform will spur rapid growth while the former Soviet Union and Eastern Europe's "shock therapy" would fail.

Since his first visit in 2005, he has returned to Shanghai and other cities frequently. The economist is currently attending the Mingde Strategic Dialogue in Beijing, after a trip in Yangtze River Delta region starting from Shanghai.

"I'm not expecting to find anything that's terribly surprising since I've been studying Chinese economy for 40 years," he told Shanghai Daily in an exclusive interview.

"But I'm quite interested in what is happening in particular sectors. For instance, there has been a significant shift in the economy's pattern from real estate investment to high-tech investment.

"I'm very interested to see what this looks like and what the general conditions are on the ground."

The author of "Don't Misread Chinese Economy" (2018) spoke on the US and Canadian tariffs on Chinese-made electric vehicles and globalization, among other issues.

Ross previously worked for the Mayor of London as Director of Economic and Business Policy, as well as a consultant to FTSE 100 firms. He is a senior fellow at the Chongyang Institute for Financial Studies at Renmin University in China.

SD: Six years have passed since the publication of "Don't Misread Chinese Economy." Do you believe that people are still misinterpreting it?

Ross: China's economy has been misread for at least 40 years. I've been writing about it for 32 years, and every year, several books are published that have a completely wrong analysis of China.
It's no surprise they are still doing that. Normally, they predict that the economy will collapse the next year, and when it doesn't, they continue to predict that it will collapse again the following year.
It never actually mentions collapsing.

SD: So how do you correctly read the Chinese economy? What data do you use to analyze the reality of the Chinese economy?

Ross: First, you must look at growth over time, especially in Western economies with business cycles. Sometimes economies grow rapidly, and sometimes they grow slowly.

Therefore, if you cherry-pick, you can take any one quarter and say that the economy grew incredibly fast.

This was especially true during the COVID-19 pandemic, as a variety of non-economic factors contributed to the situation. The yearly figures fluctuated significantly during the COVID, exceeding expectations.

So, the best way to deal with this is to go back to 2019, before COVID struck, and then average the period since COVID. That way you get rid of short-term fluctuations.

That clearly demonstrates that China's economy grew by 20.1 percent from 2019 to 2023, whereas the US economy grew by 8 percent in the same period.

You have to take a certain period and find out what are the fundamental factors driving the economy.

In a big economy, the correlation between investment in the economy and growth is extraordinarily high. You must consider the level and efficiency of economic investment.

To grow by 1 percent, China must invest about 8 percent of its GDP. That's called the incremental capital output ratio (ICOR). The United States has to invest 10 percent of GDP to grow about 1 percent.

Both are rather efficient compared with European economies, but China is even more so. China's investment is about 20 percent more efficient than that of the US economy.

SD: Then you have this new hot word "overcapacity" floating around. For example, most recently, an article titled "Why China is Starting a New Trade War" in the Wall Street Journal. Is China starting a new trade war?

Ross: I was astonished when I read this article, as it makes such elementary mistakes in economics. It's the type of thing you should not do if you were studying the subject for six weeks. I would give it zero if the authors were in my class.

For example, "China has overcapacity because it doesn't consume everything it produces." This is absurd for several reasons. Firstly, no country should attempt to be totally self-sufficient. This is the foundation of economics. Adam Smith proved it was a bad idea for every economy trying to be self-sufficient 250 years ago. "The Wealth of Nations" is his famous defense of international trade, and it's the founding work of the subject of economics.

No country in the world is the most efficient at producing everything. So if you attempt to produce everything yourself, what happens is that you build up big inefficient sectors of the economy whereby you could actually buy the goods more cheaply from somebody else.

Second, let's take Boeing as an example. Is the president of the United States criticizing Boeing because it produces more aircraft than is bought by American Airlines? No. That is ridiculous. It's selling into a global market.

Or is he criticizing American banks because they lend abroad and don't only do activities inside the US? Unless he is doing that, unless the president of the United States is prepared to say, "Boeing, you are producing too many aircraft; you've got to stop it," otherwise, it's complete hypocrisy.

Instead, what's happening is that, of course, the United States has an advantage in some industries, for example, civilian aircraft, and China has a competitive advantage in other industries like green energy products. So the logical thing to do is for the two to exchange, and therefore this claim that you should only produce what you can sell in your domestic market is absurd.

Then there's another slightly more theoretical one – it says that China doesn't consume enough, but that's again an elementary mistake.
Domestic demand is more than just domestic consumption; it is also domestic investment.
No major country in the world consumes 100 percent of its economy. In the United States, about 80 percent of the economy is consumed.
If it's got to consume everything, then the investment should be zero. If we have no investment in the economy, humanity will revert to living in caves.

SD: The US has imposed 100 percent tariffs on Chinese EVs, followed by Canada, while the EU has a similar plan. So is economic globalization over, or are we in an era of anti-globalization?

Ross: I believe two trends are happening in the world.

The United States is not able to compete internationally in certain key new industries. Green energy, for example, is one of the greatest transformations in the entire history of the economy. In the next three to four decades, the entire world will need to replace its energy system.

This may involve spending tens of trillions of dollars. China is at the forefront of this. It has invested significant resources, conducted extensive research, and made significant investments in this area, whereas the US has chosen to allocate its funds to other areas.

American researchers are no less intelligent than their Chinese counterparts. The US could have the same level of development of green energy as China, but it would have to change its priorities. It has to say we are not going to spend so much in the military, for example, or we are going to rationalize our inefficient health services. But it's not.

So, for example, China has become the world's largest exporter of cars, particularly EVs. It has a huge lead, but how are other countries responding? Most of the economies in the Global South are continuing to pursue globalization. This is why the Global South economies are growing, as a whole, more rapidly than the Global North economies. They don't want to cut out globalization at all. They are benefiting from this.

But the US is responding by turning inward on itself. Instead of changing its priorities, it's attempting to protect itself by building tariff walls. However, we know what the consequences will be. Firstly, the companies will lose their efficiency due to the absence of competition. Of course, tariffs cannot be used to compete in third markets.

Europe is in a state of uncertainty about how to proceed. It's under pressure to follow the United States. Take my country, for example. Huawei has been part of the British telecommunication system for many years very successfully, and the US has persuaded the British government to cut Huawei off the system. That means we are going to get 5G later and more expensive in Britain.

Not a good idea, but they've done it. So you've got two tracks taking place in the world economy.

One is China and the rest of the Global South, which are growing rapidly and globalizing. Another is the slow-growing US and Europe, which are falling apart. So there is no longer a uniform process of globalization taking place. Some parts of the world are globalizing and growing fast, and others are not. That's the situation.

SD: What is your suggestion for companies in the midst of this complex situation?

Ross: The most important question for the Chinese companies is going to be the importance of the Global South.

Lots of Chinese companies used to focus on the United States, then they thought Europe was very important, and then they discovered that some of the ASEAN is incredibly important, and now they discover India is growing really fast, and they discover the Global South. It is a process of shifting.

I don't mean that companies should completely abandon the Global North, but they have to balance themselves to understand that the big Global South economies are going to grow more rapidly than the Global North economies, not for one or two years, but for the next 10 or 20 years. They have to adjust their strategy to fit this reality.