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A Conversation with Siva Yam, President, U.S.-China Chamber of Commerce

Siva Yam, CPA, CFA, is president of the United States of America-China Chamber of Commerce, a not-for-profit organization that was founded by the late Prescott Bush Jr. and dedicated to promoting trade and investment activities between the United States and China. A certified public accountant, Yam also holds the chartered financial analyst designation. He is an investment banker with over 20 years of experience in mergers, acquisitions, public offerings and private placements of securities, venture financing and privatization. He has served as advisor to a number of venture funds and corporations including the Federal Reserve Bank of Chicago. He is also managing director of Siva Yam & Associates, LLC, a private consulting and investment banking boutique, which specializes in cross border business and trade, and He received his MBA from Duke University on a Fuqua Fellowship and his bachelor of business administration, magna cum laude, from the University of Wisconsin. He also graduated from the Hong Kong Polytechnic University with honors and is fluent in both English and Chinese. Mr. Yam, what do you think we can expect from China’s economy in 2017? Siva Yam:  [The year] 2017 will likely prove to be another challenging year for China’s economy. Its performance this year will depend very much on whether or not the global recovery can improve China’s exports. Nevertheless, China entered the year on firmer footing. It reported a relatively strong fourth quarter of economic growth in 2016, registering 6.8% on-year, which beat expectations of 6.7% as consumer spending in China increased and the property market rebounded. However, other indicators, such as days-of-receivables (a measure of the average number of days a company takes to collect payments on goods sold), as well as inventory levels have both increased, suggesting that China’s economic health is less than robust. According to the Chinese calendar, 2017 is the year of the Rooster. On the first working day of the Chinese New Year, China's central bank, the People’s Bank of China (PBOC) surprised financial markets by raising lending rates to banks by 10 basis points. Why did this happen? Siva Yam: This rate increase in China can be viewed as a shift towards a neutral monetary policy as economic fundamentals improve. The increase was made to guard against financial risks and curb asset bubbles as the economy stabilizes in an uncertain environment. Recent statements by the government suggest there are few options left to attempt to jump-start the economy.  China’s statement about strengthening its pillars of economic development and growth, including continuing economic reforms, bolstering the manufacturing sector, stabilizing the housing market, and accelerating urbanization merely represents a re-packaging of strategies that were implemented last year. Why is China’s economy growing at a slower pace now than it has in the recent past? Siva Yam: The slow growth of China’s economy is fundamental in nature. China's economic growth is starting to stabilize amid the country's transition toward greater domestic consumption and away from manufacturing- and investment-led growth, which have created overcapacity and led to speculation in real estate and a lack of investment in improving productivity, quality, and innovation. There has been too much reliance on directive from the government.  This is further complicated by flights of financial and human capital. What has become of China’s ‘Going-Out’ strategy, by which Chinese companies have been encouraged to expand abroad—can it help to spur growth going forward? Siva Yam: Realizing the perils of excess capacity and a poor understanding of market forces and innovation, The Chinese government embarked on the so-called ‘Going-Out’ strategy back in the early 2000s to encourage companies to bring home to China a better understanding of open-market dynamics, modern management practices, new technology, and innovation.  Unfortunately, most Chinese companies have done poorly in managing their acquisitions abroad. Many of them have invested in the real estate and hospitality industries, largely entrusting their management to third parties, thereby learning little that can help improve their own competitiveness. Until domestic consumption in China reaches Western levels, how do you think China can best deal with overcapacity in its manufacturing sector? Siva Yam: To deleverage excess capacity, China has already started to focus on trade with newly emerging countries, in particular, with neighbors such as Vietnam, Laos, Cambodia, Bangladesh, etc.  These countries believe in trade and have strong appetites for Chinese-made commodity-type products such as home appliances, clothing, and accessories. This means that China will have to pursue a two-pronged approach: on the one hand, to export manufacturing to those countries, while at the same time to help them to build up their economies so that they can afford to buy Chinese goods. And what can you say about China’s so-called “new Silk Road” initiative? Siva Yam: China’s “One Belt, One Road” initiative, although not a trade agreement per se, does intend to create a new “Silk Road” to integrate countries around China, thereby forming the largest free-trade zone in the world.  President Obama understood the implications of this and came up with the “Trans Pacific Partnership (TPP) to offset China’s growing domination of international trade.  Although there are many trade agreements in the world, none of them seems to be relevant unless they include either China or the United States.  Unlike the United States, many other countries, although economically advanced, such as Japan, Germany, South Korea, Taiwan and others, rely on trade to survive, as they do not possess all the resources they need to be self-sufficient.  It’s natural, therefore, that they pursue a different path from the U.S. Now, with the death of TPP, most Asian countries will have no choice but to jump onboard China’s “One Belt, One Road” initiative.  China’s trade with the United States amounts to about US$600 billion a year, but it also records about US$350 billion in trade with ASEAN countries. Now, with a potential surcharge to be imposed on imports from China into the U.S. by the Trump administration, China needs to come up with an alternative plan.  ASEAN countries could potentially provide a very attractive alternative, as they are among the fastest growing economies in the world.  Their Consumers have strong appetites for products made in China such as home appliances, clothing items, consumer electronics, and industrial users need entry to mid-level machine tools. At the same time, they are in need of Foreign Direct Investment ( FDI), which, most of the time, is driven by exports.  The uncertainty created by the Trump administration is forcing countries to diversify their reliance on trading with the U.S. In short, how would you summarize the main challenges China will face this year? Siva Yam: China will continue to face many difficult challenges in 2017. Chief among them are uncontrolled, speculative investment in fixed assets, including real estate, but a continued under-investment in technology and innovation, which is a continuation of what we’ve seen over the past 20 years or so. Other challenges include an excessive reliance on government directive and the inordinate influence of personal relationships (or “guanxi”) in business dealings, China will also have to contend with the continued obsolescence of its core manufactured goods, rapid technological change, the advent of ever more sophisticated manufacturing technology, and the continued flight of financial and human capital from the country. Perhaps a more alarming issue that could emerge concerns China’s outbound investments that are fundamentally long-term real estate speculations financed largely by short-term debt instruments. The resulting mismatch of asset/liability durations, together with a poor understanding of underlying asset valuations, plus an obsession with ‘trophy’ properties and a ‘must-win’ attitude, all combine to create a potential time bomb which could eventually destroy China’s financial health. The lack of any internal mechanisms to deal with these problems presents an unprecedented challenge to the Chinese government. The most likely way for China to overcome this challenge will be for it to build stronger relationships with neighboring countries. Ironically, while China is trying to bolster its economic relationships with many of its neighbors. It has also locked horns with them from a military perspective.  However, all conflicts have some economic dimension to them.  China’s neighbors are now among the fastest growing economies in the world: having recently opened their markets, many are poised to build strong consumption and manufacturing bases with foreign direct investment.  In the end, China will likely tone down its aggressiveness towards them and begin to court them to foster stronger trade partnerships.    

About
Paul Nash
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Toronto-based Correspondent Paul Nash is a frequent China commentator and serves as a Senior Contributing Editor at Diplomatic Courier.
The views presented in this article are the author’s own and do not necessarily represent the views of any other organization.