Navigating China’s Economic Landscape: Insights from Ning Zhu, Senior Partner and Head of China at Brunswick Group

By Norris Tangen

Ning Zhu, Senior Partner and Head of China at Brunswick Group, sits down to discuss key trends impacting China’s economic recovery, the risks in China’s financial system, navigating geopolitical risk and cultural differences, as well as due diligence concerns. Join us as the AmCham China Quarterly delves into Zhu’s insights on China’s economic landscape and the challenges and opportunities it presents for foreign businesses.

Ning Zhu, a leading global expert on China’s economy and financial system, advises prominent government agencies such as the China Central Bank, China Securities Regulatory Commission, and the National Development and Reform Commission. As Head of China at Brunswick, he acts as a vital link between Brunswick’s China team and the international arena. With over 12 years of experience in Mainland China, Ning combines practical knowledge with academic expertise to support clients expanding overseas, entering markets, or enhancing their global image. A trained economist, he employs a quantitative and analysis-driven approach to problem-solving and frequently addresses Fortune 500 company boards. Ning has a strong educational background, having served as a Chair Professor and Deputy Dean at Tsinghua University and Shanghai Jiaotong University, a Faculty Fellow for the International Center for Finance at Yale University, and a tenured Professor of Finance at the University of California. He holds a PhD in Finance from Yale University, a masters degree from Cornell University, and a Bachelor degree from Peking University.

Photo courtesy of Brunswick Group

Following the 2022 announcement that China would abandon its years-long commitment to a COVID-Zero policy, predictions swirled regarding how quickly the economy would recover. In March, the central government announced a target of “around 5%” growth in GDP for 2023. While 5% growth is a comparatively conservative prediction for China’s economy, some still voiced doubts about whether the country would reach its target. However, Ning Zhu, Senior Partner and Head of China at Brunswick Group, believes that China is set to deliver on its target. He discusses what he sees as the three key trends impacting China’s economic recovery. “The first is that the economy is still rebounding, and while that rebound has lost some steam as of late, it’s still ongoing. The second trend I’m observing is the concern surrounding the housing sector, which can either be a drag or a contributor to the economy. People are anxiously waiting for more policies that can stabilize the market. The third trend is that policy – especially concerning multinational corporations (MNCs) – is welcoming and encouraging. However, we’re also seeing geopolitical tensions popping up, so it’s a complex and interesting period for multinationals,” he shares.

Additionally, Zhu notes two factors that have recently stood out to him. “One is the weak housing market and how policymakers have been patient enough to not roll out more aggressive stimulus packages. This has influenced Chinese economic growth. The second factor is the return of consumption. Starting in April, the growth in consumption has been below expectations. We are still waiting for income and confidence to rebuild. Ultimately, though, consumption will have to be the main driver of economic growth in China, and it’s performing as well as people were hoping.”

Zhu foresees this gradual growth decline continuing over the next few years, hopefully at a gradual pace, he adds. “I think the IMF forecasted growth for China is 5.2% this year, but it is projected to be between four and five percent by 2025. I largely concur with that.” And, unlike some other China watchers, Zhu is unsurprised by China’s economic slowdown. In fact, he was one of the first to forecast a gradual slowdown almost a decade ago in his book, China’s Guaranteed Bubble: How Implicit Government Support Propelled China’s Economy while Creating Systemic Risk. “China has been relying on a debt-driven and housing market-driven growth model, which is unsustainable. Given that, it’s not surprising that growth is slowing,” he says. “Some are surprised at the rate at which the economy is slowing, but in my view, they shouldn’t be, as much of the growth we have enjoyed over the past decades was borrowed from the future in the form of the housing bubble and debt formation.”

However, Zhu says it’s not all bad news. He adds that in a way, the Chinese government has engineered a transition towards “high-quality” growth since around 2017, as they recognized the problems generated by the breakneck speed. Now, he says, we are witnessing a shift towards a more sustainable, higher quality, and more inclusive growth model. He notes that even at a slowed-down pace, China will still account for more than a quarter of global GDP growth.

Opportunities and Challenges for MNCs

Zhu says the opportunities for MNCs are easy to identify and leverage. “First, the size of the economy and its growth. In addition, China is no longer just a cheap labor market or consumer market; it is becoming innovative in terms of technology and business models. This can help international companies accelerate their pace of innovation. We are witnessing the China brand shifting from ‘made in China’ to ‘designed in China.’ That is a huge opportunity,” he concludes.

One challenge is the pace of change. For better or worse, Zhu says, China’s rapid transformation necessitates high adaptability from companies, which can cause clashes with the multinational headquarters of US companies. The next challenge is how China and the US can effectively manage their relationship. “Many of our US clients are more concerned about what’s happening or going to happen in the US rather than what is going on in China. Companies need to carefully craft balanced messaging,” he shares. The final challenge Zhu highlights is the complex nature of the interconnected global supply chain system. It’s not as simple as cutting China out; one must also consider the impact a decision will have on the domestic market.

Assessing Risk in China’s Financial System

The rapid rate at which the financial system in China has grown also carries increased potential risk. Zhu identifies three major risks in China’s financial system. “The first, which I emphasized in my book, is the implicit guarantee from the government. There is still a sense that the government will bail out financial institutions and investors, particularly in the case of SOEs. This creates a significant distortion of risk-return perception and, as a result, distorts investment decisions,” Zhu observes. He adds that while the 2018 “new rules on asset management products” stabilized the market to a certain extent, COVID-19 then exacerbated the burden on provincial governments and increased their debt. Combined with stalling or falling housing prices, many local governments are now facing serious fiscal challenges, which means they can no longer provide a guarantee as before, adding an additional layer of risk.

The second risk Zhu highlights is the housing sector. “As the entire financial system is concentrated around the housing sector, real estate remains the majority part of financial institutions’ balance sheets,” he continues. “If we don’t see the housing market stabilize, which we haven’t, the asset quality of the financial system will continue to deteriorate. If banks cannot provide financing to the real economy, it will hinder economic growth.”

The third and final risk Zhu shares is the potential for de-risking or avoiding China’s financial service sector, both in terms of foreign banks’ operations and potential sanctions due to geopolitical risks and increasing bans from the US on Chinese companies raising capital overseas. This area of risk is unique, he explains, because people have not been accustomed to it over the past three decades. However, in today’s age of financial interconnectivity, being cut off from the rest of the world poses substantial risks.

“Some are surprised at the rate at which the economy is slowing, but in my view, they shouldn’t be.”

Foreign Direct Investment – Quality Over Quantity?

There has been a significant shift in Beijing’s stance on foreign direct investment (FDI) in recent years, with a clear emphasis on quality over quantity. Zhu breaks down Beijing’s criteria for assessing quality investment. “China now places greater value on advanced technology, cutting-edge manufacturing capabilities, and management expertise,” he says. Zhu further illustrates this strategy by highlighting the new energy vehicle sector, stating, “It’s not just about car production; it’s about transforming the entire supply chain to China, benefiting China’s own new energy vehicle brand. This well-executed and strategic approach has been adopted by the government over the past decade.”

While the central government is focusing on quality investment, local governments have different incentives and policy priorities. Zhu explains, “Local government leaders are still being evaluated by how much they contribute to local GDP growth.” As a result, they are still motivated and incentivized to attract as much capital – be it foreign or domestic – to create jobs and generate as much fiscal revenue as possible. In that regard, Zhu says that provincial governments are still active in their efforts to attract FDI. Furthermore, he adds that after the 20th Party Congress there was a reshuffling of local government leadership, which means we are witnessing a new wave of government leaders anxious to attract investment at the local level.

In China for China 2.0

As capital controls have tightened in China, companies have become concerned about the increasing friction in getting their money out of China. Naturally Zhu says, this impacts their interest in making future investments in the market. He concedes that while in the short term, these controls can help to stabilize the capital outflow, it might also have the unfortunate consequence of hurting foreign companies’ confidence in the market.

Zhu brings up a second strategy he has seen MNCs take in response to tightening capital controls, what he dubs “de-risking through the way of compartmentalization or silo,” he elaborates, “They are working to make their China operations more standalone, even raising capital in China. I call this ‘In China for China 2.0’. This provides a route for MNCs to continue increasing their investment without increasing their share of FDI.”

Due Diligence, Geopolitical Risks, and Cultural Differences

Recent raids on foreign firms by Chinese government agencies have rattled the foreign business community and raised concerns about conducting due diligence within the country. According to Zhu, the broader picture could involve a breakdown of interagency communication. As communications fracture, he says, agencies are pursuing their specific policy objectives, sometimes without considering the potential implications their enforcement could have on other aspects of the economy. For example, he speculates that the raids on consulting companies were most likely motivated by specific national security concerns, whereas other agencies that foreign businesses normally engage with adopt a more welcoming attitude towards the foreign business community. Both messages have validity, he concurs, but if not properly coordinated, simultaneous enforcement actions by different agencies could lead to unintended consequences and impact various sectors of the economy. Ultimately, Zhu advises clients to remain committed to the China market but also to strengthen their crisis management plans and business continuity strategies to effectively navigate potential disruptions.

In the face of increasing geopolitical risks and cultural differences, navigating the business landscape in China requires careful consideration and tailored strategies. And, as Zhu says, there is no one-size-fits-all solution. The optimal approach can vary significantly depending on factors such as a company’s country of origin, the industry it operates in, and the specific market segment it targets. Zhu recommends developing a customized strategy tailored to each firm, considering the dynamic and evolving geopolitical relationship between China and other countries.

He advises companies, to demonstrate their commitment to China and its communities by actively engaging in corporate social responsibility initiatives or collaborating with local organizations. Zhu points to a notable trend within the consumer product industry, where companies are increasingly integrating ESG practices into their China operations. This not only enhances their global reputation but also positions them well for potential future crises.

Furthermore, Zhu recommends keeping a watchful eye on China’s rapid rate of change, including policy priorities and cultural nuances. Understanding the delicate balance and evolving landscape associated with doing business in China, he says, has never been more critical for success. To that end, he says it is important to foster strong local partnerships, streamline headquarter-China communication and decision-making, invest in comprehensive market research, and develop cross-cultural communication skills.

Additionally, he counsels companies to be mindful of the role of social media and be careful to respect cultural norms. He also emphasizes the need for sensitivity on social media platforms as part of an effective approach. By incorporating these strategies and insights, companies can better navigate the geopolitical risks and cultural differences inherent in the Chinese market, and position themselves for long-term success.


This article is from the AmCham China Quarterly Magazine (Issue 2, 2023). To access the entire publication for free, sign up on our member portal here.