China’s Economy Is in Flux. Here’s What Businesses Need to Know

This is the transcript of a special episode of The Insightful Leader podcast, produced by Laura Pavin of the Kellogg Insight. It features Nancy Qian, Ben Jones, and David Dollar.

[caption id="attachment_24284" align="aligncenter" width="900"] Nanchang Scenery, view from the Tengwang Pavilion, China[/caption]

The end of zero-Covid, escalating geopolitical tensions, and China’s potentially irreplaceable role in the global supply chain — plenty for Pavin and her guests to discuss...

PAVIN: In recent weeks, China abandoned its controversial zero-Covid approach to the pandemic, which it had maintained for nearly three years. The approach was never particularly popular in the global business community, because it caused havoc to supply chains everywhere. And lifting it is sure to send infections soaring — meaning even more chaos, at least in the short term.

But for economists and policymakers who closely study China, this is hardly the only story. This year, the nation saw its largest democratic protests in decades; and China and Russia declared “no limits” to the partnership between their nations—shortly before Russia invaded Ukraine, significantly ramping up geopolitical tensions with the US.

All this, combined with China’s growing economic and military might — and the US’s growing nervousness about how intertwined its economy is with China’s — has American businesses wondering: How should they interact with China?

NANCY QIAN: For the last few years, if you read the news headlines, it does feel like every day there’s something about China.

PAVIN: That’s Nancy Qian. She’s a professor of managerial economics and decision sciences at Kellogg, and co-director of the Global Poverty Research Lab.

QIAN: And the issues are so complicated, it seems like a good time for us to dig into the minds of people who have been thinking about this from the research community and see what we can learn from them.

PAVIN: Nancy Qian is joined by Ben Jones and David Dollar. Jones is the Gund professor of entrepreneurship at the Kellogg School of Management. He studies economic growth in advanced economies, and he was the senior economist for macro-economics for the White House Council of Economic Advisers. David Dollar is a senior fellow in the John L Thornton China Centre at the Brookings Institution. He’s a leading expert on China’s economy and US-China economic relations.

QIAN: The big overarching question we have, as you know: What are the biggest challenges for the Chinese economy in 2023 as it’s easing out of almost three years of very stringent Covid-zero policies — and in an environment where the political rhetoric, especially with its biggest trading partner, the US, is getting evermore adversarial? What do you think are the biggest challenges for China next year?

DAVID DOLLAR: I think the biggest challenge is going to be managing this exit from the zero-tolerance policy. I and many other China experts were quite surprised at the dramatic way in which China seems to be deconstructing those policies. I think Xi Jinping and other leaders are apparently being responsive to a lot of public unhappiness that’s been demonstrated in various ways. It has to have some positive effect on the economy, the rest of the economy, because I think the zero tolerance had a pretty negative effect. So easing up, there has to be some increase in people’s consumption going out to restaurants, travelling.

But again, we don’t know how people are going to react. And then what happens with this disease will definitely react back on people’s behaviours. If it spreads very quickly, then you may not get too much change in people’s behaviour, because they’re going to essentially self-restrict instead of having the government restrict them.

BEN JONES: So, just to dig into that a little further: the US has had a very loose policy from a government perspective around Covid for quite a long time. And yet we still see kind of puzzling — maybe not-so-puzzling — constraints on labour supply where at least some people seem like they don’t want to go back to work, maybe for a variety of reasons.

And that may be one of the forces that is driving up inflation, say, under service workers or other things. When you look at China, where we’re already talking in general about structural challenges and labour supply with an aging economy, do you think that there’s going to be a labour-supply issue going forward, even in this relaxed policy, kind of like in the US or maybe different from the US?

DOLLAR: Yeah, I think that makes a lot of sense, Ben. Looking at my own behaviour and that of some of my close friends, we have no government restriction on our behaviour, but we self-restrict. I was just out doing some errands, and I was wearing a mask whenever I went in anywhere. And we’re generally turning down invitations to any kind of large event, my wife and myself; it just seems unnecessarily risky.

You definitely get a lot of self-restriction in this environment, and that carries over to the work side. And I would think you would get a similar reaction from many middle-class urban Chinese, that if they can avoid working or going to work, they’re going to do so.

QIAN: And I was thinking about the Chinese context and specifically when I think about my family or my friends in China who are my age and who have children, most of them still rely on grandparents, right? There are parents, the elderly parents, for childcare. So, as we’re exiting and if Covid rates are going to go up and the elderly are unvaccinated and they start self-restricting, that’s just going to be really complicated if they also have to provide childcare.

DOLLAR: Absolutely. You may very well get an oscillation in official policy. So, if there’s a big resurgence of the disease and rising deaths and crisis in hospitals, they’ll probably come back. Not all the way to zero tolerance, but to a much more restrictive policy.

We’ll probably see that kind of oscillation that just creates tremendous uncertainty about economic activity, about investment. Do you want to be expanding your business when there’s this kind of uncertainty about whether people are going to be going out and consuming? It’s got to be something of a constraint.

JONES: Building on that, there’s both the government policy point, David, and then there’s the self-restriction point. And Nancy, that’s a really interesting observation about how households are structured, and then the exposure of older Chinese within the household. And that might extend self-restriction considerably compared to what US behaviour has been because our household structures are different.

But it does seem that the Chinese government has also been deploying a narrative to justify zero-Covid over years that the disease is really scary and really deadly, maybe more so than you hear from the government, even in the US. And do we have a sense that Chinese sort of believe this is even riskier than people do in other countries? And that will lead to much more tentativeness and self-restriction in terms of getting back to work and driving demand and in the economy.

DOLLAR: Well, the fact that people got really unhappy with the zero tolerance and were willing to go out and demonstrate an environment where that can be quite personally risky, I think that that says that people were not completely buying the government story. I like this storyline that just watching the World Cup has had a considerable effect: to see 80 to a hundred thousand people packed into a stadium, nobody wearing masks, people cheering. Now, when I see that myself, I worry a little bit.

QIAN: China is big. There are many different people with many different views and preferences and risk perceptions. And it has to go through what all the other countries went through, right? Which is this kind of rather conflictual often, a very conflictual process of where people who are very different kind of find their own equilibrium.

And the reason I’m saying that is I remember when I had Covid, my parents had Covid, my kids had Covid. And every time this happened, the degree of concern that was shown for us from my Chinese family and friends was, I would say, a hundred times more than my colleagues at Northwestern.

So, I feel like there is this sense of extraordinary fear that I think Americans felt in the beginning and sort of moved on from, and that the Chinese still feel now, but they will move on from. And at the same time, there’s also this diversity and opinions. I think the young people, like young people everywhere, are kind of more ready to get on with things.

And we have that even in the US, like in the beginning of the disease: there are parts of the US and Florida, Texas, they just wanted to live as if we didn’t have to deal with the disease. And I feel like that heterogeneity also exists in China. And one of the things we’ll see is once we lift the restrictions, all of these differences and opinions will be expressed in a way that they haven’t been allowed to be expressed under a strict Covid-zero policy. And that’s going to cause internal social frictions that just have to be worked out. And I’m very interested to see how the government deals with that type of social conflict, if we want to call it that.

JONES: So, to build on this, people talk about structural challenges for the Chinese economy. They sometimes talk about demand and how it’s always low consumption, high savings, but also, is there enough domestic demand going forward? They talk about debt. There’s a lot of maybe bad investments in housing or other forms of capital investment.

David, I mean, as you look at sort of these structural features, which people talk about without necessarily reference to Covid, but now we’re going to go ahead into a year where Covid is still complicated, how concerned are you for the Chinese capacity, say, of the government to manage social insurance, manage stimulus, to keep the economy going after three years of having to rely on a lot of government intervention, just to keep doing it if people are trying to stay home?

DOLLAR: You know, I do think the risks in the financial system are quite serious. They have really overbuilt the housing stock and their private real estate developers, many of them are in trouble. And so far, the authorities have managed that without an obvious financial crisis. So that’s very much to their credit.

But they do kind of push the envelope in terms of credit expansion and making sure that enough finance gets through to many of these developers so that they don’t default on their bonds and go bankrupt. So far, they’ve managed that — but it’s a pretty big challenge to have got there.

JONES: Well, I just wanted to follow this kind of out-of-the-world a bit and come to decoupling, which of course is a big issue. Decoupling means moving away from trade and economic interaction with other countries. And if you’re the Chinese government, you’re facing a lot of terrorists from the US, a lot of retaliation.

And as you’re trying to get back on your feet and get back to work coming out of the Covid times, you might be looking for demand from global consumers for your products to help support the economy. You might be looking for more foreign direct investment into China to bring investment in dollars, but also maybe technological know-how and connectivity to the world economy.

How important is decoupling for understanding what’s going to happen in the Chinese economy in the year or two ahead, and how important is that going to be for Chinese policymakers?

DOLLAR: I think it’s extremely important. China has to worry about this decoupling trend, which is really kind of politically driven in a sense, particularly from the US. The idea being that we don’t want to be so dependent on China for national security reasons, but then you have to add on top of that the US economy slowing down, the European economy slowing down. Maybe one or both will go into recession. So you’ve got the kind of long-term structural issues of decoupling, and then you’ve got short-term cyclical issues that things look pretty bad.

QIAN: When we think about decoupling, I guess my very basic question is: What does that even mean in this context? There’s one extreme, which is the Cold War, where Moscow and Washington were just cut off. There was a wall politically, economically; there was no trade. I think everyone agrees, everyone in business in research agrees, that that would be disastrous.

The economic impact on the US and China and many other countries would be terrible if we just completely decoupled. On the other extreme, you have just a free-for-all, like free trade. This is probably the mentality we had like in the ‘90s. And this is probably not realistic at this point in time. There’s been a lot of discussion about how the semiconductor industry is strategically very important to the US. That’s just one example, right?

The US needs to make sure that that’s not completely under the control of China. Is it possible to have a quasi-decoupling, between the extremes of a complete wall and a free-for-all, where certain strategic interests are addressed without wrecking the entire economies of these two countries and the rest of the world?

DOLLAR: You know, if you look at actual trade between China and the US, since America imposed these tariffs under Trump and then followed up with many other measures putting Chinese firms on our so-called entity list — which really prevents American firms for exporting most things to them — since all of that, there’s definitely been some downward trend in US-China trade, but it’s been surprisingly modest.

And this year we’re going to hit a new high in imports from China. So while we have this rhetorical war going on, there continues to be a very high level of trade in both directions. Now, as you dig a little deeper, you will find there are specific products where that story is not true. The US is importing about 50 percent less semiconductor and telecommunication equipment from China. You can see evidence of this — it’s really more of a tech war than a trade war.

JONES: Industries in the US have achieved trade protection through anti-dumping and countervailing duty tariffs, because they’re sort of the easiest to get. To respond to David’s point, when you step back, it’s actually a very small percentage of products. And so really, it’s a sort of annoyance around a lot of trade, but it’s not actually the kind of thing that’s going to show up in the aggregate numbers. I do worry about this national-security reasoning, which has been coming into trade policy and getting people sort of outside in their view of their World Trade Organization obligations.

The Trump administration was saying national security applies to steel and aluminium, and you get to much bigger commodities rather than narrow tech products. It’s not really clear how far the cat gets out of the bag. And responding to David’s point that we don’t know where this is going looking at it right now, maybe too soon.

And if the political momentum is such that people are going to keep obstructing trade and there’s going to keep being retaliation as there often is, whoever’s instigating it in the first place, we could be decoupling in some more meaningful way.

But I guess more practically, David and Nancy, are you seeing — I mean, obviously telecom in Huawei was a big issue that spills from intellectual property, the national security and then chips — but do you see people making incipient arguments that national security should apply to a much wider class of products? Or do you think that national-security argument has kind of run its course and we kind of know the verticals that we’re talking about, and it won’t really infect other forms of trade?

DOLLAR: Well, I think in Washington, at the risk of oversimplifying a little bit, you’ve basically got two views. You’ve got the kind of national-security view that within the spectrum of all the thousands of different products that we trade, there are a few that are of national-security import, and we should be restricting these. And maybe we have it about right at the moment, you know, that’s one view.

But the other view is that anything that’s contributing to China’s growth and development is a threat ultimately to the United States. You know, this is a true “let’s keep China down” kind of approach. And in some people in this camp, you bring up the issue that this is going to hurt the US economy, hurt innovation.

And what you’ll get back is as long as it hurts the Chinese more than this is a good national-security policy. And I personally think this is really quite dangerous when you start declaring that your policy is trying to keep down another major economy, second-biggest economy in the world, biggest trading nation. That just seems completely unrealistic and quite dangerous.

QIAN: I guess when I think about decoupling today, I think two issues come up. One is implementation. How does one actually implement decoupling? I can see how you can do that for narrowly defined products with short supply chains. But if it’s a complex product, it’s almost impossible without going all the way and building a wall.

And the reason is that most businesses know their suppliers. They don’t know the suppliers of their suppliers. And to ask them to know the suppliers of the suppliers of the suppliers all the way down to the raw material to make sure that some aspect isn’t coming from China. That’s administratively very cumbersome, if not completely impossible, given the complexity of the products that we’re making these days.

And the second concern is about spill-over effects. I have had conversations with people, entrepreneurs. in the US and China that are very concerned about decoupling and making business decisions based on that. No one I speak to actually works in defence industries or defence-related industries. They all work in other industries, but I would say that there’s a spill-over effect of concern. So I was speaking to a vice-president of one of the US’s largest food-manufacturing companies. It produces candy and food and food colouring, things like that. It’s not strategic at all. But she was telling me that the discussion they’re having with the corporate leadership is that they’re probably not going to be in China for the next 30 years. And the reason is because they just can’t deal with the policy fluctuations.

They’re trying to divert a lot of their investments towards Latin America, south Asia, other countries that are politically more benign. If we do strategic decoupling, we need to do it correctly, in the sense that both China and the US need to articulate their policy clearly so that people really understand that it’s really about these strategic sectors and this is how it’s going to be implemented and carried out. And there’s not this general concern of uncertainty for everyone’s business going forward, because that could just generate inadvertent decoupling.

DOLLAR: I think those are really important issues you’re raising, Nancy. On the first one, I think I have a good example. It doesn’t exactly come out of the national-security realm, but it’s analogous. It’s the case of the solar panels; the US has countervailing duties on solar panels from China, more than 250 percent. And the result of that is we don’t import any solar panels from China. We import them primarily from Vietnam and Malaysia. And these are Chinese firms that have moved some of their factory operation to Vietnam and Malaysia. The US was thinking of launching an investigation about whether it should extend the countervailing duties to those panels. But it dropped that; it just told the industry that, for at least two years, there would be no countervailing duties on panels coming from Vietnam and Malaysia.

Because if you want to increase renewable energy in the US, this is where these panels are produced. So what you have there is a very complex supply chain. China’s not necessarily being hurt by this. China’s finding new business in ASEAN countries, selling machinery and components. And in some ways, some of the value added we’re trading between the US and China now is in a sense being mediated by countries like Vietnam. And just trying to figure all that out could end up being a pretty costly bureaucratic impediment to trade.

JONES: Yeah, just building on that, which I think are issues of both complexity and then substitute-ability. When I was working in the White House in the first term of the Obama administration was when the tsunami came to Japan and took out the Fukushima nuclear reactor, and that shut down a regional economy in Japan, which is very important potentially to the global economy. We were struggling then to figure out what is the implication of the Fukushima shutdown disaster for the US, for US workers, for US manufacturers, for the world, which has many dimensions.

We found ourselves calling major multinationals, like major auto manufacturers in the US, and saying, do you have suppliers in this area of Japan? And then they would say to us, “Well, we know where our direct suppliers are, but we don’t know where the suppliers of our suppliers are much of the time.” It is very complicated, and it’s very costly to figure out.

I think that that makes it far more difficult to manage from a policy perspective. The second point though was substitute ability, which I think reflects on, you can move solar panels to Vietnam and avoid tariffs, which is very common in how companies around the world respond to anti-dumping and countervailing duty type of tariffs or other forms of tariffs. But there’s also the issue, backing up a little bit about decoupling.

And if the US wants to disengage from the Chinese economy, China can integrate with other economies. If the EU is saying, “No, but we’ll still trade with you in all these ways,” in that case, are you really putting any pressure on the Chinese economy or the Chinese government? Or are you just shifting demand and supply to other regions of the world economy? And so really the one who’s losing in that context is you, the US.

DOLLAR: Yeah, I think it’s completely unrealistic to expect our trade partners to completely decouple from China. I think keep that in mind that the degree of integration between the US and China is one issue, but the fact that we’re both integrated into the same global system, I think that’s probably more important.

QIAN: In all this conversation about decoupling, the question is how best to identify the strategic sectors. And they have to be clearly and transparently identified; how to identify those and how to articulate the policy to the public, and including like the bus businesses. People understand exactly what this means for their business, that they can carry on as usual. And for the few sectors that need to comply, what does it mean to comply?

JONES: We talked before about sort of Covid policy in China as a government choice, and then also sort of self-restrictions as a personal choice to avoid getting Covid. And I think that going to this decoupling metaphor, we have the US and China governments imposing certain kinds of policy restrictions through tariffs or other means on each other. But then we have a bunch of companies, multinationals often, that are trading across borders and may not be restricted but have to make choices themselves.

I just want to dig in here if we can, on multinationals and what’s your decision? Do I continue to expand in China? Do I hold steady and wait, or do I exit? How we think about what kind of choices they might be making, and then maybe how that might change depending on the industry you’re in.

DOLLAR: I think multinationals in general remain pretty committed to China. Quite a few of them are in China to sell under the domestic market. If there’s going to be a decoupling they’re not going to leave, they’re going to just double down and source more from China if they’re worried that international trade is being threatened.

JONES: So, an example like electric vehicles, and what are companies that you think would go that route?

DOLLAR: There are a lot of companies that fly under the radar; multinationals have a big share of the toothpaste market in China, for example. And they came in with the brands that we’re familiar with, but they also bought up a lot of Chinese brands and continue to sell. So you go into a store, and it looks like there are 20 different toothpastes available, but actually there’s a relatively small number of companies behind that.

There are lots of consumer products, food products, you know, where companies are deeply committed, and not just the preparation, the production, of food, but also restaurants, fast-food restaurants, all our familiar ones: McDonald’s, Kentucky Fried Chicken, Starbucks. I think a lot of multinationals are in China to sell to China. Aside from the tension with the US, obviously Covid and the zero-tolerance policy have had considerable effects. I definitely think it’s got many companies worried about how lean their value chains had become in a sense that they hadn’t really built in any redundancy.

A phrase I’ve heard is “China plus one,” meaning you’re mostly producing in China, and a lot of that’s for the Chinese market, but it’s good to have at least one other country where you’re operating. And it’s typically a developing country.

QIAN: I just wanted to add two thoughts to that. One is China’s moving up the value chain over time. And I think as it moves up the value chain, it actually makes it harder to substitute away from China. Earlier I gave the example of a food company. They were thinking of producing their raw agricultural products, sourcing that from China versus Latin America, and they can do it from Latin America. So that was not a very difficult move for them.

But a lot of what China’s producing now is pretty high-tech. So recently I spoke to a start-up entrepreneur who spent the last 10 years working for a large MNC that sent him to China all the time. They were a tech multinational. And during this time, he met some guys in a Chinese factory and they figured out how to make a really small and very powerful battery to make portable blenders. These guys want to make portable blenders so you can make margaritas on the fly, from your backpack. You can just pull this out of your backpack and start blending ice and you can make eight of them.

The battery’s really strong and, according to him, it took a while to figure out how to make this and also to make it at a consistent high quality at a low cost. And they figured it out with this one factory in China. And they’re going to keep working with this one factory. Their entire business plan, their cost analysis, depends on working with this guy, and they actually can’t find anyone in the US or in Mexico to make the same thing. They’re actually just going to double down and work with China and they’re raising money to expand the size of that factory in China.

One thought was that as China moves up the value chain and makes more and more high-tech things, it’ll be harder for people to just switch away to another producer. And the other thought I was thinking, that came to me when David mentioned McDonald’s and KFC, which are great favourites in China along with Coca-Cola and Disney movies, is that it seems like a bad idea for the US to move away from these customer-facing brands. Having brand presence in China has lots of benefits, right?

Obviously for the businesses, they make money, but even from the US is strategic self-interest. We know now, like from economic research and from political scientists, the importance of soft power, right?

DOLLAR: You know, a lot of our conversation has been about China, but more generally, the US has introduced quite a bit of protection aimed at lots of different trading partners. And I think that really cuts into our soft power around the world, because it means a lot to other developing countries and even the European countries, which are advanced. But yeah, mostly they’re pretty small compared to the United States.

Access to the US market is very important for countries around the world. And in my experience, it’s been a source of goodwill that this is a public good the US provides to the world, having this big open market. I do think the tariffs that we’ve introduced, the various trade impediments, this, this tendency toward Buy American in our recent legislation, all of this is undercutting our influence around the world.

JONES: But I think there’s another question: maybe the good feeling that exists between nations might prevent conflict, or have other kinds of benefits in the world. And it’s really the big question in history in the 20th Century, which is when countries sort of advance, in terms of their standards of living, do they shift towards more political liberty, towards democracy? Or not? I think the kind of laissez-faire era of globalisation was built on connectivity, regardless of the political regimes. Often you’re dealing with the pursuit of economic well-being for all the nations involved, but potentially it would encourage the rise of a middle class and create pressure in those societies for democratic change.

And it’s not just China. We’ve seen a sort of authoritarianism building in a number of countries around the world — Russia, Turkey, Hungary — that it seems are moving against democracy and participating in a world exchange, and trade isn’t really working. And now maybe it’s even worse if we disengage and we didn’t run that experiment.

But I think there’s more scepticism now that this kind of laissez-faire globalisation pays the kind of economic or conflict dividends, especially with Russia invading Ukraine, that we would’ve hoped for. I feel like this is a very big question, which we don’t maybe know the answer to though.

Maybe it’s not so simple as just letting everyone into the system and kind of hoping for the best, and that maybe we need to think carefully about engagement based on shared human rights or political values.

DOLLAR: My sense is that there is a relationship between economic integration and political liberalisation, human rights; that these are issues, but it’s extremely long term. There’s tremendous uncertainty. Nobody’s really made it to high income without political liberalisation, with the exception of a few oil-rich states. Unless you’re sitting on some huge quantity of natural resources, basically nobody’s made it to high income without political liberalisation. But as they said, I think it’s extremely imperfect. Relationships can take a long time. It was naive to expect that there would be political change in China. I mean, there has been a lot of political change in China, just not the shift to some kind of democratic system that we would recognise. It was naive to expect that to happen because China joined the WTO and started trading. I don’t know any serious China scholar who thought that whole path was likely.

QIAN: I guess I don’t think anyone knows or should pretend to know what exactly can bring about political liberalisation. It’s hard to think of an example of a country that has become a stable democracy without a certain level of human capital, social capital stability that comes with economic development. Economic development is a necessary — but perhaps not sufficient — condition for political liberalisation. If you don’t do economic liberalisation and boost incomes, political liberalisation probably just isn’t going to happen.

And then the other thing that comes to mind, and again, this is sort of a refinement of what David was saying, is just the benchmark: What’s the right benchmark? I think it is naive to think that the benchmark for China or Russia today should be the US or France or the UK. And here I’m going to put my economic, economic-historian hat on. When we think about how long it took for the West to become stable democracies, really, the latest you want to start that process is probably the enlightenment. So that’s a couple of centuries, right?

And Russia and China were ruled by the Czar and the emperor until the beginning of the 20th Century. They’ve only been on this road for a hundred years. If you see it in that light, the long-run trajectory both in terms of economic and political development is positive over time for China and Russia. And they’re actually going pretty fast. I would say they’re on the fast track relative to the enlightenment until the Civil Rights Act.

DOLLAR: When I worked for the World Bank, and when I worked for the US Treasury, I had opportunities to sit in on some senior meetings, where I was never the principal. I was kind of the fly on the wall. But the US in particular was always pushing China for very specific economic reforms: Open the capital account, more flexibility of the exchange rate. After a while, the typical Chinese response was: “We agree; we just think it’s not quite right timing-wise, and we’re going to get there. We’re moving in that direction.” And I remember one very frustrated US official, that kind of bang-the-table moment, said, “Well, when are you going to get to that?” And the Chinese response was, “We Chinese like to think in terms of centuries.”

JONES: I love this historical orientation, but I will say that I think the more contemporary, if I looked at Russia, I mean Putin is sort of taking us back to a pre-World War II mentality in some ways, a 19th Century mentality of capturing resources. China is in a very different category. I mean, Russia is an oil state, and so in some sense it’s a big one. But today’s earlier point, it’s in a bit of a different group.

And the government can sustain a lot of authority and economic power through its control of the oil and gas resources, where China really is much more of a diversified economy, and its success and development is going to require the kinds of things you guys are both talking about in terms of human-capital development.

I think the path forward for China is really quite different, economically, to get the higher standards of living and greater influence in the world. I guess I get to bring this full circle in a way. David, you were surprised how quickly Xi and the Chinese government turned around on zero-Covid. And one read of that, we may disagree, but one read of that is it shows a certain pragmatism. I mean, if you look at Putin in Ukraine, it seems like it’s all bad news all the time for Russia, but nonetheless, doubling down, doubling down, doubling down. We haven’t seen a dramatic policy reversal there.

But here we see a very dramatic policy reversal suggesting that the government is capable of maybe surprising us in pragmatic ways. As we think forward along the lines of development and human capital and political liberalisation, do you see interesting practical choices ahead that now seem more possible?

DOLLAR: I would argue that pragmatism is a feature of recent Chinese decision-making. Deng had that famous statement that it doesn’t matter if a cat is white or black, as long as it catches mice. And there’s been a worry — you see it very much in the West — that the Xi Jinping was taking China in a different direction, that he was going to be more ideological, less pragmatic.

So frankly, I’m very encouraged with the easing of the zero-tolerance policy; that does show responsiveness, pragmatism. Hopefully, we’ll see that in things like further reform of the capital markets, which I think would really help China a lot.

Actually, if I were going to list one more, despite the rhetorical support, China is not really giving Russia any material support. And I think that that’s actually quite important.

QIAN: One more thing on this point about China not giving material support to Russia — for those of you who aren’t on Chinese social media, it’s interesting to know. I found it really interesting, even from the beginning of the war, that China, which is known for censoring things that are misaligned with the official view, didn’t really censor support for Ukraine on social media. And my sense was that that was a positive sign that the Chinese government was actually open and would be pragmatic about it.

First appeared in Kellogg Insight.


New York — the preeminent financial district

“It was never built for the comfort and happiness of its citizens, but to astonish the world.” Susan Ertz

Amsterdam may have birthed the first stock market, but it is in New Amsterdam where finance has reached its greatest heights. In among the shadows of the skyscrapers, the wind blows through Wall Street and is felt around the world. It is also the playground of the rich, famous, and sports-mad locals, especially those ambitious “locals” it continues to draw from around the world every year. New York is the preeminent financial district. Not only is it ranked first on numerous lists of financial districts, but it dominates its competition across almost all measures. According to the Global Financial Centres Index, of the five competitive areas and eight industrial sectors it measures, New York ranks first in all but one (banking) where it ranks second to Shenzhen. Another illustrative example is stock market capitalisations: the combined capitalisation of the NYSE and NASDAQ was larger in August 2022 than the next 10 stock markets combined.

[caption id="attachment_22321" align="aligncenter" width="1000"] The combined capitalisation of the NYSE and NASDAQ was larger in August 2022 than the next 10 stock markets combined[/caption]

It is also home to some of the world’s biggest banks and companies including JPMorgan Chase, Citigroup, IBM, PepsiCo, Morgan Stanley, and Goldman Sachs. And into these offices as executives or clients walk the highest number of millionaires in the world: 345,600. Only the San Francisco Bay Area with Silicon Valley has more billionaires.

The New York area was home to the Algonquian people long before the Dutch and English arrived. In 1624, when the Dutch settled Manhattan Island, Beijing and Constantinople were the largest cities in the world.

Due to its location, rich agricultural land, deep-water port, and Dutch heritage, New York quickly became a key port for exporting flour and food to the Caribbean. In return it received raw sugar and slaves.

In the immediate decades after the founding of the United States, Philadelphia was the leading financial district in the new country. New York was third behind Boston. It was the Bank of Pennsylvania that largely funded the US War of Independence. Philadelphia also had the first Federally charted bank (and de-facto central bank) and the Philadelphia Stock Exchange opened 25 years before the NYSE.

However, New York slowly overtook both Philadelphia and Boston. As trans-Atlantic ships became bigger with improvements in technology, New York won out over the other two cities because of its deeper port and because it did not freeze over in winter. It was also favoured by the British. Once New York became the main trade hub for US cotton, tobacco, and illegal slaves, it developed the economies of scale and specialisations to maintain its lead. This included the development of its insurance companies, auction houses, and other financial services. When the Erie Canal was completed in 1825, opening trade to and from the Great Lakes and the frontier, New York’s domestic ascendancy was complete. A growing manufacturing sector also contributed to its growing financial influence. Manufacturing continued to be a boon to finance in the city in the late 1800s and early 1900s.

Starting in the 1850s, immigration greatly increased. By the 1920s New York was the largest city in the world. Immigration created a large consumer market and labour force in the city, and this combined with its importance as a port led to the further growth of its manufacturing industry. The clothing industry became the city’s dominant industry from the mid-1800s. Printing and publishing was second.

With the economic and geo-political rise of the US, it was inevitable that New York would eventually become the world’s financial capital. But it took The First World War for it to finally eclipse London. During the war, the allies turned to the US for food, ammunition, and money. As a result, the US switched from being a net borrower to a net lender to the world and New York was at the forefront. So when the NYSE crashed in 1929, the crisis spread from New York to the world.

New York has maintained its financial importance to this day helped by the economic dominance of the US after the Second World War and by the US dollar’s position as a global reserve economy. It has also benefitted from the US’s lead in the digital revolution. The United Nations is also headquartered in New York.

While the hollowing out of its manufacturing saw the city experience urban decay in the 1970s and 1980s, as represented in movies like Taxi Driver and Escape from New York, New York was spared compared to cities like Detroit and Philadelphia. Its financial district and the growth in financial services and products starting in the 1980s provided increased employment and economic growth for the city.

The city boomed in the 1990s as the US economy and Wall Street boomed. Immigration increased, crime subsided, and gentrification took hold. The city became a desirable destination for the rich and famous. The September 11 terrorist attacks in 2001 rocked the city but did not break it.

Today, New York is not only seen as the world’s financial capital but also one of its cultural and sporting capitals. Along with the Metropolitan Museum of Art, there is MoMA, Carnegie Hall, and Madison Square Garden.

It also has 76 Michelin-starred restaurants in 2022, lagging only Tokyo, Paris, Kyoto, and Osaka. COVID-19 hit the restaurant industry hard but there are signs of recovery.

New York also has ten major sporting teams, two in each of the four US major sports and two MLS teams. The New York Yankees and Knicks are synonymous with New York. Sports radio can be heard through building sites and taxi cabs throughout the city.

The city is also ranked high on many lists as a top shopping destination. From Fifth Avenue to Macy’s and independent boutiques, there is a wide range in styles.

It is thus no surprise that it is one of the world’s most desirable cities. Timeout magazine ranks it as the number one city people want to move to and visit. This is despite its lowly ranking of 44th in Mercer’s list of most liveable cities.

Critics of New York point to a rundown subway system, astronomical real estate prices (excepting rent-controlled apartments), a high cost of living (seventh on Mercer’s cost of living), hot summers and cold winters, and even a lack of internal laundries. Living in New York can be challenging especially for those on lower incomes. For many COVID-19 was the final straw with a 3.5 percent decrease in the population in the 12-months ending on 1 July 2021.

The rich of course avoid many of these problems with private transport, newer apartments, and weekend houses in the Hamptons. Lifestyle New York is good for the rich and famous.

However, New York with the Statue of Liberty still epitomises the American dream both for Americans and foreigners. The call of New York remains strong. The dominance of the financial district is also not expected to dissipate anytime soon. New York has already invested heavily in fintech and blockchain.

Maybe China will one day overtake the US economy in size and Shanghai and Shenzhen will overtake New York in importance. Will the US dollar go the way of the Byzantine solidus? No empire lasts forever. Even so, whatever happens, New York’s afterglow will surely last for centuries.


Spotlight on Architas CEO Matthieu André

[caption id="attachment_24289" align="alignright" width="300"] Architas CEO Matthieu André[/caption]

Blending a finance-focused career into general management perfectly prepared Matthieu André to take over as CEO of multi-manager investment firm Architas in March 2020.

André’s career path has seen him work in eight entities and five countries over his 27-year tenure with the AXA Group, of which Architas is a part. He joined in 1995 after graduating from ESLSCA Business School in Paris and spending six years at Ernst & Young as a consultant.

Since joining AXA, André has held senior leadership positions in Asia, Europe and the US, predominantly focusing on the Life & Savings and Asset Management segments. This breadth of experience gave him a deep understanding of AXA’s global customer base. That, in turn, has allowed him to drive strategic initiatives and identify opportunities to support and best serve the diverse needs of the group’s clients.

Matthieu André joined Architas with an objective: to transform the business which started with the sale of its UK-regulated entities in 2020. His vision was to build on its global foundations by redefining its strategic position, accelerating transformation, and restructuring Architas to align it with the AXA Group.

His first focus was on driving and expanding growth across Europe and Asia.

André and the Architas management committee worked in unison to develop the firm’s investment proposition, focusing on current and emerging client needs. Responsible investing identified as a priority — and a commitment that has become a cornerstone for the development of Architas.

From ensuring the full integration of ESG factors in the investment process — for all Architas products — to launching dedicated sustainability-focused funds, responsible investing is embedded at the core of the business.

Matthieu André was at the helm as Architas navigated the global pandemic, and the market volatility that it brought in its wake. The focus was on supporting customers, being present to respond to their needs, and providing reassurance in stressful times.

The CEO’s attention now turns to the next phase for the development of Architas business, and the opportunity to strengthen asset management activities as growth engines for the AXA Group with the creation of the new business AXA IM Architas within AXA IM. Building on the collaboration between AXA IM and Architas, this new unit will be the unique distribution channel for unit-linked products for AXA’s insurance entities.

Change, service, responsibility and ambition are constant forces in the ongoing Architas evolution.


Specialist Multi-Manager Architas: Responsible Investing Comes First

Architas was launched in the UK in 2008 — and now operates in 13 countries across Europe and Asia, with €28.6bn in AUM.

Architas is a long-term, global multi-manager providing investment and advisory services across risk profiles. Its aim is to help individuals and institutions meet their financial goals: capital growth, income generation, and wealth preservation.

Architas is wholly owned by the AXA Group, but operates independently — a best-of-both-worlds situation. It benefits from the stability and leverage of being part of a global leader in insurance and asset management, while retaining the agility and entrepreneurial spirit of a smaller company.

As a member of the AXA Group, Architas shares the ambition of protecting customers over the long term — and creating a stronger and more sustainable society. Specialising in multi-manager investing means bringing together the best fund managers available, rather than picking individual stocks to create portfolios. With a rigorous approach, the firm identifies managers who are experts in their field, then blends complementary funds to create diversified investment solutions.

"By using its influence as a big investor, Architas can help to direct investment flows into funds that follow good ESG principles — and engage with the managers of those that are falling short."

But the process doesn’t stop there. Portfolios are constantly monitored and assessed to weed out any underperforming fund managers. The Architas investment team believes in active management, adjusting allocations to take advantage of opportunities in the markets, and responding to changing conditions.

All Architas portfolios are diversified across a range of sectors, geographies, and, in some cases, asset classes. As each investment will behave differently in varying market conditions, and spreading investments can help to reduce any volatility and provide smoother returns over time.

Focus on Responsible Investing

Integrated within this multi-manager approach is a commitment to responsible investing. Architas recognises the impact companies can have on the world around them, both positive and negative. The firm takes on the duty of ensuring this factor is taken into account in all investment decisions.

By using its influence as a big investor, Architas can help to direct investment flows into funds that follow good ESG principles — and engage with the managers of those that are falling short. A key target of this approach is to ensure that the selected funds perform well for clients, while adhering to principles that reflect ESG integration.

This incorporation of ESG factors into screening procedures adds a protective layer of risk control, and provides diversification for investors.

Across all Architas fund-of-funds offers, ESG due diligence is embedded in the fund or manager selection process. Funds judged not up-to-scratch are excluded, meaning investors can be confident that even offers without an explicit sustainable investment objective will meet strict ESG criteria.

Underscoring this commitment, Architas has been a signatory of the United Nations Principles for Responsible Investment (UN PRI) since 2018. This is a set of six principles under which signatories commit to incorporating ESG factors into their investment decisions.

Enduring Commitment

As well as ensuring ESG considerations are fundamental to all of its offers, Architas offers dedicated sustainability-focused investments. At the start of 2022, it launched the first of its EPIC — Ethical and Prosperous Investment Choices — investment range.

The first fund in the range was an equity-focused portfolio which gave investors access to three megatrends: digital transformation, health and wealth, and sustainable planet. A multi-asset version will be available in some regions for 2023.

These funds are classified as Article 9 under the European Union’s Sustainable Finance Disclosure Regulation (SFDR), which means they have a specific sustainable investment as their core objective. Architas commits to having 100 percent of the funds’ total assets (excluding cash) invested in Article 9 securities, based on extensive research and categorisation.

Architas CEO Matthieu André underlines the Architas commitment. “We are committed to sustainable investing,” he says, “and include ESG criteria in all our fund selection, looking to draw on the strength of the AXA world and external asset managers.

“We’re also committed to ensuring that we are aligned to the overall AXA Group purpose of acting for human progress by protecting what matters. This enables us to build stronger propositions for our clients.

“The Architas EPIC fund range provides investors with access to funds that specifically focus on sustainable objectives, ensuring their investments are being made in-line with the highest regulatory requirements, and showcasing our continued commitment in this space.”


Forward You — Celebrating the Difference!

Forward You has been revolutionising investment products since 1983.

FWU — Forward You — is an international company in the financial-services sector, founded in 1983 in Germany by Dr Manfred Dirrheimer.

[caption id="attachment_24364" align="aligncenter" width="900"] Forward You Chairman: Manfred Dirrheimer[/caption]

Headquartered in Munich, FWU is now an established player on the international stage. With the brand Forward You, it markets innovative investment products in Italy, Spain, France, Belgium, Luxembourg and Austria, as well as in the United Arab Emirates, Saudi Arabia, Kuwait, Pakistan, Malaysia and Indonesia.

The core FWU products are unit-linked policies offered by FWU-approved and -owned insurance companies FWU Life Insurance Lux SA and FWU Life Insurance Austria AG.

The majority stake in the holding company FWU AG is still in the hands of the Dirrheimer family; Swiss Re Europe SA is a minority shareholder with a five percent share. FWU employs around 450 staff and operates in 10 locations around the world.

In Europe, FWU Life and FWU Invest serve 275,000 customers with €2bn in AUM and contributions totalling €9bn. Globally, the insurance companies within the FWU Group have a total of one million customers.

The expansion of FWU international began with France in 1997, followed by Italy (2006), Spain (2014) and Belgium (2017). After ongoing restructuring and organisational growth, as well as mergers and takeovers in 2016, FWU brought the 25 affiliates together under the brand “FWU — Forward You”.

Founder Manfred Dirrheimer explained the aim of the rebranding as a drive to make it clear to customers, following a swift business expansion, that the group had a shared and consistent brand promise. Financial years with record results followed, leading to a doubling in customer numbers.

FWU then introduced the award-winning product strategy, Pan-European Forward Quant, which offers customers investments in line with the quant method with UCITS funds with fixed, 2 / 2 transparency, and guaranteed contributions. Since its introduction in 2018, 50,000 customers have selected a Forward Quant insurance policy.

In 2005, FWU created FILOS, a digital consulting instrument originally designed for banks. After several revisions and improvements, FILOS was introduced in 2016 and covered all European insurance agencies by 2019. FILOS facilitates a structured, managed sales process with a high degree of customisation. The insurance representative can contact the customer in person and online. In 2021, 80 percent of all European contracts were signed electronically, 55 percent without a physical meeting.

In 2018, FWU completed the acquisition of a life insurance technology platform with the intention to consolidate and standardise tech operations. The FWU TECH entity added speed, agility, and scale to FWU’s continued expansion plans.

In 2020, FWU technological expertise ensured that the group was able to navigate and overcome the Covid-19 crisis. In just a few weeks, FWU developed a digital solution for remote support and conclusion of contracts, the so called RSS. It was now possible for insurance representatives and customers to remotely access FWU products.

From the initial discussion to the online signature: the necessary steps for signing an insurance contract could be carried out — conveniently and securely — from one’s home.

Achievements and Awards — FWU Through the Years

FWU Group — Forward You to its friends — has been offering “a different kind of life insurance” since 1983.

With €2bn in AUM in the FWU Invest portfolio, offices in Germany, Italy, Spain, France, Austria, Luxembourg, UAE, Pakistan and Malaysia, and 300 sales partners across Europe, the company has come a long way.

The company was founded in Munich by Manfred Dirrheimer, and now has 450 employees — 20 percent of them IT specialists — in 10 locations worldwide. Those employees serve more than a million customers worldwide.

FWU Factoring was founded in 1991. The financial services company has more than €1bn in active transactions. A few years later, in 1994, FWU developed investment products on European insurance funds and introduces its first unit-linked life insurance in Luxembourg and Germany.

FWU entered the French market in 1997. In 1999, the takeover of FWU Life Lux and founding of FWU Invest took place.

In 2003, the firm introduced its first takaful product in the UAE that meets all Sharia requirements. It expanded its operation into Italy in 2006. The concept of combining guarantee and fund products proved to be popular; FWU made major advances on the market.

Here are some of its notable achievements over more recent years:

2007: Alongside the expansion into Malaysia, the insurance bank model is becoming more important for businesses in Europe.

2007: Best Takaful Provider award by Euromoney Islamic Finance Awards.

2009: Entry into Pakistani market.

2011: Best Takaful Operator 2011, awarded by Economy.

2011: Award for the exceptional individual contribution of FWU to the Islamic financial world, by the Financial Forum of Kuala Lumpur

2011: Exceptional ranking of FWU LD 2R contributions in Morgen & Morgen, with a mention for highest pension contribution for the first year.

2013: To grow the group, the merger with (and takeover of) Excel Life France is instigated.

2014: In light of the success of the fund-based guarantee products, FWU introduces them in Spain — which has become its second-largest market.

2015: With the takeover of Skandia Austria, the number of FWU customers grows — by an impressive 65,000.

2016: FWU becomes Forward You as part of a rebranding to indicate the mutual mentality of all affiliated companies.

2018: FWU presents the latest version of the complete FILOS platform, the UCITS umbrella fund, and the innovative product Forward Quant.

2018: FWU acquires a life insurance technology platform, dubbed the FWU TECH, to drive speed, agility, and scale to all operations.

2018: Best Portfolio of Unit-Linked Products Europe, awarded by CFI.co.

2019: Introduction of a brand-new customer portal in Italy.

2020: Thanks to its technological expertise, FWU is able to navigate the challenges of the global crisis triggered by the Covid-19 pandemic. In just a few weeks, FWU develops a solution for remote operations allowing insurance reps and customers to access its products via mobile devices. From the initial discussion to the online signature, the necessary steps for signing an insurance contract can be carried out at home.

2021: FILOS Tech implementation.

2021: A new unit-linked product, Forward Unico, is launched.

2022: FWU integrates ESG investing awards.

Additional information on FWU products and quant methods can be found at forwardyou.com.


BBE Chief Victor van der Kwast Uses Life Experience to Guide His Hand in Finance

Victor van der Kwast’s long career could be seen as leading to this place, this time, and this role: chief executive Byblos Bank Europe.

[caption id="attachment_24386" align="aligncenter" width="900"] CEO: Victor van der Kwast[/caption]

It’s his most recent contributions to the banking industry; he was appointed to the role in 2020. Van der Kwast’s own journey of transformation and change crossed with that of BBE. He has lived and worked in Asia, the US, the Middle East, and Europe; this has given him the ability to accept challenges and change without fear.

He enjoys the complexity of new environments and thrives in the pursuit of opportunity, expansion, and new solutions. His achievement has been reaching peak efficiency, creating a better, digital bank, without losing the all-important personal link to clients and staff.

Victor Van der Kwast describes himself as "a banker in principle, but an entrepreneur in practise". And, like a true entrepreneur, he has mastered various subjects, from multitasking in a managerial role to successfully launching a start-up. He uses his accumulated knowledge in fields of business, IT, treasury, compliance, corporate, FI, and sales to lead his team. He cherishes dialogue and loves to learn from anyone: IT technicians, designers, compliance officers, risk analysts.

The chief executive remembers to always observe, listen, and avoid jumping to conclusions. In his business and managerial roles, Van der Kwast combines client engagement with product and service experience. His talent is for staying practical and pragmatic while delivering client needs. This makes him capable of giving honest advice and abstaining from a potentially profitable transaction to avoid a corporate execution risk. His advice has been appreciated by clients who recognise its worth, even though they had the opportunity to go to any other bank.

BBE cherishes relationships based on trust, loyalty, service, and excellence. It has used its longstanding skill at creating meaningful connections in its new strategy, and added digitalisation to a classic banking process to improve efficiency, simplicity, and practicality.

The CEO asks his staff to use that approach in all business endeavours. “After all, this is what private and corporate banking is about,” he says. “Learn to listen and engage with your client. That is something that can’t be digitally replaced.”


The Fine Art of Listening Has Not Been Forgotten at Byblos Bank Europe

Byblos Bank Europe keeps ears, eyes, and options open to focus on the opportunity that lies in challenge.

Digital advances have made global networking a reality, and Byblos Bank Europe (BBE) has embraced the advantages and possibilities of that — without losing the human touch.

[caption id="attachment_24390" align="aligncenter" width="900"] Byblos Bank Europe[/caption]

The go-ahead financial institution is following the fintech path, going digital and cloud-based, while retaining its people-centric focus and nurturing personal business relationships.

“We don’t seek to be everything to all people,” says CEO Victor van der Kwast. “We remain a true niche bank. Listening to our clients is what we do best. Digital availability has brought huge advantages, but we’re always available to discuss and address our clients’ needs face-to-face.” That personal touch can make all the difference.

During the pandemic, BBE faced the recurring challenge of remaining accessible to its clients, while finding new ways to serve them. For the Byblos Bank Group, facing and overcoming challenge is nothing new. In the midst of the two-year Lebanese crisis (1975-1977), the group’ opted for a versatile strategy to thrive, and expand its footprint outside in Europe.

"The go-ahead financial institution is following the fintech path, going digital and cloud-based, while retaining its people-centric focus and nurturing personal business relationships."

The first step in the creation of BBE was the establishment of the Brussels office in 1976. This presence in the European market, and the rapid success of the new office, allowed the group to profit from the opportunities that lay at the heart of crises. This was the spark for further expansion in Paris (1980) and London (1981), with the aim of maintaining proximity with the spreading Lebanese diaspora in those capital cities, and gaining ready access to the international financial market.

Booming business over the following 15 years gave shape to the management and structure of the Byblos expansion. In 1998, the Brussels subsidiary annexed the offices in London and Paris as its branches — and became the headquarters of Byblos Bank Europe.

Swimming against the tide is strenuous — but rewarding. Challenge, approached correctly, means opportunity — and recent years, seen thus, have presented plenty of both. The global financial crisis and the pandemic of 2020 left the world’s businesses with the irreversible mark of change.

Digitalisation allows BBE to remain accessible, as various processes and workflows were automated to accommodate the remote-working trend. The shift to working via tech such as Teams, Zoom, and Webex, and signing documents electronically, heralded the emergence of a global trend that has become standard practice for many. BBE took the possibility to differentiate itself from the crowd.

The bank decided to strategically embrace digitalisation, but retain the vital human and personal aspects of its business. It was a daring move, and one that has paid off very well in the post-pandemic era, says Van der Kwast. “Being a niche bank, efficiency in business relationship management and easy access to the bank played an obvious part in this decision,” he says. “Clients who were overwhelmed with online ‘shopping carts’ and automated messages appreciated the personal touch of the BBE team.” Staff were still accessible by phone, via video links, and in person, on-premises. "We are so proud of this," the chief executive says.

BBE, as a niche bank, needs to keep a focus on selective markets and businesses; it is, as Van der Kwast said, "not a bank for everyone, everywhere". But as a fully capitalised bank in Europe, with licences to operate in Belgium, France, and the UK, it provides an awful lot. Its services include commercial banking, covering financial institutions, trade finance, and treasury. BBE deals with emerging markets and provides services to clients in the European Union, as well as those selected countries across Africa, Asia, and the Middle East.

The increasing requirements for compliance and transaction scrutiny, especially in Europe, have driven some large international banks to de-risk these markets. And that has allowed BBE to capture some of them, in line with its core business and experience in emerging markets.

Diversity is not a cliché, but something to be cherished, believes Van der Kwast. BBE has implemented this principle throughout its business lines, and considers investments in human capital as a strategic advantage. “At BBE, we have employees from 24 nationalities. That has created a vibrant working environment where everyone learns from the various cultures and languages, connecting with our clients and strengthening relationships and trust."

Where the Future Lies

Change is inevitable and the future is more exciting for those willing to embrace it. BBE keeps its entrepreneurial mentality active in its offices in Brussels, London, and Paris. The bank has consistently welcomed the future for 45 years, with versatility, by building on its core values, by remaining authentic, retaining the personal touch, earning loyalty, trust, and quality.


Good News Roundup of 2022: Spotlight on Renewables

After a year marked with continued pandemic challenges, international conflicts and catastrophic climate events, the world is overdue for some feel-good news. It turns out that there was plenty to celebrate last year, more than could fit in one editorial. So, for our first instalment, we’re focusing on the shift in the energy paradigm over the past year.

Wind power for the win

The UK announced plans to build to the world's largest floating wind farm off the coast of England and Wales. The project, called Gwnt Glas or “blue wind” in Welsh, is expected to be 20 times bigger than the current record holder, which is located off the coast of Scotland. The floating wind farm — a collaboration between French energy company EDF and Irish renewable energy company DP — will generate enough to power nearly a million UK homes.

Unlike conventional offshore turbines, which are limited to 50-metre-deep installations, floating wind farm platforms can be installed in deeper waters, where 80 percent of potential offshore wind power capacity is found.

Solar energy heats up

In 2022, the world’s installed solar energy capacity surpassed the one-terawatt milestone — enough to meet the electricity demands of almost all European countries combined. It’s still only a fraction of global energy generation, which was at 26,823 terawatt in 2021, but it’s a step in the right direction. The US, EU and China are credited as the main drivers in this transition, accounting for over half of solar energy capacity globally. Meanwhile, developing nations with abundant renewable energy resources are forging full-steam ahead towards a more sustainable future.

Nearly 40 percent of Morocco’s installed energy capacity comes from renewable sources; it’s aiming for 50 percent by 2030. Over the past decade, it has attracted over $5bn in renewable energy infrastructure investments.

“We are trying to ensure that the return on capital invested on projects, particularly those most competitive in wind, solar and now hydrogen, improves so that it is a sustainable strategy,” explained Leila Benali, the Moroccan minister of energy transition and sustainable development.

Coal power is being phased out

Coal is finally getting the boot it deserves — despite reaching a new all-time high of 36 percent of global power generation. The insurance industry increasingly views new coal projects as uninsurable, and 62 percent of reinsurers now have coal exit policies.

After 30 years of operation, Hawaii’s last coal plant closed in September, moving it closer to realising a transition towards 100 percent renewable energy by 2045. Hawaii was the first US state to make a net-zero pledge and began entrenching environmental protection measure into state law in 2015.

Australia’s largest coal-fired power plant (Origin Energy) will shut down seven years earlier than anticipated and be replaced by a virtual power plant and large-scale battery energy storage system. This comes on the heels of two rival energy companies announcing the closure of their coal power plants several years ahead of schedule. Cheaper and cleaner options are pushing coal out of the country’s energy mix, with renewables predicted to grow from 30 to 70 percent by 2030.

On track to meet climate goals

Amid a backdrop of tightening regulations and mounting public pressure, banks are looking to clean up their portfolios. In December, HSBC announced the end of financing for new oil and gas fields. Lloyds bank, Britain's biggest domestic bank, reached a similar decision in October.

According to a report from climate thinktank Ember, if the current pace of renewables growth continues through 2030, the world could actually meet the climate targets outlined in the Paris Agreement.

“Even as coal and power emissions hit another all-time high, there are clear signs that the global electricity transition is well underway,” said Dave Jones, Ember’s global programme lead. “More wind and solar is being added to grids than ever. And not just in a few countries, but across the world. They are able — and expected — to provide the majority of clean electricity needed to phase out all fossil fuels, at the same time helping to increase energy security. But with sustained high gas prices amid Russia’s war with Ukraine, there is a real risk of relapse into coal, threatening the global 1.5 degrees climate goal. Clean electricity now needs to be built on a heroic scale. Leaders are only just waking up to the challenge of how quickly they need to move to 100 percent clean electricity.”

Researchers continue to push the boundaries of possibility. Stanford University engineers have developed solar panels capable of generating electricity at night, while US physicists made a breakthrough in fusion ignition that could eventually turn the dream of near-limitless, low-carbon energy into a reality.

Communities exercising their collective power

Corporations, start-ups and municipalities are capitalising on the renewable energies growth, but the real magic — and biggest impacts — happen when communities take ownership of their own energy needs. According to a report from Allied Market Research, the global renewable energy market was valued at $881.7bn in 2020 and is expected to reach nearly $2tn by 2030. Community-owned energy projects could lead to a more equitable distribution of wealth from this booming market.

Recent world events — geopolitical tensions, natural disasters and drastic market swings — are pushing individuals and communities to seek more self-sufficient and sustainable energy solutions. Community energy projects protect residents from the price gouging of utility companies that have raked in windfall profits. Rather than rely on centralised energy generation, businesses and households can reap the economic and environmental benefits of developing local renewable energy systems. While the upfront investment might seem prohibitive, in the long run, these projects cut costs and emissions, boost community resiliency and help to stabilise the energy grid.

Solar microgrids are a “game-changer” in disaster relief settings, like in the Ukraine, where more than two dozen portable solar battery systems were donated and deployed to hospitals across the country. New Use Energy, Footprint Project and their partners raised over $600,000 for Ukrainian relief assistance.

In the US, Delaware launched a solar equity programme that gives free home solar panels to low-income residents, whose energy burden can be up to three times higher than high-income households. The programme will also cover 70 percent the cost of panels for moderate-income residents. In the UK, “solar punks” in East London are combatting financial and ecological crises by turning their street into a power station. Artists and activists Dan Edelstyn and Hilary Powell started a cooperative movement to install rooftop solar panels on dozens of homes in their Walthamstow neighbourhood, donating the material and labour for some households. They raised over £113,000 through a crowdfunding campaign.

“Everything’s just driven by profit and people are so trapped in making ends meet, it’s hard for them to see that there is an alternative,” said Powell. “If we’re to have an equitable future in this transition away from fossil capitalism, we can’t let renewables repeat the power games and monopolies we’ve seen in the fossil fuel industry. There has to be equitable distribution.”


CEO Thierno Ibrahima Diallo of Société Générale Guinée Shares the Secrets of his Career

CFI.co in conversation with Thierno Ibrahima Diallo, chief executive of Société Générale Guinée.

Société Générale Guinée, a subsidiary of the Société Generale Group, is the oldest fully private financial institution in Guinea.

[caption id="attachment_24436" align="aligncenter" width="900"] CEO: Thierno Ibrahima Diallo[/caption]

It was established in 1985, and remains one of the country’s main banks, with 23 branches, and 58 ATMs. It has over 300 employees, and advises more than 100,000 clients and customers.

CFI.co: What are your hopes for the future of SG Guinea, and for the banking industry as a whole?
Thierno Ibrahima Diallo: My ambition for the future of SG Guinea is to consolidate its position as leader in the Guinean market, to be a bank rich in human capital, innovative in its offer, to deliver quality service to its clients. I would like recognition for that quality of service, and its guarantee of sustainability.

What relevant changes would you like to see made to the legislation or regulation of the banking sector in Guinea?
Regulation is the responsibility of the regulator. The banks represented by the Association Professionnelle des Banques (APB), to which we belong, have a constructive relationship with our regulator (BCRG). We are listened to and our perspective is considered, so things are going in the right direction.

Can you identify the obstacles for the banking sector?
The sector faces the challenges of digitalisation to make its services available to everyone. It’s more a question of innovation, and the adaptation of our offer. It must be remembered that banking needs a clear and protective legal framework to prosper. In Guinea, banks have historically been faced with difficulties in this respect.

This is not the place to comment on the details, but if things remain unchanged, we will not gain the security and serenity expected in our sector.

Do you have any anecdotes to illustrate your progress over the years?
I can just remind you that we have been in Guinea for more than 35 years. We now have more than 300 employees, and 23 agencies; it's a beautiful story that is being written. It has been punctuated by successes and growth that have enabled us to get to this point. In 2023, we will be inaugurating our headquarters in Guinea, a symbol of a new SG Guinea, firmly rooted in its country and orientated towards the transformations necessary for long-term survival.

How do CSR parameters affect the way you manage the SG Guinea subsidiary?
CSR is one of four pillars under our Grow With Africa programme. We say to the world: You are the future. These aren’t empty words, but an ambition to actively contribute to the sustainability of our planet. CSR will play an increasingly important role in our activities. This is already the case for all the projects we support, and it will continue so that our activities have a real and visible impact on our environment.

What are the medium- and long-term challenges facing your company?
The challenges of our world are those facing our customers. They need a bank that is agile and able to adapt to their lifestyle. We are resolutely in a digital world, which moves fast, and which no longer makes quality of service conditional on physical presence.
We are very attentive to these changes, which are certainly shaking up habits, but moving in the direction of the bank of tomorrow. Day-to-day transactions must be carried out quickly and electronically, and advice will continue to be given in our sales outlets so that the bank can continue to play its role in financing the country's economy.

What is the most important condition for becoming a global company?
My answer could certainly be supplemented by others, given the different visions that such a question crystallises. I would simply say, adapt to the environments in which you want to evolve.

How do you see the prospects for SG Guinea?
The outlook for SG Guinea will be positive in the short and medium terms. This is the work we are currently doing, consolidating our achievements while making the necessary changes to increase the level of efficiency of our activities. Banking has never been a business for philanthropists, so we will also have to keep a constant eye on profitability.

What excites you about the business world in general?
Mainly the feeling of being of service to people. Our funding and other services should help change people's lives. There is a constant challenge for us to make sense of our lives.

What lessons have you learned from your previous professional experience?
Banking is a business of experience, that's for sure. One is always learning. But I relive situations, where the recipes I learned in my past experiences work perfectly. I’ve learned above all to keep a human approach, to be patient and perseverant. That helps.


Kathrein Privatbank: It’s Been a Tough Year All Round, But There Are Strategies to Cope

Austria’s Kathrein Privatbank has managed to deliver for its clients through active portfolio management — and an emphasis on sustainability.

Wilhelm Celeda, CEO of Austria’s Kathrein Privatbank, agrees with the international assessment: 2022 was a particularly challenging year for investors.

[caption id="attachment_24443" align="aligncenter" width="900"] Wilhelm Celeda[/caption]

It presented a rare scenario: both bonds and equities suffered negative performance and heavy price losses. From January, most stock markets have been in a bear phase. The mixture of high inflation, lower earnings expectations and generally poor sentiment continues to be “an unpalatable cocktail” for equities.

Resilience in the Portfolio

The investment environment may have been challenging, but active portfolio management allows for the continuous adaptation of investment strategy to the current circumstances. “We have implemented strategies in our portfolios that outperform the market in this challenging environment,” says Wilhelm Celeda.

“In the equity sector, the focus is on defensive stocks, and those with pricing power. We won a record of six Austrian fund-of-funds awards this year — something that underscores the quality of our portfolio management.

“In the bond sector we invest in local currency bonds of emerging countries to generate higher returns — but only in issuers with excellent credit ratings, such as development banks.”

To generate an upside for clients in such an environment, trend-tracking is another option. “Some of our funds and portfolio strategies offer the possibility to take short positions and create positive returns with significantly less risk.” Kathrein Privatbank’s investment strategy has been defensive since February 2022, “which has clearly paid off for customers”.

Long-term Sustainability

Sustainability is front and centre at Kathrein. “We’re convinced that responsible business practices contribute to a better quality of life for generations to come.” This is no knee-jerk reaction to recent global upheavals; the private bank began its first sustainable investments in 2012.

“We have invested around 50 percent of the total fund volume, abiding by the sustainability approach,” says Celeda. “We increased the number of sustainable funds, certified by independent organisations.” Three were added in 2022.

Kathrein was the first private bank in Austria to introduce sustainable gold. Its clients can buy bullion — certified by the London Bullion Market Association — in amounts from two to 1,000 grams. Gold adhering to this standard ensures minimum CO² emissions and exemplary ESG standards throughout the production process.

“We are proud to offer our clients an outstanding performance,” says Celeda, “paired with relentless commitment to sustainability.” There will be no change to that policy: “We strive to elevate the rate of our sustainably managed assets — and to deliver outstanding performance.”

Whatever market forces may present themselves, where there is a will, and resilience, there is a way. “To manoeuvre through turbulent times,” Celeda says, “you need patience, the right strategy, and a trustworthy partner by your side.”


A CEO Who Worked His Way Through the Ranks of a Family Firm to Lead From the Front

Thai Life Insurance Chief Executive Officer Chai Chaiyawan started his career in 1982 in the most basic way: learning the ropes.

[caption id="attachment_24493" align="aligncenter" width="900"] Thai Life Insurance CEO: Chai Chaiyawan[/caption]

He began by overseeing human resources, accounting, administration, branch management, and supervision of sales agents. He was later made assistant chief of investment and appointed Thai Life president in 2004. He ascended to the chief executive’s post in 2021.

Under Chai's direction, the company has strived for — and earned — global recognition. In all areas of growth, including working methodology, brand creation, and human resource development, Chai has proved to be a visionary leader.

Thai Life has become the national leader in the life insurance sector. Chai Chaiyawan is something of a spiritual guide and thought leader for his staff, inspiring and empowering them in their careers.

Chai's management style is a fusion of East and West. He manages the company in an Oriental manner that emphasises loving-kindness, compassion, empathy, and serenity. He also operates in a Western manner, drawing on professional cultures that have a focus on business models, KPIs (key performance indicators) and OKRs (objectives and key results) to measure performance.

“We use Eastern philosophy, Buddhism, and Chinese or Japanese philosophy while managing people,” he says. Personnel are content and are not forced to work under any stress. “KPI is similar to job improvement — it encourages employees to enjoy pushing themselves,” Chai believes.

The Chief Executive Officer focuses on sustainable growth by setting the brand purpose: to be “a leading brand that is admired and inspired by everyone in society”. For business purposes, he aims to provide all the answers for life insurance, health insurance, and personal financial planning for life’s every stage and rhythm, as well as catering for diverse lifestyles and needs.

He achieves this by continuing to value human, value-driven-centricity. People are an essential factor in driving any business, Chai believes, and says that the most worthwhile part of an entrepreneur's life is to ensure better quality of life for employees and their families. The most rewarding thing for Chai is seeing his organisation achieve sustainable growth, strengthening society and creating social value.

Chai Chaiyawan was born in 1957 and graduated with a HND in Business Studies from the West Glamorgan Institute of Higher Education in Swansea, UK. He also holds a BA in Business Administration from Richmond University, UK, and an Honorary Doctorate of Philosophy (Business Administration) from Maejo University, Thailand.


Norvestor: A Sustainable Long-Term Value Proposition in Private Equity

The disclosure of environmental, social, and governance (ESG) practices by private equity funds has been associated with a 4.9 percent increase in the net IRR (internal rate of return). That is the conclusion of a London Business School research paper. Whilst private equity funds aren’t usually required to disclose their ESG policies, heightened public awareness and the need to remain competitive with publicly listed companies are driving PE funds to greater transparency and improved ESG reporting.

The paper also found that PE funds with a higher-than-average rate of disclosure tend to sustain a significantly reduced environmental footprint. The authors conclude that over the past 20 or so years, ESG reporting went from an esoteric sideshow to claim centre stage. It also became a tool to identify, extract, and monetise opportunity.

Nordic investors and funds have been in the ESG driver seat since the advent of ESG as a set of performance parameters. Perhaps, none more so than Norvestor which boasts nearly three decades’ worth of experience in partnering with businesses on the cutting edge of their fields.

Tapping Into Efficiencies

Norvestor is focussed on companies providing services that can be streamlined and upgraded through the judicious deployment of technology, upping operational efficiency and creating tangible value for both its clients and the wider society.

[caption id="attachment_24517" align="alignright" width="200"] Partner (Norvestor): Henning Vold[/caption]

Norvestor treads carefully but decisively in those sectors where its team possesses experience and a strong network. The company prefers takeovers or close partnerships with targets that are managed by strong and ambitious teams. The aim is to spur accelerated growth during the holding period – usually between three and six years – through the expansion of geographies and the acquisition of complementary businesses in addition to implementing digital strategies.

Norvestor’s approach to investing has remained largely unchanged since the 1990s – and with good reason. During its ownership period, operating profits of Norvestor portfolio companies have grown by an annual average of around 20 percent. Norvestor typically concentrates on medium-sized targets with turnovers in the €25m to €250m range. Its funds have made 82 platform buyouts and partnered in over 300 add-on acquisitions. Norvestor has successfully executed 54 exits, including 16 IPOs.

Sustainability with a view to building long-term value is a key tenet of Norvestor’s investment philosophy. This includes companies with circular economy business models. One such example is SmartRetur, a Nordic pioneer in reverse logistics, specialising in reusable packaging. The company provides physical handling and digital inventory management of wooden pallets for a diverse customer base that includes grocery chains, breweries, carriers, manufacturers and construction companies. SmartRetur was built to reduce waste: 100% of the wood pallets sourced in 2021 were sustainable according to industry standards, and the recycling rate is documented at 98%. The company’s business model is centered around industry collaboration and sharing of pallets to reduce the total number of pallets in circulation, and to reduce unnecessary shipments of pallets. Investing in digital capabilities has allowed the company to monitor and report factors of the clients’ logistics ESG footprint: pallet reuse level, vehicle capacity utilisation, journey length, number of shipments and emissions. This way the clients can take action to cut cost and cut carbon emissions.

Holistic Approach to Sustainability

In April 2022, Norvestor agreed to the takeover of sustainability software platform Position Green and the advisory firms The Governance Group and Velocity Consulting. The three companies have since been clustered in the Position Green Group. This holding joins leading experts in ESG software, strategy, and communication and helps corporates fast-track their sustainability agenda.

[caption id="attachment_24518" align="alignleft" width="200"] Group CEO (Position Green): Joachim Nahem[/caption]

Position Green Group currently has a portfolio of over 400 clients and more than 100 consultants across offices in Norway, Sweden, and Denmark. The holding hopes to make additional acquisitions to broaden its European footprint. Founding Partner Joachim Nahem of The Governance Group, now CEO of the Position Green Group, sees increased demands from regulators, investors, and supply chain owners for companies to articulate a clear ESG strategy supported by robust data.

“By bringing these capabilities together, supported by the experience and capital of Norvestor, our ambition is to help companies make the right strategic decisions and provide them with the necessary hands-on expertise, whether that’s helping them set a science-based target, conducting human rights due diligence in their supply chain, or providing a second-party opinion on a sustainability-linked bond”

Mr Nahem emphasises that his team provides a unique integrated sustainability offering that combines strategic consulting services with data and software, e-learning, and executive training: “This helps manage ESG-related risk, speed up value creation, and build resilient and sustainable organisations.”

Norvestor Advisory Partner Henning Vold, a renowned expert in IT growth companies, says that sustainability principles and policies will be ever more important as value drivers in business and investment decisions: “Norvestor has set ambitious goals to be an enabler of the global sustainability agenda. Position Green Group brings together a leading and fast-growing sustainability software platform with two best-of-breed sustainability consultancies. We are impressed by the strong positions that these companies have built in their respective market niches. Position Green Group accommodates corporations’ need for an integrated sustainability partner at the forefront of ESG, and we are enthusiastic about the opportunity to support management in scaling the company internationally.”

Norvestor holds a controlling stake in Position Green Group but shareholders of its three constituent companies will re-invest alongside the PE fund.


La Trobe Financial: On Top Down Under

Australia’s leading credit asset manager is committed to retaining and honouring the trust it has won from investors.

[caption id="attachment_24602" align="aligncenter" width="900"] CIO: Chris Paton[/caption]

With over $15bn in AUM, La Trobe Financial is one of Australia’s foremost credit asset managers, specialising in credit investment solutions and real estate finance.

The firm has been a proven and trusted partner for institutional investors for seven decades, and operates Australia’s largest retail credit fund for more than 82,000 retail investors.

La Trobe Financial Chief Executive Officer Chris Andrews says there have been “plenty of challenges” for investors over the past 20 years: the Global Financial Crisis, wild swings in economic, property, and business cycles, and the more recent COVID pandemic.

"We’ve been refining our investment approach since 1952 and strive, above all things, to be good stewards of our investors’ capital."

“Throughout all of these challenges,” he says, “we’re proud to have been able to provide our investors with consistent monthly returns.

“We’ve been refining our investment approach since 1952 and strive, above all things, to be good stewards of our investors’ capital. We’re mindful of the deep reservoir of trust we have built, and will do all we can do preserve that.”

La Trobe Financial’s Chief Investment Officer, Chris Paton, says that despite a challenging and volatile macro-economic backdrop, “we have been able to demonstrate significant business growth.
“We have also continued our proud history of delivering low volatility, inflation-responsive monthly income that our investors have come to know and trust.”

La Trobe Financial was established in 1952 and is one of Australia’s oldest credit asset managers, specialising in credit investment solutions and real estate finance.

The firm has won CFI.co’s Best Investment Management Team (Australia) award for three consecutive years. The programme acknowledges individuals and organisations that have performed strongly throughout the year, and have contributed significantly to the finance sector.

La Trobe Financial’s strong portfolio performance was listed as a key factor in the win.


When Will They Ever Learn? Clearing The Climate Change Roadblocks

A study from Science magazine has offered a quantitative look at the decades-long disconnect between the fossil fuel industry’s “private understanding of climate science and its public climate denial”.

The largest trade association for the US oil and gas industry, the American Petroleum Institute, has known about the threats posed by anthropogenic (human-caused) global warming since the 1950s; the coal industry has been aware since the 1960s. Investigative reports and leaked internal documents show that ExxonMobil has sowed doubts and fought legislation against predicted climate catastrophe since the 1970s. The Total oil company and automotive firms GM and Ford have known of the risks since at least the ‘70s, Shell Oil since the ‘80s.

Exxon’s own predictions through to the 1990s aligned with observable climate changes. Documents show that company research ran parallel to, or predated, the consensus of academic and government scientists. Rather than publicise the peer-reviewed models predicting global warming, the company chose to cast doubt on them. Instead of leading the vanguard to develop renewable energy, it doubled down.

Harvard researchers Geoffrey Supran and Naomi Oreskes were instrumental in bringing those documents to light. “We now have the smoking gun showing that they accurately predicted warming years before they started attacking the science,” Supran said. “These graphs confirm the complicity of what Exxon knew, and how they misled.

“They could have endorsed their science rather than deny it. It would have been a much harder case to deny it if the king of big oil was backing the science, rather than attacking it.”

ExxonMobil remained silent until the evidence began to threaten its image and operations. Then it began a campaign to discredit the research and block legislation using “dark money” and political lobbying. Internal documents leaked in 2015 have sparked dozens of lawsuits for “deceptive marketing, misleading shareholders and culpability for climate damages”. Supran and Oreskes provided expert input in some of those cases, but the company has so far managed to dodge responsibility. In 2019, it was subpoenaed to appear before an EU parliament hearing. It ignored the summons — but its lobbying access credentials were not revoked. Other hearings across the country amounted to little more than complaints about efforts to suppress the truth.

In 2021, undercover climate activists posing as head-hunters secretly recorded former ExxonMobil senior lobbyist Keith McCoy bragging about his cosy relationships with congresspeople “across the aisle” and contributions to third-party shadow organisations exploited to fight climate action legislation. “There's nothing illegal about that,” he insisted. “We were looking out for our investments. We were looking out for our shareholders.”

Benjamin Franta, founding head of the Climate Litigation Lab and a senior research fellow at the University of Oxford Sustainable Law Programme, hopes the Science exposé will prove useful for the future of litigation, public policy, and corporate accountability. “It reinforces the notion that corporate malfeasance and political obstruction — not a lack of scientific knowledge — have been the main roadblocks to solving climate change,” he said. “And, of course, it implies the need to remove those roadblocks to achieve the action we urgently need today.”

ExxonMobil maintains that it has done no wrong, citing the failure of past litigation attempts as proof of its innocence and blaming detractors for “cherry-picking internal documents to cast the industry in a poor light”.

All of this begs the question: when will big polluters be held accountable for their actions?

By Heather Leah Smith