China Faces Critical Corrections in the Years Ahead

Daniel H. Rosen Discusses China's Role in a Globalized World

Daniel H. Rosen

On February 26 and 27, we welcomed Daniel H. Rosen, co-founder of Rhodium Group, an independent research firm analyzing global trends, at events in Zurich and Geneva. With twenty-six years of professional experience analyzing China's economy, commercial sector and external actions, Dan provided us with an in-depth assessment of the state of the Chinese economy and informed us on the most likely developments ahead. Before the event in Zurich, we had the chance to talk with him about his career and China's new role as a global player. 

Anna Zwald: Your interest in Asia was already present when you chose to study Asian Studies and Economics at the University of Texas for your undergrad. When and why did a particular fascination for China and China’s economy emerge?

Daniel H. Rosen: Growing up in the 1970s and early 80s, there was a broad awareness that extraordinary developments were taking place in China. Of course, China has always been remarkable but when the reform period began at the end of the 70s and into the early 1980s, you could feel that something big was happening. It was a standing topic amongst mentors and professors of mine. But even before, at the high school level, China has been frequently discussed. Hence, by the time I started my undergraduate studies I had a pretty strong idea that I was interested in either China or perhaps India: One of these huge stories of Asian development.

What was your motivation to become self-employed and found Rhodium Group? What does Rhodium Group do and how has it developed since you founded it?

Rhodium group was not so much a vision at the beginning as a result of trial and error. I intended to combine my interest in public policy with commercial application of analysis and economic thinking in a way that was well suited to who I was. Prior to founding Rhodium Group, I did a lot of soul-searching about where I could make the best contribution. It turned out that I have an entrepreneurial streak along with a stubborn touch. My difficulty accommodating existing bureaucracies turned out to be helpful to me in creating something new. Even now however I am never entirely sure Rhodium Group – which is a hybrid between think tank and commercial advisor – will succeed, though we are now 15 years old and we have an extraordinary group of people working together. Living with uncertainty keeps us hungry and is part of staying entrepreneurial.

With the increased influence China is exerting via large foreign direct investments (FDI) in other countries. What regulative measures should a country have in place to ensure it is capable of protecting its own best interests?

This is one of the most important questions of our time. Just a few years ago China was almost completely absent as a global direct investor. We all knew China as an exporter of products but most of those products were made under foreign management and their global distribution was handled by non-Chinese firms. And now, in the space of just a few years, we see Chinese companies able to make very large-scale acquisitions, right here in the middle of the advanced economies, including Switzerland. However, we have also seen that this trend is not yet a permanent one. There has been a significant fall in Chinese outbound direct investments in the past two years. The volume and pace at which Chinese firms have started making acquisitions has raised concerns abroad. I do not think that there is just one answer to these trends: Different nations are going to have a different balance in their prioritization of security considerations versus economic dynamism along with the benefits of investment inflows. The answer depends on what kind of country China intends to be in the future. If China plans to be truly market-oriented, then there is one answer: We can deal with these investments. If China decides to go back to a more state-oriented approach, then there will be a different answer to how we choose to screen and regulate Chinese participation. But regardless of all these considerations, what a country needs first and foremost is accurate information on what is and what is not happening with regard to FDI. Rhodium Group has been studying and trying to understand the pattern of Chinese outbound investment for over a decade now, including here in Europe. There is still a lot that most people, including officials, misunderstand.

Would you say there are companies in China that can be categorized as private independent entities, as we understand it here in the West, or should firms rather be seen as extended arms of the communist party?

There is still a big difference between centrally controlled stated-owned companies and local private firms. They are distinguishable by their governance, motive, incentive structure and behavior patterns. It is a mistake to look at all Chinese corporate entities as the same. That said, it is also true that in China, as in many other countries, government has the ability to apply pressure to almost any firm. So, the question of political influence on firms in China is legitimate. When we look back over the past five years of Chinese global investments, as much as half of what we saw was activity that Beijing in fact disapproved of. To slow it down or stop it they took strong actions and even punished some leading private companies for their overseas activities. Not everything Chinese investors do is approved by the central government.

Since Asia has again become the center of gravity, particularly with regard to its economic output, what are some developments ahead that you feel the West is ignoring?

Many companies and governments underestimate the correction that China likely faces in the years ahead. The financial stress of the past two years shows that the era of financial bubble-driven growth is ending. In fact, it has already been stopped to some extent with the deleveraging initiated in 2017. Right now, that process of deleveraging has slowed somewhat, but it will restart. That means additional pressure and more adjustment to come. For example, some sell-off of state-owned assets is likely, and greater emphasis on separating boards of director and communist party committees inside companies. The current co-mingling of politics and business is not delivering efficient growth. Few western companies have clarified what that will mean for their business.

How limiting will environmental degradation and pollution in China, India and other Asian countries be to keep up with the high growth rates?

In the China Dashboard framework, environment is one of the few areas where we do see improvement: air and surface water pollution levels have moderated. Environmental degradation is a real pressure on society and the political system. For anyone who has spent time in China it is easy to see how pollution is limiting growth. Air quality, food pollution with heavy metals and pharmaceutical contamination of food are so bad that it has become increasingly difficult to convince high skilled staff and employees to remain in China. Bringing down pollution has nothing to do with ideology: nobody wants to live in a toxic environment. Growth in China in past decades have relied to some extent on ignoring environmental controls, this is no longer possible.

What is your view on the Belt and Road Initiative (BRI) and with regard to which aspects should European companies be cautious about it?

BRI has a political aspect as a global campaign from Beijing, as well as a competitiveness aspect. Chinese companies in Belt and Road countries have financing advantages over Western companies. But this is expensive for Beijing, and over the past year breathless statements about the initiative have been pruned back. The Asian Infrastructure Investment Bank (AIIB) proposes a different, more diligent model of Chinese development financing, but even that organization is turning to focus more on domestic projects. This reflects the realization that development financing in many BRI countries is really hard. No surprise. There is a need for skepticism on whether China can change the pace of development broadly around the world.  

Where is the data for the China Dashboard coming from? What are the challenges working with that data?

One of the important criteria for Dashboard is that we do not preach Western ideas using Western data. We look at China’s self-stated objectives and use Chinese data to evaluate progress. All the data that goes into the Dashboard project is sourced from Chinese official statistics. We spent two years talking to economists, experts and Chinese officials in each of the areas we evaluate in order to assemble reasonable and reliable indicators of the general direction of Chinese progress. We add extensive methodological notes for people to see which data we are using. One of the most challenging things right now is that some of the data we selected are becoming less available. That raises the question whether we should just show a blank line indicating that Beijing made the choice to not make data available any longer and let our readers draw their own conclusions or whether we should switch gears and change our indicators in the middle of our undertaking. It is a subjective question that we grabble with. Whatever choice we make, we will make it clear in our quarterly write up of our findings to allow our readers to decide for themselves what to think.


Daniel H. Rosen is a founding partner of Rhodium Group and leads the firm’s work on China, India and Asia. He has twenty-six years of professional experience analyzing China’s economy, commercial sector and external interactions. From 2000-01, Dan was Senior Adviser for International Economic Policy at the White House National Economic Council and National Security Council. He is a member of the Council on Foreign Relations, and board member of the National Committee on US-China Relations. Furthermore, he is an Adjunct Associate Professor at Columbia University. Read the Recap of our event with him in Zurich here.

Anna Zwald is Project Manager at Asia Society Switzerland.

For all of our events we have the honor to welcome interesting and fascinating speakers. They are not just experts of a particular field, but often have access to corners of the world most of us don't. As part of our «Behind the Scenes» series we let them speak about their life stories and experiences.