Six Theories to Explain China's Future Growth - with De Dao Founder Luo Zhenyu

What will shape China's future? Luo Zhenyu (罗振宇), founder of De Dao - the popular Chinese knowledge sharing platform - lays out a series of frameworks for us to better think through and understand core factors driving China's growth.

Topics addressed include the evolution of opportunities in the Chinese market, whether China faces a growth ceiling, and how China can play a positive role as growth catalyst for other developing economies around the world.

Article translated exclusively by The Harbinger.

Translated by Shaolong Lin, Yang He, Zhixiang Liang, Ling Zhang, Juzhi Zheng, Xuehe (Echo) Zhang; Edited by Liang Chen.

China, with approximately 12 trillion dollars GDP, is the second largest economy in the world. 115 of the Fortune 500 Companies are now from China. The country also has the largest middle-income population and highest number of college students in the world.

However, along with good news comes a growing anxiety. In the past, when we spoke of business, we thought about competition. Today, before you have a chance to get ready to compete, your consumers have already evolved to become a new “species”. The old business theme was to compete with your opponents; the new business theme is to go after your consumers.

On one hand, the strong grows even stronger; it seems impossible for some to catch up to the leaders. On the other hand, old rules are being broken down and new rules are being created every day. So it seems that sooner or later that we will all be surpassed and forgotten.

During the past year, I asked numerous people about their opinions on this growing anxiety. Six problems figured prominently:

1. If we are not one of the existing leaders, do we even get a chance to play ball?

2. If we are new to the game, how do we find new opportunities and gain an edge in the market?

3. If we can not keep up with the changes, will we be kicked out of the game?

The three questions are good ones. However, there are three more seemingly distant questions, which in fact have far greater effect on us.

4. Will China ever hit a growth ceiling?

5. Is the economic growth in China sustainable?

6. Can China to build a beneficial growth environment that integrates well with the world

So, let’s answer the first question - is there any place for new players at the time when the large becomes larger and the strong gets stronger?

As Sequoia Capital China’s founding partner Neil Shen told me, while what we see might be described as a stage play, we fail to notice that the stage itself is becoming larger. Although the protagonists’ images are expanding under the spotlight, there are more and more characters away from the spotlight coming up to a larger stage.

The average price of a smartphone is 2,000 RMB, but the price of a car amounts to at least hundreds of thousand RMB. Therefore, the smart car industry is larger than the smartphone industry, and it will be a market that worths trillions RMB. There will certainly be a couple of magnates in this industry. And, similar to the smartphone industry, there will certainly be Chinese companies.

As we look further to those new fields, from AlphaGo to AlphaZero, they all seem to tell the story of Western technology beating Eastern masters and wisdom. Meanwhile, however, it is the Chinese that author the most theses on artificial intelligence. What is this but an amazing opportunity!

Mr. Liu Run (CEO of Run Mi), asked me a question: did you notice something strange about the origin of some successful companies this year? They have all started from second-tier and third-tier cities. They did not build up their business in first-tier cities, but came from behind.

Logically speaking, first-tier cities have larger population, faster information dissemination, and better demonstration effect, but why were these successful consumer brands born in the second and third-tier cities?

There are many answers to this question, but all of them have to do with China’s unique attributes, especially in terms of its pattern of population distribution. The bulk of China’s population located in these second and third-tier cities, which represent a typical Chinese lifestyle.

A consumer product can only be reproduced in a larger scale after its price, its consumption habits, and the maturity of its supply chain that have been proved successful in these cities.

Although these cities are not as large as their first-tier counterparts like Beijing, Shanghai, Guangzhou, and Shenzhen, they possess considerably large population and market size. Meanwhile, there are not as many options and competition in these cities as there are in those first-tier cities. Therefore, they naturally become the testing ground for consumer brands.

Mr. Li Feng from FreesFund noted that when we extend the time range of our views, there have been 3 consumption upgrades worldwide in the past century. Before World War I, Britain was exporting Lipton to the whole world, as well as some alcohol brands; after World War II, the U.S. exported Walmart, KFC, and McDonald’s. In the 80s, Japan contributed Sony, Panasonic, and other brands. Based on the growth speed of the Chinese economy, it is viable that there will be a place for China in large global consumer brands in the future.

"It is viable that China will develop large global consumer brands in the future." (Source)

Let me give an example. Many of us have been talking about Heytea in 2017. In fact, there is another tea brand called Guming. It opened its first store in a small town in Taizhou, Zhejiang Province, 7 years ago, and now it has opened its 1200th branch. Can you believe that? What, then, is the story behind all this? It is actually all about small but detailed knowledge about consumers.

For example, the founder found that the store did not necessarily need to be well decorated, but the lighting had to be bright enough to be the streetlamp of the town. While the other stores had dim lightings, his store had bright lighting. Customers naturally perceived his stores to be better and cleaner.

Is this knowledge difficult to acquire? One should not pity oneself for not being in big cities, not listening to popular courses on entrepreneurship, or not meeting hotshots in the Silicon Valley, because such knowledge only comes from day-by-day knowledge accumulation, from practice.

This idea is one of my big theories this year. I call this “The Multiple Units Theory.” How so?

In the past 40 years, China’s economic development is often associated with the saying that “a train is fast only with a good locomotive.” Those who succeeded first led the others to succeed later, the developed areas led the underdeveloped areas, the coast led the inland, the first-tier cities led the second- and third-tier cities, the elite led the commoners. In this framework of thought, we have seen China as a traditional diesel locomotive, with the head pulling the rest of the cars. However, as we see from all that has taken place in 2017, China is obviously a multiple-unit locomotive, with every car driving itself forward.

In the case of the diesel locomotive, the more carriages there are, the slower the train becomes. On comparison, in a MU train, the more carriages you have, the more power generating units the train will pertain, and thus the train will not slow down as every carriage is contributing power. That is the metaphor for our first theory - the MU train theory.

Everyone is leveraging the opportunities provided by this new era, while at the same time contributing new values and resources. Using our MU train theory, we could have a better understanding on the rise of China.

Mr. He Fan(Economist professor of Peking University HSBC Business School) says, that China is entering an era of “grassroot” innovation. It’s like an MU train: our growth is no longer dependent on the power of the locomotive. Instead, the power is provided by every single carriage.

You might think these types of innovation are too simple to an extent that they almost seem unpalatable and boring. But just like what Peter Drucker has said, that the best compliment an innovation could receive was people saying, “wow, that’s apparent. Why wasn’t I the first one to come up with this idea?”

Indeed, this is a time when the strong gets stronger. But still, there are plenty of opportunities available for traditional industries and ordinary people. This is the Chinese opportunity, and this sums up my first theory: the MU train theory.

The MU Train Theory (Source)

Now we meet the second question: when we are facing tons of opportunities, will the rules in the previous games still play out? Or do we need to come up with new rules?

Over the past two years, a company called Kuaishou has been expanding rapidly. In December 2016, DAUs for Kuaishou exceeded 30 million. This year year when I met Kuaishou’s CEO Su Hua, DAUs had surpassed 100 million.

What does this mean? By any measure, Kuaishou has already become one of the most popular apps in China. I asked Su Hua about the reasons behind Kuaishou’s extraordinary growth. He told me a story about this old man who has been playing an Erhu (a traditional Chinese musical instrument) on Kuaishou every single night for nearly an entire year.

“One day, I suddenly found something wrong. When one plays Erhu, he or she usually holds the bow with the right hand and the string with the left. However, this man was doing the opposite. One possible explanation is that he is left-handed. Another more plausible explanation is that this old man is living alone, single or divorced or his wife in heaven. So he could only take selfie videos.”

This old person might have a wechat account, might even have 500 contacts on wechat, though not everyone in that 500 would be willing to talk to him. Loneliness surrounds him every day. But everyday at 9pm, when he live streams himself playing on Kuaishou, he has around 60 thousand fans who would request songs or buy him virtual gifts.

The value of Kuaishou is to create new connections for the market. In a huge country like China, new users are continuously joining the Internet. Each generation needs a new way of connection, and that is the opportunity captured by Kuaishou.

Let’s look at another video on Kuaishou. There are some electricity workers having lunch while sitting on a power line, thousands of meters above the ground, and 500 KV of current running through the lines. There are many similar videos of this kind on Kuaishou. They capture moments and lifes that are almost forgotten by us because we don’t see them in mainstream media. TV photographers could not climb that high. Why are we able to see them now? Because every worker has a smartphone, and there is network connection even in remote mountain areas.

Those who find it the most difficult to connect to the Internet world, to be recorded, those who are at the bottom of the society… these are the people who’ve managed to connect to this modern era through short videos. Kuaishou has seized this opportunity and provided opportunities for these people.

Young people in second or third-tier cities are connected now, thanks to the growing internet coverage. They are starting to show their presence in society, with their values and tastes completely different from what we are familiar with.

Whenever there are new generations of people getting connected to the Internet, there sprout new business opportunities to cater to their special needs and tastes. We call this people “new commercial species”.

Wu Sheng(co-founder of Luojisiwei) raised the concept of “new species”. However, from my point of view, a more valuable concept from his idea of new species is “super consumers”. As more and more new species entering the market, we should adapt our way of thinking from the Internet traffic-centered to super consumers-centered.

Previously, we thought Internet traffic should the most important focus of a business. A website wants more views and traffics while small shops want to open in areas with a dense population. However, behind this type of thinking is actually an indifferent mindset. Whoever you are, as long as you are in my business world, you are a number rather than a living human. Traffic is a word that conceals the diversity of the real world.

I am not saying that thinking in terms of traffic is wrong. Over the past 20 years, we have been benefiting from the demographic dividend of the Internet. A tremendous amount of people have been connected to the Internet, from the real world to cyberspace. Thinking in terms of traffic is therefore suitable for that era of exponential growth.

Now, this way of thinking isn’t enough. The cost of traffic has grown more expensive since traffic is monopolized by tycoons (like Tencent, Alibaba and Facebook). Under such circumstance, the only way for a startup to stand out is to change the rule of game. We now have to think in terms of super consumers. Not how many users we have, but how many super consumers we have.

"Super consumers... we want them to be proud of being our consumers." (Source)

The idea of super consumer was first brought up by Eddie Yoon (link here). It is, however, the Chinese market that gives the idea of super consumers a greater stage. “The purpose of business is to create and to keep a customer,” Peter Drucker, the legendary management guru, once said.

Singapore is a great example. Even though she is a small city state, she provides clean streets, a sound legal system, a loose regulatory environment as well as a resourceful global connection. People come to Singapore to enjoy the environment while paying a small part of their income as taxes.

However, is creating a better environment and services for consumers enough? That’s not true. Thinking in terms of super consumers is not a shift in business models, but a shift in business culture. We want our super consumers to be proud of being our users. Go back to our previous example of city, we are not only providing the residents a better infrastructure, but also to make you feel proud when you are living in this city.

Let’s come back to our previous question. For newcomers, how do we seize the new opportunities?

This question reminds me of the Amazon rainforest. It encompassed 7 million square kilometers, and is the world’s largest tropical rainforest. There are myriad types of animals, insects and plants, that do not exist anywhere else in the world. China is very similar to the Amazon rainforest. It has a large scale and great internal diversity. This is the benefit of a large ecosystem. No matter how many towering trees and groups of fierce animals, there still exist new opportunities. And there are two types of opportunities. One is to be the connector between the species, and the other is to maintain an independent ecosystem.

This sums up to my second theory: the Amazon rainforest theory.

The Amazon Rainforest Theory (Source)

Now let’s look at the third question: everyone is saying that the world is changing rapidly, will one actually become a loser if he or she is unable to follow the change?

To answer this question, let’s look at one area that experienced most rapid changes in 2017 - the new retail industry. The change is so fast that nobody has come to define what it actually is, so we just simply added “new” in front of the traditional retail concept, and call it new retail.

This year, in new retail industry, we have been only laying down the foundations and coming up with the strategies. The real execution will soon happen in the next year.

This concept of new retail may sounds obscure, but its essence is really simple - it’s all about efficiency. New retail aims to enhance the efficiency of purchase behavior in every aspect.

"Enhance the efficiency of purchase behavior in every aspect" (Source)

There are multiple ways to build up such efficiency - data algorithms, payment, logistics, inventory & warehouse, or even creating new scenarios.

No matter what method is used, they essentially let consumers to purchase and get what they want immediately. You can complete payment right at the moment when you have the desire to buy, and the delivery finishes before you realize you don’t actually want the product.

The increase in efficiency happens gradually, but when you realize it, these incremental improvements in efficiency have accumulated enough to change your lifestyle already.

This is a war that happens in every vertical segment of the retail system. At the top, there are the technologies - AI, data, drones, automobiles, robotics; at the bottom, there are the small convenience stores downstairs at your apartment building. Every segment is stimulated and aims to become leaner to win this war of efficiency.

You may think that since this is a war of efficiency, would it be simpler to make every step of operation faster, faster tracking, faster payment, faster delivery, etc? However, it is not that simple. There are even better and faster ways.

In fact, we can even improve efficiency in human minds. In the speech last year, we proposed an idea of “the war of cognition”.

The price war, no matter how heated it is, relies on actual products in malls and supermarkets where the battlefield resides; however, the battlefield of the cognition war is inside the people’s mind. The purpose of a price war is to let the customers choose my product after careful comparisons of prices and thus win the competition with a lower price, yet the war of cognition is to let consumers only know and trust my product and thus eliminate the competition completely.

It is all about the efficiency. We just mentioned the speed of product delivery, payment, and even recognition. But here emerges a question - in this field where speed and efficiency is the key focus, did we eliminate those who are too behind to keep up in this industry?

In 2017, no matter what your understanding of online business is, whether you are operating a traditional supermarket or a family-run shop, you are being pulled up to this huge trend of online business by the influence of capital, by the investment made by companies like Alibaba or Tencent.

Last year, we were still struggling to figure out a way to transform our companies online. In the year of 2017, however, as long as you embrace the enabling from the digital world, you are already running an Internet company.

For example, in the content industry, many content curators felt anxious about this round of Internet transformation. What they don’t know is, as long as you have real talent and genuine knowledge, companies like “Dedao” are so eager to hunt for you.

This is the third question for today: will we be eliminated if we fall behind the rapid changes? And we call it the Digitization Theory.

The Digitization Theory (Source)

What does that mean? This world is digitizing rapidly. New Retail is just one of the many examples of digitization. Previously, we thought the digital world was a mountain, that needed to climb over. In 2017, however, we came to realize that the digital world would come to us and empowered us.

This is one of the most important theories. In the past few years, we are afraid of seeing new concepts: the Internet way of Thinking, Freemium, the Sharing Economy, Big Data, Artificial Intelligence, etc. We are afraid of staying behind because the world is changing so rapidly. However, when you understand the Digitization theory, you will come to realize that there are two trends that will remind constant:

First, however the industry is evolving, the direction is toward high efficiency. The New Retail is simply allowing more people to get an abundant commodities with a lower price, more convenient ways and better experience. This is irreversible.

Second, the division of labor will become extremely detailed. The experts will focus on their specialized areas. They will not be left behind, and this is an irreversible trend as well.

When you understand this Digitization theory, you will no longer be scared by new buzzwords. When you become the expert in your own area, you will receive the entry ticket for the stage. There’s no need to worry about being left behind. This sums up our Digitization theory.

Now we are going to answer the fourth question: China is a country with a great population but limited resources. Will China ever encounter a growth ceiling so that our previous analysis would be rendered useless?

I asked my friends what the most important moment in 2017 was? Shi Zhan from China Foreign Affairs University thought it was October 20th. On that day, the Tanzanian government announced its approval of the Bagamoyo port project (in collaboration with a Chinese construction company). This port is projected to be finished within 3 years, and once it’s finished, it will have a throughput equivalent to the throughput sum of all the ports in eastern Africa. In fact, this project is one of the many Chinese overseas construction projects. But what makes it so special?

Let’s take a look at the map of Tanzania.

Map of the Port Bagamoyo (Source)

The red dot in the map shows the location of the Port Bagamoyo. It is connected to Tanzania Zambia Railway, which was constructed by China in the 1970s. The quality of this railway is not bad, but it is currently not operating very well. There’s no big city along the railway, and each week there are only two to three trains running at a slow speed.

Yet, the land along the Tanzania Zambia Railway has another name: Southern Agricultural Growth Corridor of Tanzania. There are 44 million hectares of arable lands while 80% are currently undeveloped. When the Port Bagamoyo project is completed, those arable lands could be connected with the whole world, especially China. What would be the implication? Just think about it:

Arable land in China is limited. China has insisted on the “red line” policy, that is, at least 120 million hectares of rural land has to be reserved for agricultural use.This is the base requirement for food security in China. Among those arable lands, 37 million hectares are reserved for Maize, which is used as animal feed. Imagine what would happen if we move these reserved land for Maize to Tanzania, using the arable lands there to grow Maize. This wouldn’t affect the food security in China, while in China that means 37 million hectares more arable lands.

By making such a connection, China won’t be the only country to receive the benefit. This is a reminder for us, that when you think about growth in China, you should not be limited to China itself. We have to discuss the question about growth ceiling from a global perspective.

The question above has been addressed in the book Connectography by Parag Khanna. In his book, Parag Khanna believes that the world is no longer blocks of territories connected by borders. Instead, it is a network knitted by infrastructures. The world is becoming more and more like the Internet.

Two superpowers, China and the US, are thinking within two completely different frameworks. In the eyes of the US, the balance of power among superpowers is like a boxing match. There are winners and losers. On comparison, China sees it as a “Tug of War” game.

Boxing matches are competition among the powerful players. There is a bar above which you are allowed to play in the game. “Tug of War” game, on the contrary, is a game of collaboration. Everybody could participate and contribute to the game.

The goal of Boxing matches is to defeat the competitors, while in the “Tug of War” game we only want to pull the high value part towards ourselves. The key for winning a boxing match is to make yourself stronger, while winning a “tug of war” game we need to make more people to stand by our side. In a boxing match, loser must leave, while in a “tug of war” game we want everyone to stick on the line.

We are no longer playing the boxing game, because the world has come closer and gradually mixed into one single entity. From a “Tug of War” game perspective, all the population, production power, resources, capital and technology reside in one single supply chain. The balance of power is no longer a matter of life and death, winners and losers, but instead a matter of who takes the lead and by how much.

In the game of Tug of War, who takes the lead? From our previous experience in the game, we know that the side with more weights and unanimity wins. In our Tug of War game, the size of population, market and industry are the key determinants. Now you understand why China is actively taking lead on infrastructure construction globally, and to maintain its global supply chain.

When you understand the Tug of War game, you will come to understand that China and the US, the two superpowers in today’s world, may not be competing in the same arena. They see two completely different images, and are applying two distinct frameworks.

"The opposite of a fact is falsehood, but the opposite of one profound truth may very well be another profound truth" (Source)

I’m not saying that between the two different logics, one is always better than the other. Niels Bohr once said, that “the opposite of a fact is falsehood, but the opposite of one profound truth may very well be another profound truth”.

This is our “Tug of War” theory. When it comes to our question about growth ceiling in China, if we are thinking in terms of a matching game, this problem needs to be addressed. However, in a world fully integrated by one single supply chain, in the game of “Tug of War”, this problem does not matter at all.

The "Tug of War" Theory (Source)

Here’s our 5th question. Is China’s Economy sustainable?

This is an important question even though it sounds like a macroeconomic problem, because it’s relevant to every one of us. There has always been a voice saying that the development model China is not unique and therefore is not sustainable. Akamatsu has a famous view called the “flying geese paradigm”; that is, as labor cost increases, industries in East Asia will be shifted to nations with lower labor cost. Initially Japan took the industry shift from the US, afterwards the Four Asian Tigers and finally China. That’s why China has become the world factory in the 21st Century. From Akamatsu’s point of view, every country is a transfer hub for industry that would finally pass the industry to other countries.

There are two direct takeaways from this model. First, China is not the leading goose in the “flying geese paradigm”. Despite the fact that China has the greatest scale, what China has are low-end industries transferred from the leading geese. Second, as the cost increases, the name of “world factory” will be transferred to other countries. And here comes the problem of sustainability.

Indeed, over the past decades, Chinese people are living in such an anxiety: even though our economy is growing at a tremendous speed, our cost is rising in the meantime. Will our industries be shifted outside? Does that mean the end of a golden era for China?

Now we are at the end of 2017, and when we look back into the past 10 years, we found out that the labor cost in China has raised for 5 times, close to the cost in developed countries. However, the shift of manufacturing towards China has still not been slowed down. Why didn’t China fall into the prediction that industries will finally shift to lower-cost countries?

Shi Zhan, Professor of Foreign Affairs University (Source)

Shi Zhan from China Foreign Affairs University offers a new dimension for looking into this problem. In the past decades, the speed of changes in industry has been accelerating. A revolutionary product in the first Industry Revolution was the train, while in the second Industry Revolution it was the car. For our current decade, the smartphone is a revolutionary product.

How long can we keep a smartphone before we get a new one? Approximately 1 year. Remember a brand called Nokia? When it was acquired by Microsoft, the CEO of Nokia Jorma Ollila once said, that they “did the right things, but the results were still weak”. From a industry evolution perspective, we might be able to find the answer to our previous question.

What was the proudest thing Nokia had when the demand for smartphones was high? Nokia owned a complete assembly line for every part it needed for its smartphones. That means Nokia had a complete control over every single details of production, and it had a strong hand over cost control. However, what is the most important thing for smartphone manufacturing? Innovation. A complete ownership over the assembly line inhibits Nokia’s ability to change since the cost of making change is huge. So, why Nokia failed? It failed because of its heavy assets (assembly lines).

When western countries enters the Innovation Economy, there is a strong demand to outsource the production process so that they won’t bear the cost of product line upgrading. In this way, they are able to innovate and generate ideas faster.

In the previous decades, the basis of innovation was technology, and technology itself was a barrier for entry. Nowadays, the basis for innovation is concept, and concept is easy to be plagiarised. The only barrier of entry for today’s business is the speed of innovation. As long as I am innovating faster than you, you will stay behind.

Take an example of a royal imperial kitchen. If you are the expert in one type of dishes and the emperor likes it, you will be good. When you only do this type of dishes, say Sichuan cuisine, and you become efficient in doing this. This is the efficiency brought by specialization. However, one day the emperor decides that he does not like Sichuan cuisine anymore but would prefer French cuisine. Then you will lose your job because you don’t know how to cook French dishes. This is the inflexibility brought by specialization. High efficiency and high flexibility is in contradiction with each other.

Who resolved this contradiction of specialization and flexibility? In today’s world, only China is capable of doing it.

What is the extent of specialization for Chinese companies? As an example, a simple lighter has 28 parts. In a village in Zhejiang, there are 28 specialized factories for it, one for each part. They produced the parts and then sent them for assembly. The lighter that costs you 1 RMB could have a production cost as low as 0.01 RMB. When Shi Zhan was in Zhejiang, he saw some factories manufacturing telescopic antenna; one factory was responsible for only one part the that antenna. This is high specialization and efficiency.

Meanwhile, myriads of highly-specialized manufactures make up a humongous and efficient supply chain network. They have their unique supply-and-demand relationship among themselves that once the demand from upstream is changed, they can adapt quickly and ensure the flexibility.

Why is China the only country capable of doing this? Two special factors about China determines China’s unique ability to balance flexibility and specialization: a large scale, and a right timing.

Yuquan Wang, investor and lecturer in Dedao platform, has always held an idea about the future division of labor at a global scale: American technology, Chinese manufacturing and a global market. FT Chinese columnist Fan He shares a similar opinion from a different perspective: when China took the industry transfer from Japan, the environment for international trade has changed. Previously it was mainly inter-industry trade; that is, trading different types of commodities, exchanging finished products. Now, however, is mainly intra-industry trade. When Apple wants to manufacture iPhone, the supply chain is across different countries, and China owns part of it. Utilizing its tremendous scale that has both flexibility and efficiency, China is very well positioned for the intra-industry trade.

This sums up my 5th theory, and I call it “the last stop theory”.

Remember the question I raised at the beginning of this session? Is China’s Economy sustainable? What is the unique advantage of China? China has a supply chain network that has both flexibility and efficiency. Therefore, China is not one of the stations of the global manufacturing transfer. China is the last stop.

The "Last Stop" Theory (Source)

We have just went through five issues, yet there is still one left that is worth noticing, whether or not China could create a benign global development environment.

Why should we care about this issue? We have been talking about opportunities in China. Given the fact that there is no ceiling for China’s growth and there’s something special about this country’s strength, how should other countries react when China becomes the one true superpower？As we all know, we (China) can only act well when the entire environment is friendly. In other words, is it possible for us to build beneficial relationships with the rest of the world and what kind of roles should we play in order to achieve it.

In the book “The Hub”, by Shi Zhan, there is a key judgement about China, “China has always been the independent variable of the world order.” This is essentially important, because China is not just playing an essential role in today’s world, historically speaking,China has always been the key player in the world.

What is an “independent variable”? The change of an independent variable will affect the entire system, whose change makes a part of the creation and evolution of the system. China is an independent variable in the system called World.

Some of you might still remember the saying that China is unfortunate. Everything we buy is more expensive and everything we sell is cheaper. It seems to be a weakness of China. However, from another perspective, this world cannot be how it is without China. And, this is the role, as an independent variable, we are playing right now.

But, being an independent variable only indicates the importance of China, and it is still not clear about the position China plays in the global structure. This position is not taken from competitions, it is a demand towards China from the gradual evolution of the world structure.

Why don’t we look at a regional structural shift after the WWII. Many African nations gradually gained their independence after the WWII. To be honest, economic development at the time was prosperous in Africa. It was a result of the involvement of western countries. They wanted resources and economic hinterland, which were exactly the things Africa could provide.

By the time it was in the 1970s when the Oil Crisis happened, and Western economies grounded to a halt. Western demand for raw materials dropped dramatically, making African countries experience terrible financial difficulties. What happened next was clear, with a series of reforms from Reagan to Thatcher, the western economic crisis was over and began to experience years of prosperity in the mid-80s. However, at the same time, it was the most miserable decade of African modern history.

Because of the dramatic shift on western countries’ economic structures, they arrived at an era of economic innovation, where over 70% of the GDP came from the service sector, and the demand dropped dramatically. The gap between these western countries and those raw material based developing countries was huge. Who is going to fill this gap? In the 90s, this role was played by China.

Understanding this process of evolution, we could easily understand the global role that China is playing today. Because of the gap I just mentioned, western countries were unable to form direct economic and trading relationships with those developing countries. China became a necessary node in the global economic and trade cycles. It is not some theoretical deduction, it is an established fact. China is becoming the intersection of global economic system, the only way where resources, information and capital must be passed, a router and a hub, mentioned in Shi Zhan’s book.

As a hub, we are exporting capital, manufactured goods, infrastructures and employment opportunities to those raw material-producing countries.

As a hub, we are providing western developed countries with assorted industrial manufactured goods and opportunities for innovation executions.

In the 2016, China invested 36.1 billion US dollars in Africa, which makes up 39% of total foreign direct investment in the area, more than any other nation’s direct investment amount. It was not just a simple investment, China is building infrastructures in Africa, such as railways, roads and telecommunication systems, to connect mines, villages and towns in Africa with the rest of the world.

Standing on the western countries’ point of view, they are exporting “order” through China. While, standing on developing countries’ point of view, they are sharing the prosperity of globalization. Those are merely the main functions of China being the hub of the world.

The role of a hub was determined both by China’s geographical location and its mega-scale, a position and responsibility the world expects China to play. Understanding the abilities and responsibilities, we are capable of creating a benign ecosystem, not creating zero-sum game of the existing superpowers.

This is the last question this talk is trying to solve. I name the solution as “The Hub”.

The "Hub" Theory (Source)

Today, we have answered six major questions. Within the six subtopics we have explored, we have recognized six opportunities for China. It is only a start. I am pretty certain that we won't just easily come to some ultimate solution. Our generation will keep exploring these questions. These explorations are not abstract, but in fact have everything to do with every decision we are making today.

This article was originally published by De Dao on January 1, 2018 via the Wechat Public Account of De Dao.