Chicago Booth Magazine Chicago-style Economics in China

Having been told by Tofler’s Third Wave that the 21st century was going to be the century of biology, Qi Bin, ’97, came from an undergraduate physics degree at China’s Tsinghua University to pursue a PhD in biophysics at the University of Rochester. While there, he realized that his real passion was to study America’s advanced economic system.

That prompted his application to Chicago Booth. At a time when the average Chinese salary was the US equivalent of less than $1,200 a year, a big problem was how he could finance his MBA education. Associate dean for global outreach Bill Kooser, ’81, then associate dean at Booth in Chicago, suggested that Qi move from the MBA Program to the PhD Program. Two days after Qi applied to the doctoral program, the school offered him a full scholarship. But after two weeks of soul searching, Qi turned it down. He didn’t want to be an academic. He bit the financial bullet, struggling to find money for the continuing tuition costs and borrowing money from everyone he knew, and completed his MBA. He received an offer from Paribas Capital Markets upon graduation and moved on to join Goldman Sachs.

“I believed that China someday would have to build a more advanced economic system,” said Qi, now executive vice president of the 10-year-old China Investment Corporation (CIC), the country’s sovereign wealth fund with more than $200 billion in registered capital and $810 billion in domestic assets. “Modern China would need people who understand free-market economics, and I could be one of them.”

Qi joined CIC in August 2016, having previously moved from investment banking in the United States and Europe to spend 16 years at China Securities Regulatory Commission, the main regulator of the securities industry in China. Since joining CIC, whose mandate was to invest overseas, Qi has pursued a two-pronged investment approach. He looks for opportunities to expand CIC’s direct investment overseas. At the same time, he is adjusting the investment mix, boosting alternative investments such as private equity funds as well as optimizing public market portfolios.

“For direct investment, we have to identify targets that have synergy with China’s consumer market,” Qi said. “It also has to benefit the home country or the companies we are going to invest in. That might be a joint venture or a joint fund, something we are talking about right now—work with a Midwest pension fund, for instance. We want to serve as the bridge to integrate China into the world economy.”

While not yet actively talking to any Midwest pension funds, Qi and CIC are actively looking for opportunities. Specifically, Qi is looking at manufacturing investment in the Midwest. John Deere, for instance, sells 10 percent of China’s tractors, but that accounts for only 2 percent of their global sales. Chinese farmers call John Deere the “BMW of tractors,” which are beginning to gain sales momentum in China and have a bright future. Today, GM sells more cars in China than in the US.

There is also China’s reputation for high-profile infrastructure projects. The world’s largest bullet-train network was built in China, for instance. The largest cement plant in Azerbaijan, built by a Chinese cement company, also promotes the country’s manufacturing and infrastructure capabilities. The latter project could factor into China’s ambitious One Belt, One Road initiative to recreate the Silk Road, bringing it into the open-market technology age and producing goods more cheaply in other Asian countries.

For all its prowess, “China needs to upgrade its industries,” Qi said. “Japan, Israel and Germany are probably all 5 to 10 years ahead of Chinese industry.”

Qi’s strategy at CIC will enable Chinese companies to learn from their overseas counterparts, stimulate the domestic economy, and find new markets in China for the investment targets. It also potentially plays well with President Trump’s promise to add more jobs in American manufacturing, particularly in the Midwest region and Rust Belt.

“The rationale is that the Trump administration promised a lot to the people there and has to deliver something,” Qi said. “China and the United States have a lot of ways to collaborate.”

There is much talk about how far China’s controlled economy will go toward free-market liberalization, the backbone of Booth-style economic thinking. Qi sees no contradiction between the two. In fact, he feels that China’s economic development over the past three decades is the “realization of Chicago-style liberalization.”

“We liberalized our agricultural sector in the late 1970s and 80s,” he said. “I read a study when I took classes with professors such as Merton Miller and Sam Peltzman, PhD ’65 (Economics), ‘Who Will Feed China? Wake-up Call for a Small Planet.' The thought was that there would not be enough food for the then 800 million Chinese, and if we fed the millions of people who lived in China, there would be no food left for the rest of the world. We have 1.3 billion people in China today, most of whom are trying to lose weight.” China subsequently liberalized its electronics and automotive industries, each now the world’s largest; healthcare, education, and financial sectors should follow.

Along with liberalization comes more openness. On June 6th, CIC will host its first Beijing forum, to become an annual event, where Chinese and international executives in healthcare, consumer products, manufacturing, technology, media, telecom, and other industries can discuss and negotiate potential relationships.

“There is no such thing as a completely free economy,” Qi said. “In any economy you have regulations and you have to balance equity and efficiency. It’s always about degrees of freedom. China’s story is an example of how the Chicago idea works in a gradual and pragmatic approach.”