Keynote Speech, Richard Li: 6th Chicago Asia-Pacific Business Conference

Oct 21, 2006, Chicago IL

Distinguished guests, scholars, fellow and aspiring entrepreneurs, it is an honor to speak to you tonight. I apologize that I can't be there in person.

As many of you know I was born and raised in Hong Kong - a city that has always deeply embraced, and owes it success, to the free market philosophy of Milton Friedman and so many outstanding thinkers at the University of Chicago.  Mr. Friedman has always been a great friend of Hong Kong.

Hopefully he would be pleased that my trust has recently bought a 50% share in the Hong Kong economic journal.

Like the S.A.R., the journal was founded on the non-interventionist principles of the Chicago school. My plan is give the paper the resources it needs to continue that legacy, particularly as China launches itself onto the world economy.

By increasing transparency, the journal and other media will have an important role to play in China's continued success.

This is because the story of China's economic development could be titled "The Good, The Bad and The Vague."

The good is clearly visible. You see the headlines everyday:

"The World's fourth largest economy."

"Almost a trillion dollars in foreign reserves."

Over 400 million people have been lifted out extreme poverty.

These are real achievements. And this has given the Chinese people a new confidence.

A poll completed this month by the Chicago Council on Global Affairs found that the Chinese see their country catching up with America in terms of global influence in 10 years.

And this confidence, at least the reasons for it, has spilled over into asia and beyond. 

Five years ago many predicted China would starve asia of foreign funding. Today China is the single largest contributor to export recovery in the region.  The mainland imports nearly 50% of asian exports. That is up from just 7% in 1999.

While China's demand for resources has its drawbacks, countries as far away as Brazil have benefited from higher commodity prices.

China's low cost of production has contributed to low inflation rates globally. Ask anyone who shops at Wal-Mart - and that is just about everyone in America.

And American companies are starting to see some returns on their investments - on the surface at least. The Bank of America has made a US$5.5 billion profit on a 9% share they bought in China Construction Bank just 15 months ago.  

Like the good, the not-so-good is clearly visible.

China has a growing inequality gap: the government believes some 15 million people migrate each year from the interior to the coasts in search of jobs.  

The widening trade gap with the U.S. And Europe is large and growing larger.

75% of all pirated goods confiscated by U.S. Customs are reportedly made on the mainland.

These issues are not hidden. China's leaders are aware of them. And they are confronting each of them - too fast for some, not fast enough for others.

However, for investors, the real obstacles lie not in the visible, but in the vague - what goes on behind the scenes. The decision-making process is very unclear. And the result is often mixed messages.

If you look at the Bank of America profit figure, that is very real. However, have they really achieved their objective of entering the Chinese market? As the F.T. pointed out recently many banks had been led to believe they were entering the China market to do business.

Consider the case of a recent leveraged buy out.

In 2005 authorities appeared to be inviting foreign investors to play a role in reforming state-owned industries. In October, US private equity group Carlyle announced that it had agreed to pay $375m for 85 per cent of Xugong, a state-owned machinery company in Jiangsu province. Ten months, later, Carlyle is still awaiting approval and may have to reduce its stake to 50%.

We have seen similar abrupt policy changes governing the property market and the Shanghai stock exchange.

Part of the problem is the size of China and where they have come from.

Another part of the challenge, according to analysts, is the historical tug of war between reformers and economic nationalists. At the moment the latter may be gaining ground.

China, of course, is not alone in that battle. As our global resources become more scarce many nations are startng to become more nationalistic in their economic behavior.

We saw that in the U.S. in the backlash against the attempted takeover of the oil giant Unocal by a Chinese firm. In Europe, France stepped into to stop an American firm from buying Danone Yogurt - and Danone was started by a greek national.

These issues were in the air during U.S. secrectary Henry Paulson's recent visit to China. The treasury secretary warned that China faced serious "downside risks," as the economy grew bigger and moved from a centrally-planned economy to one that is market driven. He called on China to counter those risks by accelerating reforms across the economy.

In a country of 1.3 billion people, again, we must all accept that that will not be easy.

In conclusion, China's emergence as an economic power is as complicated as the country itself. As we look ahead there will be continue to be winners and losers, false starts and far reaching progress, great frustrations and great profits. Such are the facets of every great country that moves in step with the free market - or tries to. 

Thank you.