Jul. 2015 No.13 ISSN 2095-4212 www.boaoreview.

com

The Blue Economy: How

China Can Inspire Africa
Gunter Pauli
Founder of ZERI; Author of the Blue
Economy

Industry 4.0: A German

Perspective on a Global
Challenge
August-Wilhelm Scheer
July 2015 October 2013
Founder of IDS Scheer

拾月号 Simple Rules: How to Thrive

in a Complex World
Kathleen Eisenhardt
S.W. Ascherman Professor at Stanford
University
Don Sull
Senior Lecturer at the MIT Sloan School
of Management

The Greek Region of Attica:

Dedicated in Serving the
Common Interest of Growth
Rena Dourou
Regional Governor of Attica

An Important Step Toward

RMB Internationalization
Michael Zhu
Senior VP of First Eagle Investment
Management

Reining in the
Bull Market
A stock market listing should not only eliminate economic
bottle-necks, but also deliver rapid capital appreciation
as well the solid foundations for future growth. The
regulatory authorities must achieve a sustainable level of
market climb, while companies need to deliver stronger
results to justify their rising valuations.
Contents

Focus

032
Jimmy Chang: For China the bull market is a welcomed stimulus for the economy, but it could
quickly turn into a double-edged sword. Parabolic market surges eventually fizzle out. Chinese
authorities need to bring down the market’s angle of ascent to a sustainable level by offering
alternatives to China’s massive savings.

Li Shanquan: Although the rate of return for China’s stock market has been the highest in the
world so far this year, the market mechanisms for the allocation of capital should be improved to
better promote real economic growth, and regulatory bodies have to be calculating about where
they do and do not get involved.

016 Macro Economy

August-Wilhelm Scheer: The Industry 4.0 age definitely has begun, which implies deep
changes in the drivers of business management for industrial companies. The new features
of success will be individualization, decentralization, self-direction, service orientation and
transparency.

038 Finance
Michael Zhu : To achieve the internationalization of the RMB, interest rate liberalization and the reform
of China’s monetary policy framework are steps that cannot be skipped. Even after implementing those
reforms, the whole framework is still worth testing out for at least one global business cycle.

Development 070 Gunter Pauli: The Blue Economy philosophy proposes that everything gets used,
nothing is wasted. It concentrates on generating more value with readily available
resources embracing innovations in technology, and also adopting new business
models and payment system that ensure that more money remains circulating in
the local economy.

Business 106 Kathleen Eisenhardt & Don Sull: Simple rules can tame the complexity that many
people and businesses face. By understanding what simple rules are, why they work,
and how to develop them, people start coping more effectively.
Contents

Information Macro Economy 宏观

010 The Report on Development
of Rural Finance 2015
012 Internet Finance Report 2015
014 BFA Members’ Club Event:
Mixed Ownership—Rekindling
the Reform of State-Owned
Enterprises
016 Industry 4.0 or the Industrial
Big Change: A German
Perspective on a Global
Challenge
August-Wilhelm Scheer: The Industry
4.0 age definitely has begun, which
implies deep changes in the drivers of
business management for industrial
companies. The new features of
success will be individualization,
decentralization, self-direction,
service orientation and transparency.
020 FTAAP Benefits Global Economy
Bob Carr: When China and Australia
finally agreed on a bilateral free trade
agreement last year, there was really
just one problem. For all the benefits
to China and Australia, the rest of
the region misses out. This is why a
Free Trade Area of the Asia-Pacific
(FTAAP) makes so much sense.

Macro Economy 宏观

022 The Greek Region of Attica:
Dedicated in Serving the
Common Interest of Growth
Rena Dourou: China’s Silk Road
Strategy will offer opportunities for
global development for China, Europe
and in particular Greece. With its geo-
strategic location, infrastructure and
tourism potential, Attica aims to
play a decisive role in new
regional and international
development.
024 New Development Institutions
in a World of New Financial
Order
Ben Shenglin: Asia Infrastructure
Investment Bank and BRICS-sponsored
New Development Bank, representing
the first, yet major, step in re-balancing
global governance dominated by the
developed world, are to fill the gap and
supplement, existent institutions. They
must embrace new technology and new
financial tools.
028 Innovation Policy as a Process
of Creation and Selection of
Effective Institutions
Dominique Foray: The government
does not have innate wisdom or
the ex-ante knowledge about future
technologies. Innovation policy is
a process of creation and selection
of effective institutions that can
channel the energies of a large number
of people towards research and
innovation.

Focus 核心话题

032 Too Steep for Comfort: Stock
Trading as a National Pastime;
Optimism in Spite of Slowing
Growth
Jimmy Chang: For China the bull
market is a welcomed stimulus for
the economy, but it could quickly turn
into a double-edged sword. Chinese
authorities need to bring down the
market’s angle of ascent to a sustainable
level by offering alternatives to China’s
massive savings.
036 How Should We Approach
China’s Stock Market?
Li Shanquan: Although the rate of
return for China’s stock market has
been the highest in the world so far
this year, the market mechanisms
for the allocation of capital should
be improved to better promote real
economic growth, and regulatory
bodies have to be calculating about
where they do and do not get involved.

004    Jul. 2015


Finance 金融
038 An Important Step Toward
RMB Internationalization
Michael Zhu: To achieve the
internationalization of the RMB,
interest rate liberalization and the
reform of China’s monetary policy
framework are steps that cannot be
skipped. Even after implementing
those reforms, the whole framework
is still worth testing out for at least
one global business cycle.
Public Policy 公共政策
054 The Triple Helix: Cooperation
Between Government,
Academia and Business
Cheryl de la Rey: The problems
facing humanity tend to be shaped
by social and political factors and
the answers are not merely scientific.
The ultimate ‘grand’ challenge lies
in institutions successfully working
together to build capacity and
harnessing knowledge to develop
shared perspectives.
Energy 能源
066 Creating an Oil-Climate
Index: Key Lessons for Asian
Policymakers
Deborah Gordon, Wang Tao, Matt
Ferchen: Oil policies in Asia will
drive oil development practices
and protections worldwide, but
they require transparency and data
disclosure so that Asia’s decision-
makers can better weigh their oil
options.
046 Turning China’s Money
Reserves into Capital
Miriam Campanella: With the current
financial situation, "China's holding"
vast amounts of sovereign paper is no
longer viable. Financial liberalization
is necessary for China to move
into a policy that would allow it to
better control and protect its foreign
reserves.
058 International Tax Policy in the
21st Century
Gary Clyde Hufbauer: Recent
developments show that international
tax policy faces a difficult patch.
Policy makers should not devise new
international tax rules; they should
seek to scrap corporate taxation.
This can be achieved by treating
corporations as pass-through business
entities where income is taxed not at
the business level, but the individual.
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TAX
050 “One Belt, One Road” Bonds
Chandima Mendis: Bond markets
along the “One Belt and One Road”
will grow and provide a key source
of financing and diversification.
Organizations such as the AIIB
will be channeling investment
resources while catalyzing the
growth of domestic bond markets
in these countries, resulting in
better infrastructure investment and
speeding the internationalization of
the Renminbi.
062 Whither Latin America?
Development Challenges
and Medium-Term Growth
Monica de Bolle: Most of the decline
in potential output in Latin America
is explained by a dramatic fall in total
factor productivity stemming largely
from infrastructure bottlenecks. To
reap the benefits of China’s pivot to
Latin America, countries will need to
strengthen institutions and maintain
a sound macroeconomic framework
going forward.
Jul. 2015    005
Contents

Development

070 The Blue Economy Transforms 074 The Remarkable “Laboratory

Economic Growth into a
Competitive Job Generation:
How China Can Inspire Africa
Gunter Pauli: The Blue Economy
philosophy. It concentrates on
generating more value with readily
available resources embracing
innovations in technology, and also
adopting new business models and
payment system that ensure that more
money remains circulating in the
local economy.
for the World” That Lee Kuan
Yew Leaves Us
Kent Calder: Leaving Singapore a
small yet highly dynamic “laboratory
to the world”, with a creative,
humane focus on government support
for private housing, may be Lee Kuan
Yew ’s most enduring legacy.

Investment 投资 Culture 片故事

078 Nepal – A Country of Eternal Impressions

102 Solving Strategic Risks in
the “One Belt, One Road” Nyainqên: Row upon row of houses lined up
Eurasian Connectivity Initiative along the vibrant Kathmandu Valley; a Kumari
of Kathmandu looking distantly down from her
Sameh El-Shahat: While beflowered window; the dusk-lit tenderness in two
connectivity and the essential lovers’ eyes; flower-hat-wearing Hindus, lighting
nature of infrastructure should be candles and pounding tambourines, lost in devout
emphasized in the “One Belt, One chanting…
Road” initiative, there needs to
be a deeper connectivity of ideas
between countries with some marked
differences.

Business 商业

106 Simple Rules: How to Thrive in

a Complex World
Kathleen Eisenhardt & Don Sull:
Simple rules can tame the complexity
that many people and businesses
face. By understanding what simple
rules are, why they work, and how
to develop them, people start coping
more effectively.

006    Jul. 2015

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From the Editor
A Stroll in the Park
Over the past six months, the Chinese
stock market has apparently been the focus
of attention of observers. Warmed by the
wealth effect of a new bullish market, both
the traditional broadcast media and the ev-
er-updating micro-blogs and WeChat post-
ings have been packed with information on
stock market investments. Whether this has
been simply to generate hits, or it involves
some unnamed interest, expert and grass-
root predictions have been coming in thick
and fast.
This brings to mind a couple of “an-
cient” jokes: one is about how a gorilla in
a science lab outwits the researcher, and
the other is about how “economists have
successfully predicted 15 of the 5 recent
economic crises”.
This in fact reveals the nature of the
stock market itself to a certain degree, as
a great deal of randomness is involved in
stock market transactions, and theoretically
at least, there is no way of accurately pre-
dicting these. The reason is very simple: if
it were possible for someone to accurately
predict movements, there would be no
counterparties in the transaction. In other
words, the crackdowns on insider trading
by securities regulators around the world
are actually intended to perpetuate market
unpredictability.
Focusing on the stock market as the topic
of this issue was not entirely for the sense of
occasion. We have invited two contributors
with a wealth of experience in the industry:
Li Shanquan, a senior fund manager with
US-based OppenheimerFunds; and a col-
umnist for this publication, Jimmy Chang,
chief equity analyst at Rockefeller & Co.
In an article entitled “Dealing with
China’s current stock market”, the former
goes back to its very origins, and proposes
that, as part of the development process of
China’s capital market, the market’s capital
010    Jul. 2015
allocation mechanism should be allowed to
mature, and more effectively promote the
growth of the real economy.
The latter writes on a more straight-
forward topic: “A bull market is a dou-
ble-edged sword”; starting from a micro
economic point of view, he makes it clear
that the challenge facing China’s policy-
makers is how to change investor senti-
ment, and transition them from a ‘get-
rich-quick’ mindset to one which is more
focused on long-term investment value.
Jimmy Chang starts his article by quot-
ing ice hockey legend Wayne Gretzky: “I
skate to where the puck is going to be, not
where it has been.” This is the essence of
forward-looking management; in contrast,
Li Shanquan ends his article by pointing
out that the capital market of China, the
world’s second-largest economy, will inevi-
tably hold a top position internationally.
Obviously, we cannot hope that the aver-
age investor will keep some kind of historical
imperative in mind as they complete their
transactions, as that would simply make a
mockery of the adage “buying big for the
motherland”. On the contrary, maybe a more
reasonable expectation is that as individual
investors become more rational and mature,
they will become more responsible with their
funds, and find their most suitable balance
point between fear and greed.
In the background of the stock market,
more worthy of note are the indicators of
China’s real economy: “Large-scale econo-
my, effective resilience, potential aplenty,
sufficient space to move, multiple policy
tools” –these definitions by China’s lead-
ership may offer investors a more positive
outlook.
“When looking at the Chinese econ-
omy, one cannot simply focus on the
growth rate; the size of China’s economy
is constantly increasing, and incremen-
tal economic growth of approximately
7% is already quite impressive; this ac-
cumulated momentum could not have
been achieved even with our previous
double-digit growth.” These words, from
China’s president Xi Jinping at the Boao
Forum for Asia Annual Conference 2015,
provide a clear direction for accurately
observing China’s economy.
Of all of the pieces in the global econom-
ic jigsaw, the development of the Chinese
economy is clearly the focus of attention.
The definitions of “the new normal”, i.e. a
transition from high-speed growth to medi-
um-to-high-speed growth, from rough-and-
ready growth focused on scale and speed
to more quality and efficiency-intensive
growth, from investment-driven to innova-
tion-driven growth are reversing evaluation
and expectations about China’s economy
from all walks of life.
As in the past, besides our Focus column,
we have not pulled our punches either.
In the Macro Economy section, one of
the founders of German Industry 4.0 and
founder of the Scheer Group, August-Wil-
helm Scheer, describes the challenges
facing Germany: new information technol-
ogies introduced by the Internet of Things
are impacting all of the major functions of
industrial companies, and bringing in new
business models by means of new prod-
ucts, services and business processes. Who
will take the first step with these profound
changes?
Blue Economy author Gunter Pauli
cites South Africa’s Johannesburg as an
example, describing the “implementation
of a philosophy of zero emissions”. He be-
lieves that only changes in business models
will provide the opportunity for significant
changes in the current situation. Perusing
aside, we think that “disruptive innovation”
has a more intuitive feel.
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Jul. 2015    011

Information
Highlights of the BFA
Annual Conference 2015
The Report on
Development of Rural
Finance 2015
▌▌On the afternoon of 26 March 2015, during
the Boao Forum for Asia Annual Conference
2015, the Boao Review and the Hainan Rural
Credit Cooperative jointly released their
Report on Development of Rural Finance
2015, themed on “exploring new models of
China’s rural financial reform”, the topic
moderator being Vice President of Chinese
Academy of Social Sciences and academician
Li Yang.
▌▌Since the onset of reform and liberalization,
China’s rural economy has made considerable
progress, but the economic development of
rural areas has been relatively slow compared
with that of urban areas, and there has been
no fundamental change in the migration trend
of high-quality social resources towards the
cities. The huge imbalance in the development
of urban and rural areas, has become a crucial
012    Jul. 2015
constraint for the future development of
China’s economy and society.
▌▌Finance is the lifeblood of economic life
and development, and resolving China’s
“3F Issues” (farmers, farming, farmstead)
necessarily requires the effective support of
the modern financial industry. As part of the
overall reform and liberalization process,
China’s rural financial reforms have achieved
remarkable results in recent years. The latest
round of rural financial reform kicked off
in 2003, and the following decade saw rural
financial institutions increasingly diversify,
and major improvements emerge in the rural
financial supply. Against this background,
further reform of — and improvements to —
the rural financial system, as well as enabling
the rural financial system to more effectively
promote economic and social development in
rural areas, are clearly key steps to resolving
the country’s “3F Issues” at this stage.
▌▌The Report notes that the focus of the
current round of financial reform is the reform
of rural credit cooperatives; these, together
with rural banks, micro-finance companies
and mutual credit cooperatives, are the
leading lights in the development of new
forms of rural financial institution.
▌▌The Report indicates that this round of
reforms has been successful, focused as it
is on bringing about fundamental change
in the financial strength and operating
circumstances of the rural credit cooperative
system. Reforms at the Agricultural Bank of
China, which have included restructuring,
market listing and the establishment of three
internal agricultural affairs departments,
have greatly enhanced its capabilities. At the
same time, new forms of rural institutions
have developed rapidly since 2006. Moreover,
in addition to the top-led reform of rural
financial institutions, a number of local
governments and financial institutions have
actively sought over the past decade to expand
their experience and methods in fields of
financial systems, of financial product and
service innovation, and of the development of
the rural financial ecology.
▌▌In order to gain a better understanding of
whether China’s rural financial reforms have led
to any improvement in satisfying the financial
requirements of agribusinesses, farmsteads and
other rural bodies, the topics team selected four
typical provinces – Hainan, Jiangsu, Shanxi and
Zhejiang – in which to perform a questionnaire
survey. The survey ran for a month, from
December 2014 until January 2015. A total of
1310 completed questionnaires were received
from farmsteads, 1367 from agribusinesses,
making a total of 2677 questionnaires. On the
basis of the survey data, the Report analyzes the
level of satisfaction of the financial requirements

of agribusinesses and farmsteads, evaluations of
the effectiveness of rural financial reform, and
the segments in which rural finance systems
need to further improve.
▌▌Level of satisfaction of the financial
requirements of agribusinesses and
farmsteads: for both agribusinesses
and farmsteads, loan amount and term
requirements were being better met. On a
province-by-province basis, Zhejiang and
Jiangsu performed slightly better in terms of
satisfaction with the loan amount and terms,
for both agribusinesses and farmsteads.
▌▌Assessment of rural financial reform by
agribusiness and farmsteads: The research
showed that compared to 10 years and 5 years
previously, agribusinesses and farmsteads
in general believed that there had been an
improvement in the satisfaction of financial
requirements; of the provinces, Zhejiang
registered the highest satisfaction.
▌▌The service quality of financial
institutions: agribusinesses and farmsteads
in general believed that, compared to 10
years and 5 years previously, there had been
an improvement in the quality of service,
particularly noticeable in Zhejiang, and most
noticeable over the last 5 years in Hainan.
▌▌Satisfaction with government support
measures: the vast majority of agribusinesses
and farmsteads indicated that they were
either satisfied or mostly satisfied; Hainan
agribusinesses registered the highest
proportion of satisfaction, at 75%, whereas
Zhejiang farmsteads registered the highest
proportion of satisfaction, at 85%.
▌▌The financial institutions which provided
the best assistance: 84% of agribusinesses
believed that rural banking institutions
(including rule commercial banks, rural
cooperative banks and credit cooperatives)
were the most helpful, whereas 62% of
farmsteads believed that rural commercial
banks provided the best assistance. Viewed
by region, 77% of Hainan farmsteads believe
that credit cooperatives were most helpful,
whereas Jiangsu, Shanxi and Zhejiang
farmsteads were more inclined to believe
that the best assistance was provided by rural
commercial banks.
▌▌The service efficiency of financial
institutions: agribusinesses on average had
to wait 13 working days after they submitted
their loan application until the release of
funds; Zhejiang provided the fastest service
at 4 working days. Farmsteads on average had
to wait 7 working days from the submission
of the loan application until the release
of funds – only half the time required by
agribusinesses.
▌▌The criteria which made loans most
difficult to obtain: the research showed
that a lack of collateral, and information
asymmetries caused by a lack of appropriate
guarantee agencies were two main criteria
constraining loans to agribusinesses,
accounting for 40% and 26% respectively.
It is worth noting that bank credit controls
were also a major obstacle to agribusinesses
obtaining bank loans, accounting for 80%.
As for farmsteads, over half – 51% – believed
that a lack of collateral was the criterion
which hampered them most from obtaining a
bank loan, while 21% believed it was the lack
of appropriate guarantee agencies.
▌▌Services which require improvement:
the service improvement which both
agribusinesses and farmsteads most wanted
WWW.BOAOREVIEW.ORG
was simplified procedures.
▌▌The Report noted that at present and
in the near future, as China breaks out of
its dualistic urban/rural structure to form
new urban and rural social and economic
development patterns, the rural economy will
undergo sustained and profound change, and
this will place new demands on rural financial
reform.
▌▌The Report noted that the construction
of the rural financial system is an important
guarantee for the implementation and
promotion of China’s “3F Issues” policy,
requiring major banks to play a key, pivotal
role, servicing major clients and major
projects, with rural small and medium
financial institutions playing on the benefits
of their flexibility to service the grassroots
levels, including farmsteads and small
and micro enterprises. Both marketized
commercial finance and cooperative finance
institutions as well as non-profit institutions
such as governmental and policy banks are
required in order to dissipate and reduce the
associated risk; furthermore, even-handed
guidance must be provided in order to enable
private lending and other social capital to
enter the rural finance arena. This comprises
5 specific aspects: the reform of rural banking
institutions, the reform of rural policy banks,
the reform of agribusiness commercial
financial institutions, the strength and the
development of rural financial institutions,
and the establishment and improvement of a
rural guarantee system.
▌▌According to the Report, each institution
must ensure that each of its divisions focuses
on its specific responsibilities and areas of
expertise, and ensures the division of labor
2015年7月    013 
Information
and orderly competition in order to form
a reasonable, sustainable rural financial
organization system, thus truly and effectively
increasing financial supply, and continuously
improving the reliability, practicality and
convenience of rural financial services.
▌▌With regard to improving the rural
financial control system, the Report notes
that the rural financial system covers many
geographic areas and has a wide range of
impacts. Its reform affects not only the
financial sector, but also every area of rural
economy and society. This requires the
establishment of a rural finance system which
not only provides effective services, but
more importantly, which actively cooperates
with external systems. Effort is required in
5 specific areas: Improvements to the fiscal
support system, improvements to financial
support policy, optimization of financial
oversight mechanisms, improvements to the
rural financial ecology, and improved rural
finance risk transfer and sharing mechanisms.
▌▌According to the Report, as part of this
process, there must be a proactive change
in the function of government, which must
play an active role in providing mechanisms
and structures. Policy support must be
increased, so as to create an appropriate
financial control environment, encourage the
improvement of the market as a whole, and
map out a powerful, effective rural financial
control system, so as to gradually establish an
environment which is both suited to the new
rural financial ecology and encourages the
healthy, sustainable and secure development
of financial services.
Internet Finance Report
2015
▌▌On 26 March 2015, during the Boao Forum
for Asia Annual Conference 2015, Boao
Review and Shanghai Lujiazui International
014    Jul. 2015
Financial Asset Exchange Co., Ltd. jointly
released Internet Finance Report 2015 —
“Focus on P2P Lending” — the coordinator
being Mr. Xie Ping, Executive Vice President
of China Investment Corporation.
▌▌P2P lending is a new form of financial
organization that best reflects internet finance
features. It is receiving more and more
attention and approval from Chinese and
overseas markets. On 12 December 2014,
the largest global P2P internet platform
“Lending Club” was successfully listed on
the New York Stock Exchange. Meanwhile,
many Chinese financial institutions as well
as industrial companies have conducted
relevant strategic deployment in terms of
internet finance, and the government decision-
makers have also released clear signals of
encouraging the healthy development of the
sector.
▌▌Currently, China’s P2P lending, small
in scale compared to traditional finance,
develops very fast. According to statistics,
by the end of 2014, China had 1575 internet
lending operating platforms, more than
900 (including problematic platforms) of
them going online in 2014. There has been
an average monthly compound increase of
5.43% of normally operating platforms. The
turnover of China’s internet lending sector
for the whole of 2014 reached 152.8 billion
RMB, 2.39 times that of 2013, with a monthly
increase of 10.99%. By the end of December
2014, the total loan balance of China’s internet
lending sector was 103.6 billion RMB, 3.87
times that of 2013. It is estimated that by
2024, the size of China’s P2P market shall
have increased from 27 billion RMB of 2013
to 2000 billion RMB, accounting for 0.9% of
the stock social financing (excluding shares
and bonds). By the same time, the profits of
the internet finance enterprises shall increase
to 40 billion USD, with a yearly average
compound growth rate of 41%, accounting for
8% of the overall profits of the banking sector
in 2024.
▌▌The Report points out that three major
factors worked together to generate the current
prosperity of China’s P2P lending sector: one
is the development by leaps and bounds of
information technology, mobile internet, and
third-party payment technology; the second
is the tolerance of financial regulation, as
currently there is no specific regulation over
P2P intent lending and the handsome profits
have encouraged the establishment of a huge
number of P2P internet lending platforms; the
third is the need of the detailed categorization
of the market, with the huge needs for small
and micro lending like private lending, and
for debt of high profitability, directly reflected
on the increase of the balance of P2P internet
lending. Currently, China’s P2P internet
lending is mainly characterized by the
internet operation of private lending, a feature
of this specific stage of development.
▌▌Theoretically, P2P lending is a new
financial organizational form that best
represents internet finance. Its internet
features of adequate information, high-
speed matching, and near-zero marginal
costs, bringing it unparalleled advantages
compared with the traditional financial
regime: first of all, the boundary of financial
transactions can be greatly expanded,
effectively reducing the transaction costs of
financial activities; secondly, the need for
financial democratization and popularization
can be satisfactorily met, as the core of the
internet spirit is equality, freedom, openness,
sharing, democratization, popularization,
and decentralization; thirdly, financial
marketization has been enhanced and the
trend of financial disintermediation has been
accelerated.
▌▌The advantages of P2P internet lending
lie in its data base, while the key obstacles
in the development of China’s P2P lending

are the lack of soundness and openness
of the credit collection system. With its
underdeveloped credit collection system, and
P2P lending platforms’ lack of a huge data
base, the efficiency of credit valuation, loan
costing and risk management of P2P lending
has been directly constrained. The launch
of offline surveys by P2P internet lending
platforms increases transaction costs, and the
lending rate of interest has been increased
accordingly. In comparison, international
P2P lending platforms practise “online”
operations. The Report points out that the
steady, stable, and risk-managing development
of UK and US P2P lending platforms, in
comparison with China’s, mainly benefit from
the drastic drop of information asymmetry
which is brought about by their highly-
developed credit collection systems and the
mature finance behavior of clients.
▌▌The Report points out that the current
development of P2P internet lending in China
is still in an age of wilderness, still involved
with credit agency operation in a different
form, that the P2P internet lending market
still universally requires warranty, and that
only a tiny small number of platforms are
characterized by the information agency
model The lack of supervision and regulation
and the low access render the development
WWW.BOAOREVIEW.ORG
targeted at traditional institutions of banks,
securities traders and insurance companies,
and they do not apply to P2P lending born in
the internet age. A supervision of P2P lending
with such conventional approaches for banks
as high threshold and capital adequacy rates,
may run against the very idea of the internet
spirit.
▌▌The Report claims that as an information
agency, P2P lending supervision should adopt
the principle of full disclosure of information
similar to direct financing, the key being
full disclosure of information, including
shareholder information, transaction
procedures, management constitution, and
of P2P internet lending far from being
transaction record backup, available for
normative, both qualified and unqualified
online inquiry to any investor. Supervisors
operators are in the market. Often P2P
and regulators should be responsible for the
lending platforms close down or their bosses
formulation and improvement of regulating
simply run away. The public, therefore,
principles, the punishment and fining of
harbors severe doubts and challenges for P2P
violations of regulations and laws on the part
lending in China.
of practitioners, the prevention and reduction
▌▌However, the Report points out with
of risks and accidents of various sorts, and the
optimism, that these problems will be
decrease of the scope of the market affected
improved with the accumulation of data:
by risks.
the social credit collection system is
▌▌Looking to the future, the Report suggests
steadily improved on the one hand, and
that although China’s current P2P lending
the positive feedback mechanism between
is close to micro and small internet lending
the development of P2P lending and the
in nature, as an important complement to
accumulation of data will help reduce the
China’s financial market, far from being able
transaction costs on the other hand. Against
to shake China’s traditional financial system,
the background of big data, there will be
P2P internet lending must not focus only on
more and more investors participating in P2P
lending, and there will be more and more
accumulated data; the huge amount of data
will in turn support P2P internet lending
platforms to accurately manage the risks,
reduce the level of bad loans and operating
costs, do away with the necessity of guarantee,
and tend to become a comprehensive and
thorough information agency.
▌▌In terms of supervision and regulation, the
Report points out that P2P lending should be
supervised and regulated on the basis of data.
Currently, China’s supervision theories are all
2015年7月    015 
Information

the expansion of “peer” itself, and that the of a number of state-owned capital operating Decision is clearly on the right track, and
categories of products for transactions must companies, and support for the restructuring of the Decision provides the basic principles
also be greatly increased. certain state-owned enterprises into state-owned for ongoing SOE reform as well as mixed
▌▌The Report emphasizes that we must be capital investment firms. ownership reform. However, there remains a
more imaginative in dealing with internet ▌▌In the view of Liu Shijin, Deputy Director lack of consensus between the various parties
finance. In the process of the integration of the State Council’s Development Research involved.
between the internet and finance, the Center, the SOE reform as laid out in the ▌▌So what are the main differences between
development of third-party payment and the various parties in this round of SOE
P2P lending, for example, may affect the
depositing channels of banks, which may,
however, drive further reform in banks.
The Report claims that for the financial
system, the ideal market should be one
that is characterized by equality, freedom,
convenience, high efficiency, low information
asymmetry and transaction costs, and
more effectiveness. Whether in terms of
theories, actual needs or the development of
technological progress, this is an irreversible
trend, to which internet finance, P2P internet
lending in particular, conforms.

BFA Members’ Club

Event Mixed Ownership:
Rekindling the Reform of reform? What is needed to overcome these the event was Financial Times’ Associated
State-Owned Enterprises obstacles? What is the next step forward to Editor and FTChinese.com’s Editor in Chief
deepen the SOE reform? Zhang Lifen.
▌▌The reform of China’s State-Owned
▌▌On 26 March 2015, during the Annual ▌▌ “This is an excellent concept, and both
Enterprises (SOE) extends over three
Conference of the Boao Forum for Asia, reiterates the results of the last round of SOE
extraordinary decades, and has consistently
State Council Development Research Center reform in our new, changing circumstances,
been seen as “the toughest nut to crack”.
Deputy Director Liu Shijin, former State and also builds on these results”, commented
The “Decision of the CCCPC on Certain
Commission for Structuring Deputy Director Shao Bingren on the idea of mixed ownership
Major Issues Concerning the Comprehensive
Shao Bingren, former Deputy Prime Minister put forward by the 18th Central Committee,
Deepening of Reform” of the Third Plenary
of Russia Anatoly Chubais (known as the particularly during the Third Plenary Session.
Session of the 18th Central Committee of the
“Father of Russian capitalism”), Roland ▌▌Looking back over the progress in SOE
CPC (hereinafter referred as the “Decision”)
Berger Global CEO Charles-Edouard Bouée, reform from the 1990s to date, Shao noted
once again raises the topic of SOE reform, and
Temasek Holdings Senior Managing Director pointedly that the consensus formed at the
outlines a roadmap for SOE reform, highlighting
Wu Yibing, and Yale University School of time has today been blurred: “There has not
the need for further improvements to the state-
Finance Professor Chen Zhiwu came together only been no progress in terms of SOE reform
owned asset management system, the use
for a Boao Forum for Asia Members’ club over the last decade or so, but in certain
of capital management as a primary tool for
event, titled “Mixed Ownership: Rekindling areas, this has even fallen back. Monopolies
strengthening the oversight of state-owned
the Reform of State-Owned Enterprises”, to not only remain unbroken, but have even
assets, reforming of the state-owned authorized
probe the weak points of reform as well as to grown stronger. Empowered by the “bigger
capital management system, the establishment
get a sense of its direction. The moderator of is stronger” slogan, state-owned enterprises

016    Jul. 2015


have in fact invested state capital on blind
expansion with very low rates of return, the
long-term result being a drain on the country’s
coffers.”
▌▌For this reason, Shao emphasizes that any
further progress in SOE reform will require
the breakup of these monopolies. “Making
progress in mixed ownership reform must
start with the battle against corruption, and
continue with the elimination of vested
interests. I believe that the issue of mixed
ownership is not one of how to look at the
implementation of mixed ownership, but
rather whether we dare deal with the problems
of vested interests.”
▌▌Anatoly Chubais was asked to talk about
the bravery required for such reforms.
Known in his home country as the “Father of
Capitalism”, he was self-deprecating during
his speech, calling himself the country’s most
hated politician in opinion polls taken over
the last 15 years. In 1992, Chubais launched
the world’s largest and fastest privatization
of state assets, which placed 80% of the
Russian economy in private ownership. He
believes that confusion over ownership rights
is the root problem for the low efficiency
of state-owned enterprises, and, as a result,
“the fewer the state-owned enterprises, the
lower the asset holdings by the state, the
greater the competitiveness, and the higher
the efficiency.” Chubais’ experience in Russia
is that governments must have a powerful
political will and expend great effort to
deliberately generate any increase in the
private share of capital.
▌▌In this regard, Liu Shijin held a different
view, declaring that controlling these shares
will not lead to the development of a market
economy – a market economy is a competitive
process. As part of this competitive process,
the more competitive an economic structure,
the greater its share will be, while other shares
will shrink. “Creating a fair competitive
environment is something that we must make
every effort to achieve.”
▌▌Furthermore, Liu’s views also differed
from Chubais’ in terms of the deliberate
control of state capital, as he believes that
state capital must be expanded. “What are
the benefits of a moderate expansion in state
capital? This must be used in services which
support strategic State objectives, and not in
any other area.”
▌▌Liu called a process whereby this is
neither deliberately suppressed or increased
a fair competitive environment: “I believe
that mixed ownership cannot be arbitrarily
applied: there must be a reason behind it.” He
continued, querying the reasons why certain
areas of private capital are not overly keen to
dabble in mixed ownership.
▌▌Market-oriented operation was a topic
which Wu Yibing emphasized at several
points during the event. Wu explained that
Temasek is an investment company with
entirely market-oriented operations, with a
market-oriented governance structure: “None
of Temasek’s board of directors or senior
managers is government appointed; they are
all market-oriented experts, and this is the
basic reason why the board has been able to
create a market-oriented operation.”
WWW.BOAOREVIEW.ORG
▌▌Professor Chen Zhiwu iterated that the
possibilities for replicability under China’s
current system are very low: “Implementing
any state-owned operation according to a
market-oriented approach is very difficult.
The management of central enterprises are
appointed by the central government, which
makes the game very dull indeed – market
orientation becomes impossible.”
▌▌Chen went on to say that merely focusing
on increasing quantity simply means that ever
greater amounts of social capital are used to
perpetuate the investment projects of penniless
state-owned enterprises or local governments;
mixed ownership of this kind is undesirable.
“State-owned enterprise reform should focus
on cutting the fat, rather than continuing to
encourage obesity.” According to Chen, local
state-owned assets in stock, particularly those
with low levels of efficiency, should be sold off.
▌▌ “Actually, they are a bit overweight,”
says Charles-Edouard Bouée. “This is
because, over the last 30 years, China’s
economy has grown extremely rapidly,
and state-owned enterprises have played a
central bread-winning role in this process,
providing the nation with public services and
products, and investing in the development of
infrastructure.” Bouée agreed with Liu Shijin
in the belief that the objectives of the reform
are to make state-owned enterprises stronger,
more efficient, and to enable them to continue
to play a major role in the public services
area. With regard to the route to be taken by
these reforms, Bouée emphasized that “contact
points” are very important, and he proposed
introducing mixed ownership from the most
commercially-oriented areas of the market,
and gradually extending to less commercially-
focused parts of the market.
2015年7月    017 
Macro Economy

Industry 4.0
The Industrial Big Change
A German Perspective on a
Global Challenge
By August-Wilhelm Scheer

Prof. Dr. August-Wilhelm Scheer

Professor for Business Informatics; inventor of
the ARIS concept; entrepreneur; shareholder and
chairman of the advisory board of Scheer GmbH

018    Jul. 2015


The Industry 4.0 age definitely has begun, which
implies deep changes in the drivers of business
management for industrial companies. The new
features of success will be individualization,
decentralization, self-direction, service orientation
and transparency.
N
ew information technologies led by the In-
ternet of Things are impacting all significant
functions of industrial companies and are
leading to new business models with new products,
services and business processes. The question is,
who will qualify as a successful early mover and pio-
neer for such profound changes? In this context one
should not only look at the opportunities provided
by new technologies but also consider and evaluate
the readiness of economic entities to leverage the
arising opportunities.
Leading edges of new German technologies
Germany, for example, is in a good starting place for
the digitalization of industrial companies. The automo-
tive, electrical, chemical and mechanical engineering
industries, along with their suppliers, are innovative
and preparing themselves for the Big Change. This im-
plies dramatic changes in three relevant process areas,
namely those of the factory, of product development
and of logistics. However, they can’t start from scratch
and must consider the backgrounds of their existing
business. Products made by mechanical engineers last
for many years and, for the most part, manufacturers
WWW.BOAOREVIEW.COM
have committed themselves to offering spare parts and
maintenance services for many years to come; this can
hinder major changes to the product offering. In direct
comparison, countries which are just beginning to build
their industrial bases can invest in new Industry 4.0
technologies without regard to the past, thereby pro-
viding themselves with a competitive advantage. The
introduction of new technologies such as 3-D printing,
for example, increases the development speed of new
products through the faster development of prototypes.
Large industrial companies in Germany have their
own substantial IT departments which support product
development and the automation of the manufacturing
process. Many companies are now hiving off their IT
departments as companies in their own right in order
to enable the sale of their know-how also to other in-
dustrial enterprises or to provide platforms for ‘smart’
services for third parties. This can further stimulate
the implementation of Industry 4.0.. Thanks to new
technologies customers can issue orders, change them
or cancel them, through many different channels such
as standard computers, laptops or smart phones. All
channels must be usable by each other. A client’s ease
of access to its supplier, together with individualization,
leads to an increase in change requests and therefore to
Jul. 2015    019
Macro Economy
4.0
higher demands on flexibility during the whole order
processing, manufacturing and product development.
The client can wish a change in its original product
definition practically just moments before the start of
the manufacturing process. The challenge for inno-
vative companies is to directly meet and satisfy these
needs.
A particular strength in Germany is also its indus-
trial supply base with companies that manufacture
machines for other industrial companies. These
companies already possess a high degree of expertise
in automation technologies and work together with
international hardware and software manufacturers.
They already implement new I4.0 technologies in their
factories such as the so-called Cyber Physical Systems
(CPS). These are software intensive production systems
connected to the internet and able to communicate
with each other as well as with intelligent materials.
The high flexibility of CPS makes possible the strong
individualization of the manufacturing process as the
process changeover of the system takes place with no
loss of time and therefore also with no costs. For this
reason the manufacture of quantities with lot size 1 is
possible at the cost of mass production. Additionally,
these companies already make use of the cost-effective
storability of mass data in the production process, price
reductions in storage devices and new “in memory” da-
tabase technologies being the enabler. Sensors measure
the condition of machines, materials and production
peripherals in real time. Analytical evaluation processes
then use actual conditions to trigger immediate actions
and beyond this give indications of expected future
system behavior. I would assume, that especially those
companies which manufacture machines are very close
to the vision of a real time self-directing, extremely de-
020    Jul. 2015
centralized factory — a smart factory.
Risks in the development of new technology
Nonetheless, we constantly have to face the dan-
ger of losing our leading position in I 4.0, as several
branches in other countries and on other continents
like Asia, have equally identified the I 4.0 concept as
a path to growth. I am convinced that one decisive
element in the development of German industry will
be the so called “Mittelstand” which implies medi-
um-sized and often family-owned companies. They
represent the backbone of German economics; they
have proved to be flexible and proactive when it comes
to changes in the markets. But with I 4.0, they have to
face and accept a complete change in system. Only if
these companies commit themselves to this through
innovation and adopt industry 4.0 processes, we can be
successful in our pioneering task and thus stabilize the
basis for economic welfare in our country.
Another risk for Germany can be found in its de-
pendence on collaboration with international hardware
and software manufacturers which means that it is not
always up to date with the latest developments and
cannot influence further development in real time and
according to specific needs. I am glad that the federal
government has identified the respective problems
and is therefore attempting to build new competencies
through a targeted support program for the research
and foundation of new start-up companies.
The Industry 4.0 age definitely has begun and
implies deep changes in the drivers of business man-
agement for industrial companies. The new features
of success will be individualization, decentralization,
self-direction, service orientation and transparency.
 WWW.BOAOREVIEW.COM
WWW.BOAOREVIEW.COM

LSE and China

Since LSE’s foundation in 1895 the School has engaged with China
The School’s motto rerum cognoscere causas – To know the cause of things – remains just as relevant in
our engagement with modern day China. LSE strives to increase understanding of a complex and changing
world, and China’s place within it, through excellent teaching and research in the social sciences.

The School runs a range of programmes in • Public Lectures and Conferences

China, including
• Collaborative Research and PhD Exchange
• A Joint Summer School with Peking University
• Visiting Scholars Programmes
• Double Master Degree Programmes with
Peking and Fudan Universities • Advising and Training on public policy
and management

For more information on LSE in China, visit www.lse.ac.uk/china

Jan.2015 
Jul. 2015 015
  021
Macro Economy
FTAAP Benefits
Global Economy
By Bob Carr
When China and Australia finally agreed on a bilateral
free trade agreement last year, there was really just
one problem. For all the benefits to China and
Australia, the rest of the region misses out. This is
why a Free Trade Area of the Asia-Pacific (FTAAP)
makes so much sense.
I
t was 10 years in the making.
In November last year, negotiations finally
came to a successful end. China and Australia had
clinched a free trade agreement (FTA).
China is Australia’s biggest foreign buyer, account-
ing for 32.5 percent of its exports in 2013-14. To put
that in perspective, Australia’s second largest customer,
Japan, took less than half that.
Australia is China’s sixth largest import source. It is
Australian iron ore that goes into making the steel that
China needs for ongoing industrialization and urbani-
zation. According to China’s Customs Bureau, Australia
now supplies 57.9 percent of the country’s iron ore im-
ports.
The China-Australia Free Trade Agreement (ChAF-
TA) was announced when Chinese President, Xi Jin-
ping, was in Australia for the G20 Leaders Summit.
During the visit, President Xi delivered a much-praised
address to a joint sitting of Australian Federal parlia-
ment. Diplomatic ties between the two countries were
upgraded to that of a “comprehensive strategic partner-
ship”. There was even a stopover in Tasmania, the only
Australian state the President had yet to set foot on.
But back to the trade deal.
The benefits and limitations of bilateral FTAs
It was everything you could want in a bilateral agree-
ment.
There were big cuts to tariffs. Upon full implemen-
tation, all Chinese goods will enter Australia duty free,
022    Jul. 2015
while 95% of Australian exports to China will receive
the same treatment.
It extended to services. Australian aged care pro-
viders were as surprised as anyone to learn that they
would be given unprecedented access to the highly lu-
crative Chinese market.
Finance wasn’t forgotten either. Sydney was given
an RMB clearing bank. The screening threshold Aus-
tralia imposes on Chinese private investors was raised
from AUD 248 million to AUD 1.08 billion.
There was really just one problem. For all the bene-
fits to China and Australia, the rest of the region missed
out.
That’s the nature of a bilateral agreement, even the
best.
It’s now been more than two decades since the
last round of trade negotiations was concluded in the
World Trade Organization (WTO).
With no sign of progress on the multilateral front,
the countries of the Asia-Pacific have taken to doing
bilateral deals with gusto.
If the sheer number signed were a key performance
indicator, the region would surely be promoted.
The Asian Development Bank says that by 2014
there were already 119 FTAs in place and active. This
was more than double the number a decade ago. An-
other 25 have been signed but are waiting to take effect.
And then there’s the 69 currently being negotiated.
But the flurry of trade diplomacy is not all good
news.
Last year, The Economist Intelligence Unit and
 WWW.BOAOREVIEW.COM

Last year, The Economist Intelligence Unit and

HSBC surveyed firms in 80 countries across the
region on their use of more than 50 FTAs. They
found that each FTA signed in Asia is used, on
average, by only one in four exporters.

HSBC surveyed firms in 80 countries across the region
on their use of more than 50 FTAs. They found that
each FTA signed in Asia is used, on average, by only
one in four exporters.
The low take-up was not because FTAs failed to de-
liver meaningful benefits. In fact, of those respondents
who had made use of an FTA, 85 percent said that their
exports to the markets covered by the agreements had
increased either significantly (23 percent) or moderate-
ly (63 percent).
It’s the cost side of the equation that’s holding things
back. The region has become a noodle bowl of trade
provisions. The cost to businesses of trying to keep up
with them all has meant that many have simply given
up.
That’s why the idea of a Free Trade Area of the
Asia-Pacific (FTAAP) makes so much sense.
The FTAAP better contributes to the world
economy than the TPP
In recent years it’s been the Trans-Pacific Partner-
ship (TPP) that has attracted the most attention. But by
including only 12 countries, it just adds to the noodle
bowl.
The FTAAP stands in obvious contrast: it covers all
21 APEC member nations.
The economics is clear: for truly rich gains, trade
liberalization in the Asia-Pacific needs to include both
the US and China. Modelling published in a paper by
the East-West Center last year put the boost to global
income from a FTAAP at more than eight times that
from the TPP.
That’s not surprising.
The WTO says that China overtook the US to be-
come the world’s largest trader in 2013.
And it’s China that’s been driving the growth in
world trade.
Since 2010, data from the International Monetary
Bob Carr
Former Australian Foreign
Minister and Premier of NSW;
Director of the Australia-
China Relations Institute at
the University of Technology
Sydney
Fund (IMF) show that the volume of China’s imports
has leapt by 27.8 percent, with a value of USD 702.6
bn. This compares with 7.6 percent and USD 408.3 bn
for the US, 8.8 percent and USD 163.7 bn for Japan
and 15.8 percent and USD 121.0 bn for India.
Some have tried to paint China’s backing of FTAAP
as a power grab, an attempt to write the rules in the
region.
This fails the common-sense test. The FTAAP is the
only deal on the table that actually includes all the ma-
jor players.
That China has put its hand up to drive such a lofty
agenda makes it all the more delicious.
When it comes to reducing trade barriers, China still
has a lot to give. The WTO says that the average tariff
rate in China remains at around 10 percent. It’s just 3.4
percent in the US.
And while growth in China may have slowed in line
with the government’s emphasis on quality over quan-
tity, it continues to outperform other major economies.
The fundamental long run growth prospects for the
region are hugely positive.
According to a report from the OECD last year, Chi-
na’s share of world GDP in 2060 will be 24.3 percent,
up from 18 percent now. India’s share will skyrocket
from 6.7 percent to 17.7 percent.
But economic history is littered with examples of
countries and regions that have failed to live up to their
promise.
The so-called middle income trap is a case in point.
In 2013 research by the World Bank pointed to the
stunning reality that of the 101 middle-income econo-
mies in 1960, only 13 managed to achieve high-income
status by 2008.
Governments should step up and start matching
their commitment for greater cooperation and mutual-
ly beneficial outcomes for the region.
Uniting around an ambitious goal of achieving an
FTAAP within a decade would be a worthy start.

Jul. 2015    023

Macro Economy

The Greek Region of Attica:

Dedicated in Serving the
Common Interest of Growth
By Rena Dourou

China's Silk Road Strategy will offer opportunities

for global development for China, Europe and in
particular Greece. With its geo-strategic location,
infrastructure and tourism potential, Attica aims to
play a decisive role in new regional and international
development.

T
he launching of the “One Belt One Road”
(OBOR) initiative , also known as the “Silk
Road Strategy”, by Chinese President Xi Jin-
ping, marks a new era for international cooperation. A
new era which aims at connecting China with Europe,
through Central and Western Asia, the Middle East and
Africa. This global initiative creates new opportunities,
by promoting global development and by linking new
markets with important economic potential. It rep-
resents a win–win situation for all the countries that
share the ideal of growth through more openness and
inclusiveness.
The economic weight of this initiative is of critical
importance because it helps both global growth and the
strengthening of the fight against backward forces of
religious extremism. It could help stop the rise of such
forces in Asia and the Middle East, prevent the spread
of their dangerous ideas in Europe, and help face ter-
rorism and the forces promoting it.
Apart from the economic driver of this initiative,
there is an important geopolitical challenge concerning
not only Central Asia but also Europe and the Middle
East.
Both regions are undergoing a crucial period, a peri-
od marking the end of models of growth and especially
models of thinking.
The EU is facing the consequences of the debt crisis
and a very slow growth rate. In reality, the EU is deal-
ing with the pressing need to change its way of thinking
locally and globally in order to overcome some struc-
tural obstacles and restore a decent growth rate. This
is the only way for the EU to again become the major
player the international community needs.
At the same time, the Middle East is undergoing a
period of uncertainty, and in some cases of violence.
The era designed a hundred years ago, by the Paris
peace conference and the Treaty of Versailles of June
1919, is fading out. We are about to witness important

024    Jul. 2015


changes in this crucial area rich with energy resources.
New alliances and new balances of power are emerging,
creating a new environment regarding politics, trade
and of course the key issue of energy resources.
In that context, the OBOR initiative could be of great
importance because it represents the challenges that
will shape the future. Our common future in a glo-
balized world. A world that brings together two ancient
cultures such as the Chinese and the Greek culture. The
OBOR initiative can be the opportunity for the renewal
of an ancient relation.
Thanks to its geo-strategic location, Greece rep-
resents a key country for the 21st century. It is at the
crossroads between Europe and the Middle East - two
regions undergoing structural changes. Greece repre-
sents political stability and has the economic potential
and the will to act as a pivotal state and a reliable part-
ner for promoting peace, stability and growth.
Nowadays Athens is promoting a new, energetic,
extroverted foreign policy, emphasizing building new
economic ties with important international players.
Greece will proceed in a systematic way, taking the
necessary steps in order to ensure the success of our
strategy. Because it is very important to build strong
ties, ties that will resist hard times. Being a member of
the Eurozone gives Athens a comparative advantage
in the building of such ties by giving Athens the ability
to create the necessary environment of stability and
confidence in order to act as a bridge between different
worlds.
“There is no stronger link between cities or individu-
als than the common interest”, taught Thucydides. Our
common interest, in Greece in general and especially
WWW.BOAOREVIEW.COM
Rena Dourou
Regional Governor of Attica
in its most important region, Attica, is to promote the
proper policies for growth and stability, creating the
proper environment or foreign investment.
Attica, the region I have the responsibility of gov-
erning, since the elections of 2014 till 2019, covers
1,470.32 square miles, with a population of almost
4 million. This is half of the total population of the
country. Attica is an important asset for both Greece
and Europe. It is an important agent of growth in
Greece, hosting the Piraeus port, the largest port in
Greece, and an important part of the “21st Century
Maritime Silk Road”.
Attica is also a very popular touristic destination
thanks to the Parthenon but also for many other rea-
sons, such as the Classic Athens Marathon, organized
every year, in November. We have an Overall Strategic
Plan for Tourism Development and Promotion for the
next 5 years, for the period 2015-2020. This will be a
useful tool not only for the Region of Attica but also for
our international partners.
Our aim is to build a new, comprehensive model
of international win-win cooperation, emphasizing
growth policies, based on innovation strategies for
smart specialization. Thanks to its economic assets,
Attica could play a decisive role in the new regional and
international context undergoing the changes I have
just referred to. It can do so by linking old and new,
local and global players, serving a common goal: estab-
lishing the roadmap for new growth opportunities for
the people of our countries.
This is our common interest. An interest, the new
administration of the Attica region, is dedicated to
serve.
Jul. 2015    025
Macro Economy

New Development
Institutions in A World of
New Financial Order
Why AIIB Deserves Our Support
and Requires New Thinking?
By Ben Shenglin

One of the most-talked-about new international

financial initiatives in recent decades is the proposed
establishment of new development institutions like
AIIB and BRICS-sponsored NDB.

T
he establishment of AIIB was formally pro-
posed by Chinese President Xi in October 2013,
it had a relatively slow start as many countries
needed time to understand the proposal and assess
their options of joining, given their respective national
and global dynamics they face. In the meantime, the
US has not been helpful as it sees, or is perceived to be
seeing, AIIB as a direct competitor with the existent
players like Asia Development Bank (ADB) and World
Bank, which by no coincidence have been dominated
by the West. The UK’s decision to join AIIB earlier this
year is considered a milestone as many other Western
countries immediately followed suit, breaking ranks
with the US. The AIIB has now attracted global atten-

026    Jul. 2015

 WWW.BOAOREVIEW.COM

Dr. Ben Shenglin

Professor of Banking & Finance, Dean, Academy
of Internet Finance, Zhejiang University;
Executive Director, International Monetary
Institute, Renmin University of China

AIIB & Its Peers

Institution Registered Capital Total Asset Total Loans

AIIB USD 100 billion N/A N/A

World Bank USD 10 billion N/A USD 290 bln

Asia Development Bank USD 16.9 bln ＊ USD 116 bln USD 56 bln

China Development Bank RMB 307bln RMB 10,317 bln RMB 7942 bln

Note: ADB' s capital is paid-in capital & reserves; all data is as of end-2014.

tion and garnered broad support with 57 countries and
regions having signed up for becoming the founding
shareholders of the new institution, making it one of
the most multilateral institutions in the world and the
first multilateral institution initiated by a developing
country.
The unique role for AIIB: filling the gap
AIIB will be the first multilateral development
institution headquartered in Beijing. While its head-
quarter office may be close to China’s domestic policy
institutions like China Development Bank (“CDB”),
AIIB distinguishes itself from its domestic neighbors in
significant ways: its multilateral nature, its mission and
focus, and its governance and management structure,
though these are yet to be agreed upon by the expand-
ed shareholder group.
Compared to ADB, AIIB will be much more focused
on infrastructure projects, and given China’s success in
this area, AIIB will bring the new experiences as well as
the much-needed additional funding to fill the huge in-
frastructure investment gap in Asia’s developing world
and beyond. According to one estimate, each year Asia
will need USD 800 billion infrastructure investment
until at least 2020. ADB has a total balance sheet size
of USD 160 billion while WB has USD 290 billion, and
what is available for new infrastructure financing in
Asia is much less than their total asset, meaning more
financing is required.
Therefore, the positioning of AIIB should be and is
clear: it is to fill the gap and supplement, not to disrupt,
existent institutions. It will be a China-headquartered,
Asia infrastructure-focused multilateral development
institution with an international-standard governance
board and management team. It will be both Asia and
the world’s “most Chinese” multilateral development
institution and the most international among all devel-
opment institutions led by China. Simply put, it will be
both regional and global as well as Chinese.
AIIB & new world order
The establishment of AIIB and NDB marks a turning
point and carries profound significance, reflecting the
shifting power globally, with post-war global govern-
ance bodies (financial, economic and political) having
been dominated by the US-led West. AIIB represents

Jul. 2015    027

Macro Economy
the first time in human history that a multilateral bank
is founded and spearheaded by a developing country
without the incumbent superpower. In the case of
NDB, it is the first time that developing countries as a
group have sponsored a global development institution
without the prior endorsement from the developed
world. In this connection, the AIIB and NDB represent
the first, yet major, step in re-balancing the current
unbalanced global governance, which has been domi-
nated by the developed world.
AIIB – the Chinese perspective
Many international China watchers now known Chi-
na’s so-called “One Belt & One Road” (“BAR”) strategy
— the inter-continental partnership initiative that Chi-
na has decided to undertake to further integrate itself
with the rest of the world. The initiative is probably
easier known as the “New Silk Road” strategy that em-
ulates the ancient Silk Road that connected China and
Europe.
The establishment of AIIB (and to an extent NDB) is
part of China’s broad globalization and modernization
initiative. China sees it crucial to broaden and deepen
its global integration as it embarks on the next phase of
economic development.
Granted China is undertaking this strategy out of its
own interest: China’s previous policy bias towards in-
vestment and restrictive foreign exchange policy so far
has led to overinvestment and excess capacity domes-
tically in certain industrial sectors. To rebalance and
upgrade its industry capabilities, it needs to channel
more investments into higher-value-add sectors as well
as overseas. The strategy has started working. In 2014,
China’s outbound direct investment reached USD 140
billion, making it a net capital exporting country for the
first time in history.
More importantly, China also knows from its own
recent experiences that developing infrastructure is
critical to economic growth and China wants to share
its valuable experiences with other developing coun-
tries. It is a nice and convenient addition that China’s
large savings need and are available for global deploy-
ment.
China now considers itself as a willing and able
country to contribute more to the world’s development.
028    Jul. 2015
Together with other developing nations, it attempted
to increase its contribution to and shareholding of ADB
and WB. But the effort to reform within the system and
with the existent institutions has been frustrated. It is
against this global background that AIIB and the broad
“BAR” initiative were proposed as an alternative and
opportunity for China to answer the world’s call for
more visible and active roles for developing countries,
while furthering its own growth objectives.
The new thinking on how AIIB should operate
Needless to say, AIIB and NDB will learn from the
best practices that ADB and other development banks
have accumulated over the years, in terms of strategic
focus, key governance and operational matters. But
simply copying those will not be enough. They will
need more fresh and progressive thinking about how
to govern more democratically, how to operate more
efficiently and effectively (which have been areas of
criticism for incumbent players), how to engage more
broadly with the private partners and general public,
and so on.
To achieve these goals, AIIB (and NDB) must em-
brace new technology and new financial tools such as
“internet finance”. Take the example of crowd-funding,
a recent financial innovation that has gained a lot of
interest in China and USA. Given the vast visibility and
direct connectivity it establishes among the funded
party and numerous investors involved, crowd-funding
will be an effective way for a public institution like AIIB
to broaden its funding sources, potentially lower the
financial cost, and raise the level of public participation
in what it does and aims to achieve. Crowd-funding
(and other innovative solutions) has the necessary in-
gredients to become a powerful tool to unleash the full
potential of the public-private-partnership that is sore-
ly sought after and yet has proven so elusive to realize
with existent institutions and conventional funding
methods.
Fortunately we are now in a new world with access
to new technologies, new financing tools, new lessons
and new models for development. To leverage them
properly to help achieve our shared goals of develop-
ment institutions, we need new thinking and act upon
them decisively!
 WWW.BOAOREVIEW.COM
WWW.BOAOREVIEW.COM

Can you imagine…

the Savannah
without elephants?

Every piece of ivory comes from a dead elephant.

Go to www.ifaw.org to learn more.
Jul.
Jan.2015 
2015 019
  029
Macro Economy
Innovation Policy as a
Process of Creation and
Selection of Effective
Institutions
By Dominique Foray
What kind of innovation policy would we like
to see?
Let us first think of what we do not want! We want to
avoid government making conjectures about what sec-
tor should be given support or about what are the most
important critical technologies to help. Departing from
neutrality with respect to technological fields is always
dangerous since it implies guessing future technologies
or market development; and deciding by committees
what is better left to the market. We also want to avoid
governments adding agencies, programs and organiza-
tions any time a new problem is perceived by the policy
makers, resulting in great bureaucratic complexity and
high transaction costs.
The sort of innovation policy to be discussed here is
defined as a process of creation and selection of institu-
tions – effective institutions that can channel the ener-
gies of a large number of people towards research and
innovation as well as effective institutions that can help
private agents to exploit opportunities for collective
actions. The kind of desirable policy can find specific
expressions in three domains: science, industry, and
grand challenges.
030    Jul. 2015
Science policy
Science policy issues are at the same time very sim-
ple and very complicated! Simple because the most
effective institutional arrangement in science is the
so-called research university, an institution which is
unique in coupling research and education. The stu-
dents (at least at the master level) need the teaching
and supervision of the best scientists and the scientists
need to be exposed to the energy and creativity of the
students! However it appears to be very complicated as
we see many European countries unable to follow this
prescription. A very large part of the scientific research
landscape is occupied by another institution – the so-
called public research organization or government
research laboratory – which is by definition less effi-
cient because it breaks the intimate relation between
research and education.
The importance of government laboratories is a leg-
acy from the past when certain economies in Europe
needed to generate critical mass of scientists, and to
focus on large technological objectives to catch up to
others. However, as these countries (notably France,
Germany, Italy) go closer to the technology frontier,
 WWW.BOAOREVIEW.COM

Dominique Foray
Professor, Chair of Economics and
Management of Innovation, Ecole
Polytechnique Fédérale de Lausanne
(Switzerland)

The government does not have innate wisdom or

the ex-ante knowledge about future technologies.
Innovation policy is a process of creation and
selection of effective institutions that can channel
the energies of a large number of people towards
research and innovation, and help private agents to
exploit opportunities for collective actions.

new institutions are needed: research universities and
research councils to allocate grants in a competitive
manner. However, one can observe a strong institu-
tional inertia: in countries of the east and south of
Europe as well as in France and Germany, where the
sector of government laboratories is still hypertrophied
and the research universities are poorly supported and
funded. The so-called Joint Research Centers of the EU
contribute to such hypertrophy. This is a great waste of
resources. At least 50% of scientists in Europe are em-
ployed in the government laboratory sector and as such
are not exposed to any student!
The way the public research sector is organized and
funded in Europe is just inadequate to the logic of in-
novation; however, the UK, Switzerland and the Scan-
dinavian countries are exceptions. We have therefore a
strong policy case about designing a process to lead to
more effective institutional arrangements in science in
many countries of Europe.
Industrial policy
SMEs are a key industrial asset in many Euro-
pean countries. The innovation capacities of SMEs
are dependent on their internal capabilities but
also on the ecosystem in which the SMEs operate.
A rich local ecosystem is the one which provides
the resources for innovation that an SME needs
but cannot produce and maintain by itself. These
resources are provided by industrial associations,
local universities and large companies through
spillovers of research, training, diffusion of tech-
nologies to suppliers, general marketing invest-
ments, and so on. Large companies have always
been very instrumental in generating these spillo-
vers towards their local environment. These spill-
overs constitute the complementary capabilities
that most SMEs can draw on – even if they have
not contributed to their production. Clearly Euro-
pean countries enjoy rich ecosystems and SMEs
are strongly benefiting from this.
Now the story is that in many countries (in the
US for instance), the sources of the complementary
capabilities have dried up and large holes in the indus-
trial ecosystems have appeared. Such an unfortunate
evolution is the result of several factors such as the in-
creasing tendency towards outsourcing and offshoring,
as well as the changes in the governance of large com-
panies, etc.. As Suzan Berger writes in her recent book
(2013): “SMEs are home alone ”. Even start-ups with
great innovation and generous venture backing cannot
do it all in house. They need to find suppliers, qualified
production workers and engineers, expertise beyond
their own. The new ecosystem is too poor to be able to
provide all these resources.
There is a strong policy case as SMEs need strong
ecosystems to realize all the opportunities offered by
the new technological wave (in manufacturing technol-
ogies, 3D printing and the like). The right policy is diffi-
cult since there is always the temptation to accumulate
a profusion of agencies to match the great diversity of
services and resources needed by the SMEs. However,
a better option would be to empower private agents (the
SMEs) with the capacity to produce their own private
institutions which will help to solve most of the public
goods problems which are represented by the need for
complementary capabilities.
The idea is not new and was first developed by R.
Coase: instead of the State providing the public goods,
private agents can generate institutions – such as as-
sociations, clusters – which help to capture research,
training or marketing externalities. There are many

Jul. 2015    031

Macro Economy
historical examples showing the ability of people to
produce these private institutions in order to realize
opportunities for collective actions (Weder and Grubel,
1993). Empowering private agents with this capacity
to create private institutions is a right policy goal as
Romer (1993) showed in an interesting but neglected
paper.
Grand challenges
It is a reasonable idea to identify grand social chal-
lenges (such as climate stabilization or global health)
and to structure a policy response to them. After all, a
lot of innovations are needed in the domains of clean
technology and energy efficiency if we want to address
successfully the climate change problem. The policy
problem here is that we want not only to increase the
rate of innovation but we want to increase the rate in a
certain direction . There is a standard response to this
problem: let’s internalize all social costs, including car-
bon emission, and the incentives to innovate towards
cleaner technologies will increase. However, it is diffi-
cult to make it work: economic instruments such as a
global carbon tax or a market for emission permits are
difficult to implement and to operationalize, but there
is a degree of urgency in finding solutions to the climate
problem.
Our argument is that solutions should not only
concern the “demand for innovation” side (with instru-
ments like a carbon tax or a market for emission per-
mits) but also the “supply of innovation” side in order
to make green R&D and innovation more profitable.
The idea is therefore to support the exploration of new
domains of R&D which are potentially fruitful in terms
of green innovation and clean technologies. However,
we do not want a policy with a government making
conjectures about the best technology to support.
The key principle of any policy addressing a grand
challenge is related to the recognition that the gov-
ernment does not have innate wisdom or the ex-ante
knowledge about future technologies. Policy makers
must guard against the intellectual logic imposed by
the principal-agent model, according to which the
032    Jul. 2015
principal (the government) knows from the start which
technologies should be developed and therefore con-
fines itself to setting up the incentives for private indus-
try to carry out the plan. “What if, as I and many others
assume, there are no principals…with the robust and
panoramic knowledge needed for this directive role ? ”
(Sabel, 2004).
The key point here is that discovering what to do
(what are the technologies to be developed) is fully
part of the policy process and should be done by the
business sector. This is the so-called “self-discovery”
principle (Hausman and Rodrik, 2003). It is the role
of companies and entrepreneurs to open a new field,
to undertake a new exploration activity in the area of
clean technology and to produce both the technological
and economic knowledge about their business ideas
in the field of green innovations. However, because
such explorative activities are characterized by weak
appropriability (information externalities), have scale
economies, and show some coordination failures, the
most promising of them should be subsidized and sup-
ported. In such a process, the policy must be endowed
with a “self-destruct” mechanism, so that any support
will be terminated after a certain period of time has
elapsed. This provision is crucial just because after such
a period of time (say 5 years) the “new” activity is no
longer new and therefore the main rationale for policy
has disappeared.
With this kind of policy design, a process is put
in place through which opportunities are discovered
by entrepreneurs, whose development activities are
supported in case of market and coordination failures.
New options are generated at any time.
Governments do not know (or know very little
about) the kind of technologies or activities to sup-
port but they can do useful things. They need to
view innovation policy as a process of creation and
selection of the most effective institutions to channel
energies of people towards research and innovation,
to help private agents to exploit opportunities for
collective action and to help private agents discover-
ing new domains of opportunities to address a Grand
Challenge.
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 Focus
Too Steep for Comfort
Stock trading as a national
pastime; optimism in spite of
slowing growth
By Jimmy C. Chang
“I skate to where the puck is going to be, not where it
has been. ”
This quote by hockey great Wayne Gretzky is cited
so often in business, management consulting, and aca-
demia that it runs the risk of becoming a cliché. How-
ever, I have yet to find another quote that captures so
well the essence of anticipatory management.
Investing is about anticipating what will likely tran-
spire down the road. The puck that the market focuses
on is money. Where the money goes to will likely affect
the movement of asset prices. For over a decade, one
would have done quite well by anticipating where Chi-
na’s money was going, given the country’s huge scale.
Starting over a decade ago, China’s purchase of com-
modities was rising rapidly as a result of its massive
infrastructure build-out. It gave rise to the commodity
super-cycle and made mining stocks some of the best
performers for years. However, by 2011, it was time to
hop off the commodity bandwagon as China signaled
the intention to shift its economic growth driver from
infrastructure to consumption. China’s new wealth
then developed a taste for luxury goods, which lifted
share prices of luxury brands. Macau and various gam-
ing stocks had also hit the jackpot as Chinese gamblers
flocked to its gleaming new casinos. These investment
themes eventually lost their allure after the anti-cor-
034    Jul. 2015
ruption campaign curtailed conspicuous consumption
and gifting.
Where is Chinese money going these days? For one,
the e-tailing adoption in China has been breathtaking.
Online sales now account for 16% of China’s retail
sales vs. 8% in the U.S., even though the U.S. was the
early adopter. China’s outbound tourism has also been
big. It seems that everywhere you turn in travel des-
tinations around the globe, there are Chinese tourists
snapping pictures and clearing store shelves. Then,
there is the stock market – it appears that stock trading
has become a national pastime as a record number of
new brokerage accounts have been opened lately. The
numbers are staggering -- more than one million new
accounts per week. A local survey reported that more
than two-thirds of these new investors have never
attended or graduated from high school. We are not
opposed to the less-well educated buying stocks; we are
concerned that some may view it as a one-way street to
quick profits. Historically, the alarm bell also tolls when
retail investors get overly excited.
Unlike China’s spectacular but short-lived bull mar-
ket in 2007, the current rally is partially fueled by mar-
gin trading, which was approved in 2010. While a typi-
cal margin account requires at least 50% of the portfo-
lio in cash or securities (i.e., one can borrow up to the

For China the bull market is a welcomed stimulus for
the economy, but it could quickly turn into a double-
edged sword. Parabolic market surges eventually
fizzle out. Chinese authorities need to bring down
the market’s angle of ascent to a sustainable level by
offering alternatives to China’s massive savings.
Jimmy C. Chang
Chief Equity Strategist, Rockefeller & Co.
amount of one’s capital), there are ways to increase the
leverage. The so-called umbrella trusts, which invest in
several equity funds under a master trust product, were
able to let investors borrow up to five times their capital
until the practice was banned a couple of weeks ago.
At the time of this writing, the Shanghai Stock Ex-
change Composite is up more than 30% YTD, and has
more than doubled from a year ago. The growth-com-
pany dominated ChiNext Composite Index on the
Shenzhen Stock Exchange has doubled YTD. It is
ironic that the stock rally gained momentum since last
autumn, after the downside risk to China’s growth be-
came more pronounced. In line with the bad-news-is-
good-news phenomenon seen in many other markets
around the world, China’s stock rally appears to be fue-
led by the expectation of more accommodating mon-
etary policies needed to arrest the slowing economic
growth. Coincidentally, the rally also picked up steam
after the Shanghai-Hong Kong Stock Connect Program
was launched on November 17, 2014. Some credit the
program, which allows mutual access between Shang-
hai and Hong Kong exchanges, as a catalyst for the
stock rally. However, data shows that the initial uptake
of the program was rather tepid.
The stock connect program had a real impact on the
Hong Kong stock market over the last few weeks. Prior
WWW.BOAOREVIEW.COM
to April, the Hang Seng Index was essentially fluctuat-
ing in a trading range for a number of years. As stocks
on Chinese Mainland soared, a valuation gap opened
up for companies with dual listings on both Shanghai
and Hong Kong exchanges. Hong Kong shares’ widen-
ing discount to their Shanghai peers eventually attract-
ed Mainland capital to move south, and the stampede
started on April 8, driving the Hang Seng Index up 13%
for the month of April.
For Chinese policymakers, the surging bull market is
a timely stimulus to the economy. The official People’s
Daily recently argued that the bull market has only just
begun, as it reflects the country’s new development
strategies and economic reforms. Various local media
have been crowing about the wealth effect. Investors
are giddy that the quick profits in stocks have far ex-
ceeded the low yields of savings accounts. Even the
once red hot peer-to-peer (P2P) lending sites experi-
enced a sizeable decline in lending volume as investors
shifted money to the stock market.
Having experienced several epic boom/bust market
cycles in the last two decades, I would caution that a
surging market is a double-edged sword. A sharp and
steep market reversal could quickly unravel the wealth
effect and take a toll on investor psychology and the
economy. Some studies have shown that the psycho-
Jul. 2015    035
Focus
logical hit from investment losses is greater than the
euphoria from investment gains. Margin debt could
also lead to bankruptcies among the borrowers as well
as the lenders.
There are signs that China’s regulators are attempt-
ing to curb their retail investors’ enthusiasm. On Fri-
day, April 17th, the China Securities Regulatory Com-
mission (CSRC) announced a number of measures to
tighten the rules on margin lending, facilitate shorting
of stocks, and ban the margin-trading businesses of
brokerage firms from using the aforementioned um-
brella trusts. The move triggered a sell-off across world
markets and Chinese stock index futures. Two nights
later, the People’s Bank of China (PBOC) announced
a highly stimulative 100 basis point cut in the reserve
requirement ratio (RRR) for banks. If not for the CS-
RC’s timely rule changes, this surprise 1% RRR cut, the
largest by the PBOC since the dark days of the global
financial crisis in late 2008, probably would have at-
tracted even more inflow of investment capital and sent
markets soaring.
Whether China’s stock rally will continue is anyone’s
guess. The steepness of the current rally is eerily similar
to that of the bubble in 2007. If investors focus solely
on further monetary easing as the main driver for the
market, the Shanghai Composite could go a lot higher
as we believe there are likely several more rounds of
easing. There are also unconfirmed reports that the
PBOC may consider injecting more liquidity by buying
local government bonds from Chinese banks. Another
potential driver is the restructuring of the less efficient
state-owned-enterprise (SOE) sector – there are var-
ious unconfirmed reports that the number of SOEs
could be consolidated from 112 to as few as 40.
036    Jul. 2015
One can also argue that the market is still reasonably
valued as the Shanghai Composite’s P/E ratio is in the
mid-teens, in line with its long-term average. However,
it belies the fact that the index’s P/E is skewed lower
by mega cap stocks – banks, energy companies, steel
makers, etc. – that probably do not deserve higher
valuations due to various issues from the lack of trans-
parency to overcapacity. Many Chinese stocks with
better growth prospects, on the other hand, are already
trading at stretched valuation levels.
In aeronautics, an aircraft could stall out and crash
if it takes off at a very steep angle of climb. Similarly,
we’ve learned from history that parabolic market surges
eventually fizzle out, and corrections are unavoidable.
The challenge for Chinese policymakers is to change
the investor mindset from get-rich-quickly to longer-
term appreciation. Just like in aeronautics, they have
to bring down the market’s angle of ascent to a sustain-
able level by offering alternatives to China’s massive
savings – more IPOs, outbound investments, bonds,
and even renewed interest in real estate. Chinese com-
panies also need to deliver stronger results to justify
their rising valuations; the market cannot trade on
hope indefinitely. If fundamentals fail to reaccelerate,
China’s sovereign wealth funds may want to consider
selectively taking profits to build up some dry powder
to be redeployed as a market stabilization mechanism
down the road.
There is an adage that when the U.S. sneezes, the
world catches a cold. These days, given the country’s
size and scale, a hiccup in China would have rever-
beration across the world. How China’s stock markets
behave in the months and years ahead is likely to have
significant global ramifications.
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Jul.
Jan.2015 
2015   037
065
Focus

How Should We Approach

China’s Stock Market?
By Li Shanquan

So far this year the rate of return for China’s stock market has been
the highest in the world, but this is clearly not the only criterion by
which a country’s stock market should be measured. As China’s
capital market develops, the mechanisms for the allocation of capital
should be improved, in order to better promote real economic growth,
and regulatory bodies have to be calculating about where they do and
do not get involved.

A
s of the time of this writing (14 May 2015), the Chi-
nese stock market has maintained the highest rate
of return of any market in the world, with the Shen-
zhen stock market reaching a rate as high as 72%. Mean-
while, evaluations of the Chinese stock market by both inves-
tors and theorists have been many and varied—many predict
a continued rise, while many also warn of a crash. However,
the market appears not to be heeding these warnings of the
looming bear, and continues to reach new heights.
From an international perspective, conservative investors
have had to admit that when it comes to making predictions,
the Chinese stock market often leaves foreign experts looking
foolish. Domestic public opinion towards the stock market is
also mixed. The optimists believe that a new era for the Chi-
nese stock market has only just begun, and that it will climb
even higher in the future. The pessimists, on the other hand,
believe that this boom in the stock market will be short-lived,
and that the returns for future investors will be miserable in-
deed.
Rate of return is not the only measure
Is a stock market with a high rate of return a good stock
market? The answer to that question is unlikely to be clear-
cut, as everyone has different opinions over what makes a
038    Jul. 2015
“good” stock market. For most investors, the rate of return is
the primary – but not the sole – factor in evaluating a stock
market. For example, when the rate of return is incorporated
into the restrictions on risk preference, for many markets it
is no longer possible to simply use the rate of return to assess
the quality of the market. Or, when investors expand the
definition of risk beyond market volatility, the rate of return
loses further status. Additionally, for long-term investors, cri-
teria and methods for evaluating rates of return and risk are
very different from those for short term investors. It is clear
that the evaluation of a stock market is a diverse subject, and
largely a matter of opinion. And even among experts, opin-
ions vary.
Well, is there an objective standard for determining whether
a stock market is good or bad? The answer is yes. The standard
is simple: a good stock market is a rapid, efficient market for
capital, which can allocate capital effectively and thereby expo-
nentially increase its efficiency. Industries and enterprises in
urgent need of development can thus use the stock market to
attract investors and gain rapid access to capital, which can then
be effectively deployed in the field for development. The result is
not merely the elimination of bottle-necks and shortcomings in
economic development, but the process delivers a rapid appre-
ciation of capital and lays a solid foundation for a healthy next
economic and capital cycle.

Li Shanquan
Global Equity Team Portfolio Manager,
OppenheimerFunds
Investors participating in this market must minimize spec-
ulation and blind investments as much as possible and have
a clear and objective view of the industries and enterprises in
which they are investing, while avoiding excess production,
reduced rates of return and losses of principal due to capital
mismatches.
Regulatory bodies: knowing when to step in
A healthy stock market increases the expectations of the
regulatory body. In order to increase the efficacy of the capi-
tal market, government regulation must be present in every
aspect thereof, with the establishment and refinement of laws
and regulations as a precondition, as these form the foun-
dations of transparency and efficiency required for market
operations. On this basis, strengthening legal enforcement
is the only way to ensure order within a market. Regulatory
authorities must be able to quickly investigate any act or be-
havior that has a direct adverse impact on market efficiency,
regardless of whether they stem from listed companies or
investors. Eliminating or reducing the incidence of behavior
that breaches market principles of transparency and fairness
is primarily the responsibility of the regulatory bodies, and is
ultimately aimed at increasing the quality of both companies
and investors through a dual-pronged approach, using edu-
WWW.BOAOREVIEW.COM
cation and punishment. This should be the long-term priority
of the regulatory authorities.
Assessing the level of the stock market or deciding what
kind of evaluation is appropriate, is not the responsibility
of the regulatory bodies. Although regulators can influence
a market through policy changes, this should ultimately be
achieved through interaction with market participants and
between investment and finance, and through overcoming
the necessary learning curve.
China’s capital market has achieved a remarkable level of
development considering its short history, and is becoming
an increasingly important component of the international
capital markets. History will show that, as the world’s second
largest economy, China’s capital market will become more
and more important on the international stage. As interna-
tional investors become increasingly drawn to the Chinese
stock market, it will naturally spur the development of the
market itself. It is clear that there is still a lot to be done as
part of this process, but we take a clearer stand behind the
concept that the market must incorporate a continuous
process of self-improvement. There will undoubtedly be a
learning curve to be overcome as part of this process, be it for
investors, listed companies or regulatory bodies. We sincere-
ly hope that this process be as rapid as possible, and be as
painless as possible.
Jul. 2015    039
Finance

An Important
Step toward RMB
Internationalization
Edging China
a Step Closer to
a Free-floating,
W
ith China’s success in securing

Fully Convertible Currency

57 founding members for its
new international financial
By Michael Zhu institution, the Asian Infrastructure Invest-
ment Bank (AIIB), the timeline of Renminbi
(RMB) internationalization is back on the
table. China’s efforts are expected to attract
global support, as RMB internationalization
will not only help rebalance their own econ-
omy from investment to consumption, but
also will introduce structural changes in in-
ternational trade and ease global imbalances.
For all the enthusiastic chatter in the Chinese
financial circle, there are widespread com-
ments by the country’s officials hinting RMB
will be included in IMF’s special drawing
rights basket (SDR) by the end of 2015, thus
opening the door to the introduction of a
reserve currency. It is clear that the interna-
tionalization of the RMB will serve to protect
China’s national interests and will have enor-
mous significance in symbolizing the rise of
China.
In the development of RMB internation-
alization, many discussions and studies have
been concerned with capital account liber-
alization. Understandably, the growth of in-
ternational financial transactions and inter-
national capital flows is in the core interest
of the global financial community. However,
in China’s best interest, after experiencing
many severe disruptions in the interest rate
market due to inadequate market oversight
and enforcement, the focus should lean
toward reforms to strengthen the People’s
Bank of China’s (PBOC) monetary policy
toolkit and fixing its monetary transmission
mechanism. Before the modernization of

040    Jul. 2015


China’s central bank is complete, an early
aggressive RMB internationalization could
trigger unexpected turmoil, throwing China’s
economic growth and structural reforms into
jeopardy. The centerpiece of China’s mon-
etary reform is interest rate liberalization.
Establishing a market-based interest rate
system will provide a foundation for PBOC to
acquire powerful tools to effectively regulate
market order.
An orderly market promotes fairness,
efficiency and transparency
Since first allowing Hong Kong residents
to open RMB deposit accounts in 2004, Chi-
na has come a long way in promoting the in-
ternationalization of the RMB, the 5th most
traded currency, the 2nd most used currency
in trade financing, the 7th largest reserve
currency, and the 9th in forex trading. As
the world’s fastest-growing major economy,
Chinese RMB is likely to play a much more
prominent role in international trade and
financial transactions in the future. The
alarming aspect of the recent development
stems from the composition of participants
in the use of RMB-denominated financial as-
sets and investment products. The RMB-US
dollar peg and the persistent steep interest
rate differential between the two currencies
make China a prime target for hot money
inflows. Mainstream institutional investors
and large mutual funds did not participate in
this carry trade. As of May 7th 2015, none of
the 25 largest US mutual funds totaling USD
3.1 trillion holds RMB denominated assets,
except small exposures to H-shares and
WWW.BOAOREVIEW.COM
Michael Zhu
Senior Vice President, First Eagle
Investment Management
B-shares. Even after Vanguard’s decision to
add A-shares to VWO, investigation of the
balance sheets of 5 prominent proponents
for the inclusion of China into the MSCI
Emerging Markets index in the asset man-
agement industry indicates most funds will
likely remain underweight China. The main
cause of this issue goes to China’s capital
control policy which offers limited access to
international investors and the structural
defects of those quota systems, such as QFII.
Most obstacles in the course of implement-
ing the channels to invest in Chinese capital
markets are technical in nature, and can be
resolved over time. For example, the author-
ity has disclosed the pending policy shift to
raise or even abolish the 300 billion RMB
(USD 48 billion) aggregate limit on pur-
chases of Shanghai shares through the Hong
Kong-Shanghai Stock Connect.
International investors have always been
concerned about the low visibility of China’s
market order. An orderly market promotes
fairness, efficiency and transparency and
gives investors the confidence to participate.
To ensure market order, regulators should
act to prevent market manipulation and
fraudulent practices, and central banks are
expected to step in and lend liquidity to
help market prices reflecting the true value
of assets. In an orderly market, there are
no bad assets, just bad prices (James
Grant). Financial market disorder and vola-
tility are “tails risks”, which are often difficult
to price. Without a deep and liquidity deriva-
tive market to find proper risk management
products, international investors are reluc-
tant to hold RMB assets for long-term invest-
Jul. 2015    041
Finance

Chart 1: The Strong Correlation between the Volatility of Short-term Interests

and the Volatilities of a Country's Exchange Rate and Other Risky Assets
15.0%

14.0%
Swiss Franc

13.0% New Zealand

Exchange Rate Volatility (%)

Dollar Australian
Dollar
12.0%
Swedish Krona
Norwegian
11.0% Krone
Euro
ment, further exacerbating the risk premium 10.0%
on RMB assets. Japanese Yen
9.0%
Stable short-term interest rates are Canadian Dollar
8.0%
the foundation of an orderly market
US Dollar
British Pound
7.0%
From a monetary perspective, a free-float-
ing reserve currency has the responsibility 6.0%
to provide reliable liquidity to international 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45
Short Term Intrerest Volatility(%)
investors regardless of economic and market
Note: Volatility is measured by annualized standard deviation. The exchange rate on USD
conditions. Liquidity in a financial system is the Dollar Index (DXY). Short-term interest rates are 3-month LIBOR or equivalent
is often measured by the stability of risk- market conventions.
Source: Bloomberg (April 2010 ~ April 2015).
free assets, more specifically, the volatility
of short-term interests. Empirically, the
volatility of short-term interests is highly Chart 2: The Explosive Volatility of Short-term Interest Rates in China
correlated with the volatilities of a country’s Volatility of Short-term Interest Rates(%)
exchange rate and other risky assets (Chart 1).
0 0.20 0.40 0.60 0.80 1.00 1.20 1.40
Historically, G4 currencies (the U.S. Dollar,
the Euro, the Yen and the Pound Sterling) all China
have great track records in terms of liquid-
Australia
ity, even during some of the worst market
crashes. Norway
The Chinese banking system has Switzerland
gone through quite a few perfect
storms of tightening money supply in New Zealand
the past 5 years. During those liquidity Sweden
shocks, interbank rates occasionally
spiked into double-digit territory, the Canada
level at which financial markets tend Euro Zone
to stop functioning. Consequently, the
US
volatility of short-term interest rates in Chi-
na has been explosive (Chart 2)- 3 times over UK
the level of Australia, which is considered as
Japan
the most risky developed market!
Source: Bloomberg (April 2010-April 2015).
In the initial phase of the full liberalization
of the RMB, the exchange rate of the RMB
will likely exhibit a large degree of variability.

042    Jul. 2015


2010. 11. 8 ~ 2011. 1. 20 2011. 4. 18 ~ 2011. 6. 20
3M SHIBOR +1.84 %
Shanghai Composite -15.25%
With the market-driven price mechanism,
an equilibrium should gradually stabilize
around RMB’s intrinsic value. However, if
PBOC allows elevated levels of short-term in-
terest rate movements to reoccur periodical-
ly, RMB will be deemed a high-beta currency
and find itself distant from international
investors. To get a sense of how concerning
the situation could be, by interpolating the
simple relationship between the volatilities
of short-term interest rates and currencies, a
bearish scenario shows a free-floating RMB
could have an annualized standard deviation
north of 20%, exceeding the level of Brazil-
ian Real. While this indirect quantification
is far from scientific, international investors
have enough reasons to be anxious. Even
assuming currency risk is hedge-able using
forex derivatives, it is impossible to manage
the confidence in local currency denominat-
ed assets. For example, whenever Chinese
banks show signs of running out of cash, the
Shanghai Composite Index has routinely
cratered in the past:
In absence of any catastrophic economic
collapse, such frequent liquidity and asset
price shocks make it difficult not to lay crit-
icism on the mismanagement of market
order. If Chinese markets continue to react
exactly like a typical emerging market, the
exchange rate of the free-floating RMB will
have very high positive correlation with Chi-
na’s risky assets. In the presence of liquidity
crises, RMB and A-shares could slide simul-
taneously as the result of a panic selling. This
positive correlation is detrimental to the
asset allocation weighting of EM local cur-
WWW.BOAOREVIEW.COM
2013. 5. 29 ~ 2013. 6. 27
+1.48 % +1.92 %
-14.26% -16.09%
rency denominated assets in international
portfolios, as managing the likelihood of tail
risk events for emerging markets has been
proved to be extremely challenging.
An orderly market cannot be maintained
without stable short-term interest rates, as
the short-term interest rate market is the
foundation of financial leverages. The most
commonly used tools of financial leverages
are derivatives. According to the Bank for In-
ternational Settlements (BIS), by the end of
2014, the developed over-the-counter deriv-
ative market has reached USD 630 trillion.
The risk-free term structure of interest rates
is a key input to the pricing of derivatives. In
particular, a majority of the derivative prod-
ucts use LIBOR-based rates to discount cash.
With such a massive outstanding notional
amount, even a one basis point move in LI-
BOR can equate to billions of dollars worth
of profits or losses. In order to avoid disrupt-
ing the derivatives market, a lot of effort has
been put into enforcing the oversight over
LIBOR to crack down on any manipulation.
Recently, regulators in the US, the UK, and
the European Union have punished a num-
ber of global investment banks more than $9
billion for rigging LIBOR. China has become
the second largest equity market and the
third largest bond market, as measured by
market value. Amid the great growth of the
capital market, the expansion of the use of
derivatives is still very limited. Some deriva-
tive instruments have been around for a very
long time, such as RMB interest rate swaps,
but yet undeveloped to their full potential.
China’s persistently high and volatile short-
Jul. 2015    043
Finance

Chart 3: LIBOR Rates Tend to Track the Federal Fund Rate Closely Over Time
6.0%

3M LIBOR
5.0% Fed Fund Target Rate

4.0%

3.0%

2.0%

1.0%

0.0%
6

9
5

8
3
2

7
1

5
3
2

4
r-0

r-0

r-0

r-0

r-0

r-0

r-0

r-0

r-0

1
r-1

r-1

r-1

r-1

r-1

r-1
Ap

Ap

Ap

Ap

Ap

Ap

Ap

Ap

Ap

Ap

Ap

Ap

Ap

Ap

Ap
Source: Bloomberg (April 2010~April 2015).

term interest rates should be one of the limit-
ing factors. China has determined to steadily
expand its asset securitization programs. If
the experience of developed markets is any
guide, assets securitizations will eventually
evolve into leveraged financial derivative
products, depending upon the reliability of
short-term interest rates.
Short-term interest rates are influenced
by a number of factors, some classified as
structural or cyclical, and some as endoge-
nous or exogenous. Compounding negatives
factors, the amplification of the effects of a
small shock could run into a liquidity spiral,
such as the 1997 Asian financial crisis, the
2007–08 US financial crisis and the 2011
European debt crisis. In the event of a li-
quidity crisis, the common practice in the
developed world is for central banks to react
strongly with ex-post policy intervention and
inject liquidity to maintain an orderly market
condition. This free downside insurance pro-
vided by the central banks and their ability to
efficiently influence short-term interest rates
should serve as part of the infrastructure of a
reserve currency.
Risk-free rates and cost of capital in China
are too high relative to other countries with
comparable levels of inflation and econom-
ic growth. Many contributing factors are
structural, reflecting the interrelationship
of funding liquidity risk and credit risk, e.g.
China’s sharp-slowing down shadow-bank-
ing industry and banks’ outsized exposures
to wealth management products that are
invested in “non-standard” assets (those
not traded on the interbank bond market or
stock exchanges). However, developed econ-
omies have committed the same errors in the
past. For example, the US banking industry
faced credit risks of a similar magnitude back
in 2008. The difference is that G4’s central
banks are more tempted to taper down mar-
ket volatility in short-term rates. Their first
responses to market failure have always been
restorative. Take the 2008 post-Lehman
credit crunch as an example. In the second
half of September 2008, the US markets suf-
fered a sudden reduction in the availability
of credit. LIBOR spiked up 2%. Within days,
the Fed cut its overnight target rate by 1%
and followed with a series of unconventional
monetary operations, including leapfrogging
the US monetary base from USD 900 billion

044    Jul. 2015

 WWW.BOAOREVIEW.COM

Chart 4: The Interest Rate Market Routinely Over-reacts in the Early Phase of a Policy
Shift and Swings Violently when the Central Bank is in Hold Mode
7.0% 25.0%

6.0%
20.0%

Resvrve Requirement Rate(%)

5.0%
Interest Rates(%)

15.0%
4.0%

3.0%
10.0%

2.0%
3M SHIBOR
Reserve Requirement Ratio 5.0%
1.0% 1Y Deposit Rate

0.0% 0.0%
9
5

8
7

3
2

4
1
t-0

t-0

t-0

t-0

t-1

t-1

t-1

t-1

t-1
Oc

Oc

Oc

Oc

Oc

Oc

Oc

Oc

Oc
Source: Bloomberg(October 2006-April 2015).

to nearly USD 1.7 trillion in the Q4 of 2008.
By the end of October, LIBOR already recov-
ered to pre-Lehman levels. At the time, root
causes of major credit risk events were yet
unresolved and banks were still waiting for
trillions of dollars to get recapitalized. In the
context of Chinese markets, PBOC and other
regulators must act to protect an orderly
market amid a crisis, crystallize their inten-
tion to keep short-term interest rates stable,
and ensure a reasonable level of financial
leverages in the system can be maintained.
According to some market commentators,
one of China’s liquidity squeezes might be an
engineered stress test by the government. A
sensible policy maker should never
sacrifice an orderly market envi-
ronment in order to push a delever-
aging process through the financial
system.
The visibility of the global economic trend
has never been this low. The growth and
inflation rates and the monetary policies of
major economies appear to be on diverging
trajectories. With the unprecedented scale
of the liquidity injection by global central
banks, cross-border flows have become
increasingly complex. While the benefits of
RMB internationalization should still sur-
pass its costs, China’s policy makers should
devote more time and resources into risk
management. Before embracing a fully
convertible RMB, PBOC needs to complete
the final strides in modernizing its mone-
tary policy framework. As the complexity of
China’s economy grows, the effectiveness
of the reliance on M2 as an intermediate
monetary target has diminished. PBOC’s
conventional monetary policy toolkit looks
obsolete in the course of transmission of
monetary policy. International experiences
have underscored the importance of shifting
to price-based targets such as interest rates.
For example, LIBOR rates tend to track the
federal fund rate closely over time (Chart
3). As opposed to China’s current monetary
framework (Reserve Requirement Ratio+1Y
Deposit Rate+1Y Lending Rate), the interest
rate market routinely over-reacts in the early
phase of a policy shift and swings violent-
ly when the central bank is in hold mode
(Chart 4). Since 2013, PBOC has introduced
a number of new tools to adjust liquidity
more swiftly and accurately, e.g. Short-term

Jul. 2015    045

Finance
Liquidity Operations (SLO), Standing Lend-
ing Facility (SLF), Pledged Supplemented
Lending (PSL) and Medium-term Lending
Facility (MLF). Those structural interven-
tion operations must work in conjunction
with conventional tools, and in particular, a
well-communicated and transparent interest
rate target by the central bank.
The interest rate liberalization and
the reform of China’s monetary policy
framework are the prerequisites of
the internationalization of the RMB
Empirical evidence no longer supports
maintaining a reference to money in China’s
monetary framework. The completion of In-
terest rate liberalization will be the milestone
in pushing China’s modernization of con-
ventional monetary policy tools through the
last mile. When the central bank gives more
flexibility to banks in setting deposit rates,
banks will be incentivized to independently
innovate the level of interest rates according
to their own liquidity conditions, cost of cap-
ital and their perception of financial market
environment. A new interest rate system
and interest rate formation mechanism will
be formed on the basis of the central bank
benchmark rate, money market rates for
mediation, and financial institutions deposit
and lending interest rates determined by
market supply and demand. More specifi-
cally, current policy rates (Reserve Re-
quirement Ratio+1Y Deposit Rate+1Y
Lending Rate) will be phased out and
046    Jul. 2015
replaced by a new central bank bench-
mark target rate. There are no major
technical obstacles for such a move:
As China’s foreign reserve has shown a
persistent down trend, reserve requirement
ratio will be downgraded to a liquidity man-
agement tool.
Governor Zhou Xiaochuan indicated in
March that if there is a chance, the depos-
it-rate ceiling will be lifted by the end of this
year. As a result, the deposit ceiling was
raised to 150% and may continue to rise.
After removing lower bound restrictions
on lending rates in 2013, lending rates have
been fully liberalized.
PBOC will likely pick a pair of repo/
reverse repo rates to form the low/upper
bounds of its new benchmark policy rate.
The transition will require the central bank’s
vigilant supervision and governance, and
the path of progress is not always a straight
line. China’s State Council’s recent decision
for banks to roll over some of the existing
obligations is quite intriguing. Some media
even speculate the interest rate liberalization
agenda could get postponed. Every struc-
tural reform comes at a cost. To achieve the
internationalization of the RMB, interest
rate liberalization and the reform of China’s
monetary policy framework are steps that
cannot be skipped. Even after implementing
those reforms, it is still worth testing out the
whole framework for at least one global busi-
ness cycle. Before that is accomplished, RMB
internationalization remains a long-term
ambition.
 WWW.BOAOREVIEW.COM

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For more information visit

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Jul. 2015    047
Finance
Turning China’s Money
Reserves into Capital
By Miriam L. Campanella
S
ome economies in East Asia have
built up large amounts of foreign ex-
change reserves in the past decades.
Holding large amounts of reserves helped
these economies to stabilize their macro
economy and exchange rates under periods
of market stress and rapid shifts in relative
economic size. Generally, it has been a strat-
egy to provide a defense against external
shocks with damaging consequences for ex-
ports.
Rules aimed at limiting foreign reserves,
in order to prevent currency manipulation,
have been discussed over a long period of
time. Yet there are to date no rules that come
with effective disciplines—and it is unlikely
that such rules can be agreed upon multilat-
erally, at least for the foreseeable future.
China’s measures to cope with
challenges in foreign reserves
The first line of defense was assigned
to the State Administration of Foreign Ex-
change (SAFE), part of the People Bank of
China (PBOC), with the objective to diversify
away from U.S. government securities. In
essence, the purchasing of new U.S. Treasury
bonds was going to decelerate, if not stop.
This is not an adequate policy. Even if China
048    Jul. 2015
would reduce its U.S. denominated foreign
exchange reserves, it does not answer the
question of what China should do with all the
assets it has already accumulated.
Improving the safety of its foreign re-
serves and the yields it can realistically
expect is linked to improving China’s institu-
tional structure for financial competition and
openness. In order to transition some of its
current reserves, China should “decentralize”
and move capital into the economy guided
by solid market mechanisms. Financial lib-
eralization would allow the country to con-
sider redeployments of its foreign reserves—
redeployments allowing for greater amounts
of investment from China in America’s real
economy.
Even if China’s foreign reserves seem des-
tined to shrink, redeployment is necessary
if China wants to gain better control over its
reserves by reducing its exposure to larger
systemic and macro risks.
Debate over global imbalances and
foreign reserve accumulation
In the wake of the financial crisis, there
has-yet again-been an animated debate
about global imbalances and foreign reserve
accumulation. In the decade before the crisis,
 WWW.BOAOREVIEW.COM

Miriam L. Campanella
Jean Monnet Professor at University of
Turin, Senior Fellow ECIPE Brussels

China’s vast foreign reserves have caused much debate and

questioning both at home and abroad. With the current financial
situation, holding such vast amounts of sovereign paper is no
longer viable. Financial liberalization is necessary for China
to move into a policy that would allow it to better control and
protect its foreign reserves.

Figure 1: Global Bank Assets and International Reserves (in billion US$)
300

Bonds, equities, and bank assets

250
Total commercial bank assets
Total reserves minus gold
200

150

100

50

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: IMF-IEO 2010

emerging markets and low-income coun-
tries accumulated reserve holdings of over
5 trillion U.S. dollars. These reserves were a
powerful defense against external turbulence
in 2007-2009.
However, the IMF and many others have
questioned whether higher reserves are al-
ways better and argued that excess reserves
held by China and other countries are dest-
abilizing the global economy. The Fund sug-
gests there is a strong correlation between
excessive reserve accumulation and global
imbalances, and that large foreign exchange
reserves could be instrumental in altering ex-
change rates, consequently eroding the sta-
bility of the international monetary system.
One response to these arguments has
come from the Fund’s own Independent
Evaluation Office (IEO). In a 2012 report,
the IEO argued that when compared to the
expansion of global financial markets, the
size of official international reserves does not
appear excessive (Figure 1).
The debate over imbalances and reserves
offers more nuances than the short de-
scription exhibited above. Yet, some of the
urgency in the debate has abated in the past
two years as the structural growth in foreign

Jul. 2015    049

Finance
Figure 2: China's Foreign Exchange Reserves 2014, 2015
4.0
3.95
Trillion (US dollar)
3.9
3.85
3.8
3.75
3.7
Apr/14 Jul/14
Source: Trading Economics and PBOC
exchange reserves has slowed down.
Is China a currency manipulator?
There is one part of the debate that refuses
to go away – the charge that China is a “cur-
rency manipulator” and that it runs a foreign
exchange reserve policy that destabilizes the
world economy. The U.S. Treasury has been
close to naming China a currency manipula-
tor but refrained from doing so.
However, the “currency manipulation
discipline” proposed in the debate, and the
campaign for its implementation, can turn
out to be a red herring. Excessive foreign
reserves are already a big concern to China’s
authorities, but for different reasons. Hold-
ing reserves come with opportunity costs –
and big reserves inevitably mean big oppor-
tunity costs.
Excessive foreign exchanges reserves:
forgone growth and systemic risks
Excessive reserves imply denied growth.
For China because of its reserves, the for-
gone growth amounted to almost 6% of GDP
between 2001 and 2010.
Yet what appears to have concerned
China’s authorities more in recent years is
that its foreign reserves, mostly parked in
sovereign debt securities of the developed
world, are no longer harbored in safe havens
050    Jul. 2015
Oct/14 Jan/15 Apr/15
after the 2008 global financial crisis. In the
current unstable structure of international
monetary policy these assets are exposed to
a mix of systemic risks. At home, as Yu Qiao
observes, “the balance sheet of the Chinese
central bank is constantly being expanded
with stockpiles of foreign reserves over the
years... Consequently, domestic money sup-
ply is increasing to a dangerous level and
inflationary pressure mounts”.
Abroad, inflationary pressures are sub-
dued, and prices and interest rates are in
some countries falling despite seven years
of rapid expansion of central banks’ balance
sheets. Yet, these developments are due
more to the role of monetary and financial
agents, as Claudio Borio puts it, “After all,
interest rates are not determined by some
invisible natural force, they are set by central
banks of developed economies”
In sum, ultra-expansionary policies cre-
ate powerful incentive distortions whose
consequences are typically understood only
after a crisis. Such warnings have not passed
unnoticed in Beijing. Chinese authorities are
increasingly alarmed about systemic finan-
cial risks abroad and how a crisis could erode
the value of China’s reserves.
Redeploying foreign reserves
The persistent policy accommodation, and
the evolving “currency wars”, have ended up

diluting international reserves. Consequent-
ly, China needs to defend its riches and take
measures to that end.
This is easier said than done. While foreign
reserves are liquid assets, China’s foreign re-
serves are locked in the U.S. Treasury bonds
and the European sovereign debts. Selling a
large amount of them would drop their value
sharply and erode the market. This is the so-
called “too-big-to-exit” problem.
The first way to reduce the huge pile of
foreign exchange reserves is obviously stop
buying them. And, for a variety of reasons,
China is obviously slowing down its reserve
accumulation (Figure 2).
A second way to protect the value of its
reserve is legalistic. While there may be
no reason to worry about a default by the
U.S. government, Barry Eichengreen ar-
gues that “China, as a creditor nation, has
responsibilities on putting its savings safe,
and especially has an interest in a stable
international debt regime.” Hence, argues
Eichengeen, a reinforcement of bond cov-
enants and contracts are the way to go,
and, the only option left for China is to an-
nounce “that, henceforth, it will buy only
bonds including such provisions”
These provisions – if they ever would be
agreed upon – will not address the stock of
accumulated bonds now, and the risks asso-
ciated with them.
A market-driven approach
A third approach would be to change the
nature of the reserve holdings, turning them
away from holdings of sovereign paper into
real capital that can be measured, allocated
and protected in better ways.
In such a manner, resources of sovereign
debt securities could be diversified in a way
that would not prompt political responses
abroad. Such diversification would include
shifting the sovereign assets into equity
claims against private corporations in com-
mercial industries. For this purpose, a ded-
icated agency – taking lessons from the CIC
or the concepts guiding Debt-Equity-Swap
WWW.BOAOREVIEW.COM
(DES) facilities – would have to be created in
order to manage the transition and the im-
provements in investment strategies.
A pure DES model, as designed by Yu
Qiao of the Tsingua University, introduc-
es important innovations into the debate.
According to Yu, the DES is conceptually
a special instrument of asset conversion
that changes debt into equity claims in the
process of a liability restructuring. Such an
ex-ante DES facility rests on accessibility to a
variety of market-oriented and professional
investment platforms. This is needed to set
up new private investment companies with
joint-share ownership structures, sound cor-
porate governance structure, and adaptabil-
ity to external environments.
This is a bold idea – and it is easy to see
what challenges face it. Obviously, the prime
one is that China’s government would have
to let go of the control of the parts of the
reserves that are transformed. Yet it has one
core strength: it gives an opportunity for the
Chinese government to diversify its reserves
faster and do it in a way that it can control. It
also makes another thing clear: for China to
improve the protection of its riches, it needs
to reform its financial sector by providing
better structures of competition and allow
for greater market access.
Therefore, it is argued that financial liber-
alization is necessary for China to move into
a policy that would allow it to better control
and protect its foreign reserves.
A recent poll, commented in The Globalist ,
suggests that Americans consider China their
“nemesis” as they see China’s growing eco-
nomic power as a “critical threat” to Ameri-
ca’s “vital interests”.
As Stephen Roach warns, “what rather
should worry the U.S. administration is that
China’s determination to re-balance the
country’s economy into more of domestic-led
growth can be far more complicated for the
U.S. and the world economy than expected
as there will be far less capital available for
government bonds”.
Note: The author’s original notes have been omitted for
consistency of style. They are available upon request.
Jul. 2015    051
Finance
“One Belt,
One Road” Bonds
By Chandima Mendis
Bond markets along the One Belt and
One Road will grow and provide a key
source of financing and diversification.
Organizations such as the AIIB will be
at the forefront of this development,
channeling investment resources while
catalyzing the growth of domestic bond
markets in these countries, resulting in
better infrastructure investment and
speeding the internationalization of the
Renminbi.
T
he One Belt and One Road initiative and
the launching of the Asian Infrastructure
Investment Bank (AIIB) are two significant
developments in international finance and trade this
century. While many in the old world have been quick
to dismiss the importance of these initiatives, their
emergence highlights the already established tailwinds
in world trade and finance.
The ‘One Belt, One Road’ is, however, different from
the old Silk Road, which predominantly ran across
central Asia into Europe until the rise of Ottoman and
Mongolian empires effectively ‘cut’ dynamic trade links
between the East and the West. The One Belt and One
Road is more encompassing, moving beyond Eurasia
to include South Asia, the Middle East, and even Africa
and Latin America. Hence not only has the Silk Route
shifted south, but it has several nodes – A Northern
line though Eurasia to Europe, a middle line through
the Middle East and a Southern line through Africa to
Latin America. These new routes are not only about
trade in goods, but will also channel investment, infra-
structure, human capital and technology.
052    Jul. 2015
Figure 1: Foreign Ownership of Domestic Bonds
60
50
40
30
20
10
0
Brazil Colombia Indonesia
Local bond markets
Macroeconomic stabilization, economic reforms
and robust export performance have enabled countries
along the One Belt, One Road to move from a vicious
cycle of booms and busts to a virtuous cycle of growth
and stability. This trend will continue over the course
of this century as emerging economies steadily increase
their share of global trade, capital flows, reserves and
output. It is only natural that the development of local
bond markets along this “One Belt, One Road” takes
place given the rise of these economies. As seen in the
charts below, local bonds now account for the lion’s
share of outstanding emerging bonds and even in
smaller counties they are becoming important.
Local bond markets have been identified as a major
conduit to realize these objectives. Development of
local bond markets would not only open up financing
for longer term projects along the One Belt, One Road
areas, such as infrastructure development and capital
investment, it would also channel the savings and in-
vestment needs of economies through the introduction
 WWW.BOAOREVIEW.COM

Chandima Mendis
Chief Investment Officer, Emerging Star
Asset Management, Geneva; Leading expert
and portfolio manager; leading strategist and
economist for the International Monetary Fund

Korea Malaysia Mexico Peru Romania Russia South Africa Thailand Turkey

Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Sep-14

Source: JP Morgan

of new sets of institutional investors through currency

diversification.

19 ％
Local Sovereign and
Local bond markets can facilitate this liberalization
process by changing the financing structure of the
Corporate Debt, USD capital accounts in both issuer and borrower coun-
Figure 2: 9.3 trillion
tries. Countries which are in need of capital can issue
Total EM Debt
新兴市场国家流通
domestic and foreign currency bonds, to reflect these
Outstanding
81％
债券总额
new trade linkages, thereby reducing the currency
mismatch risks inherent in past crises. There are hence
Hard Currency Sovereign
and Corporate Debt
important balance sheet and diversifications consider-
USD 2.2 trillion ations for the AIIB: the issuance in local currencies can
Source: JP Morgan help mitigate risks while also advancing the interna-
tionalization of the Renminbi.
Domestic bond markets meanwhile enable these
countries to reduce the dependency on short-term for-
eign debt – and issue securities in domestic currency
with longer maturity. Having a liquid domestic market
will enable competitive pricing of primary issuance and
lower funding costs. Opening domestic debt markets
to foreign investors has the added advantage of diver-
sifying the funding base from hard currency debt and
passing the foreign currency risk to the holder of such

Jul. 2015    053

Finance

Figure 3: Selected Local Treasury Bonds

450

400

350

300
USD billion

250

200

150

100

50

0
hs a
n

A a
G ia

K on a

a
M sia

N co

ia

Q u

au u r
A a

La a
ha a

T nd

ru y

y
am

a
a
ak si
ta

th bi

U ke

V ua
d n

di si

T nk
ri ic

bi
er
b

er

at
en

i
In ha

ila
az e

ou ra
ay

S fr
om

ex

am
tn
P

ur

g
ig
K

ie
al

R
ol

Z
M
C

Sources: National, IMF, JP Morgan

S

debt, particularly with respect to one currency, the US
Dollar, as witnessed in many emerging countries.
While the focus of local bond market investors have
been in larger economies such as Brazil, Turkey and
Russia, smaller countries are also rapidly opening their
domestic bond markets to international investors.
These include Kazakhstan, Mongolia, Nigeria, Para-
guay, Ghana, Angola, Kenya and Vietnam among oth-
ers, which have a growing government bond markets
and nascent corporate sector. Issues such as the AIIB
could tap domestic savings in these countries, such as
pension funds and insurance companies whose assets
are continuously growing.
Benefits of developing local bond markets
Apart from opening up alternative funding sources
to finance budges and infrastructure projects, a do-
mestic debt market can contribute to greater market
efficiency and liquidity and spur the development of
corporate debt markets. A mature, deep and well-func-
tioning domestic bond market also makes monetary
policy more effective, in terms of yield curve manage-
ment and signaling.
The development of domestic bond markets has
implications for other markets in the financial sector.
These include money markets, corporate bond mar-
kets, foreign currency markets, derivatives markets and
equity markets.
Government bond markets can lead to greater ef-
ficiencies in capital markets. As governments issue
bonds, private companies will follow as they will find it
easier to price their bonds. More issuance will increase
bond market liquidity and capital markets will subse-
quently develop.
Traditionally, many companies and agencies have
relied on internal cash flow and bank credit for financ-
ing investments. The ability to raise financing through
domestic bonds would greatly enhance a corporate’s
financing options, improving liability and cash flow
management. However, the development of domestic
private bond markets would need a strong institutional
and regulatory framework for the sector to take off. The
government will have to go beyond simply launching
domestic bond issuance to ensuring that a supporting
legal framework exists, in terms of legal structure, such
as recognition of covenants in bonds, the recourse to
courts and the creation of bankruptcy laws.

054    Jul. 2015


Russia
Netherlands
Kazakhstan
Turkey
Uzbekistan
Greek
Iran
India
Sri Lanka
Kenya
Domestic bond markets will also have an important
interaction on foreign currency markets. As more trade
flows across this route, domestic bonds can play an
important role complimenting central bank swaps and
trade financing facilities. The presence of foreign inves-
tors will lead to an interaction with foreign exchange
policy, and as many countries have witnessed, the
development of local bonds have led to capital inflows,
boosting foreign exchange reserves. Conversely, policy
challenges can emerge during periods of outflows and
volatility, and an element of institutional preparation
is needed to prepare for potential capital outflows and
spikes in domestic yields.
Domestic bond markets are an also important ele-
ment for developing derivatives markets. Investors use
futures, forwards and swaps in complement to cash
instruments, and overall intermediation efficiency will
rise with the development of this aspect of the financial
sector.
Development of a deep and liquid domestic bond
market will lead to significant efficiency gains for inves-
tors and borrowers along the One Belt and One Road.
Development of domestic bond market would enhance
greater banking competition. A liquid domestic bond
WWW.BOAOREVIEW.COM
Indonesia
market would open up lending to other financing options,
improve flow of financing to borrowers and enhance resil-
ience of the economy to shocks. Transaction costs would
be reduced along with greater liquidity and transparency
in pricing of instruments. Both investors and borrowers
would be able to better manage maturity risk, leading to a
more efficient allocation of resources.
Many projects which need funding from the AIIB
could be financed in this manner, as already done by
other multilateral agencies, such as the World Bank,
EBRD and Asian Development Bank. Some of the sec-
tors where bonds could be issued include infrastructure
(such as railways, highways and housing), energy, agri-
culture and technology.
Bond markets along the One Belt and One Road
are bound to grow and provide a key source of
financing and diversification for lenders and bor-
rowers. Organizations such as the AIIB will be at
the forefront of this development, channeling in-
vestment resources while catalyzing the growth of
domestic bond markets in these countries. Such a
process will also go a long way in internalizing the
Renminbi and spurring infrastructure investments
along the One Belt and One Road.
Jul. 2015    055
 Public Policy

The Triple Helix: Cooperation

Between Government, Academia
and Business
By Cheryl de la Rey

New roles of universities

While the role of universities as producers, inter-

preters and disseminators of knowledge is well estab-
lished as part of the teaching and research functions,
the emergence of the concept of the knowledge society
and knowledge-based economies brought with it ex-
pectations that universities can and should play a much
more significant role in innovation. This shift in think-
ing was helped along by the emergence of the national
systems of innovation approach, which advanced the
idea that innovation is fostered within a system consti-
tuted by a set of interacting institutions.
From the more traditional view that universities
contribute to innovation through the creation of hu-
man capital in the form of skilled graduates and pro-
fessionals and through scientific knowledge, the debate
has moved on to questions of how universities may
contribute more directly to job creation and economic
development—through research utilization and com-
mercialization, technology transfer and spin-out com-

056    Jul. 2015

 WWW.BOAOREVIEW.COM

The problems facing humanity tend to be shaped by social

and political factors and therefore, the answers are not
merely scientific. The ultimate ‘grand’ challenge lies in
institutions successfully working together to build capacity
and harnessing knowledge to develop shared perspectives
that can be translated into meaningful and positive action.

panies—with a much wider reach than the immediate Grand challenges

community or region. Within this context, a tripartite
collaborative model bringing universities, governments
and industry together has been widely mooted as the
best mechanism for optimizing innovation systems.
The triple helix metaphor—created from the triple
stranded structure of DNA—was first introduced to de-
scribe how the relationship between universities, gov-
ernment and industry could work in the twenty-first
century (Etzekowitz and Leydesdorff, 2000). Essen-
tially, this model signifies moving away from the linear
movement of new knowledge produced by research
from universities to industry, who then transforms it
for use in the economy as directed by government, in
favor of non-linear, interactive, recursive hybrid rela-
tionships and networks between the three role-players.
A strong characteristic of the triple helix model is the
idea that universities should take a more pro-active
stance in creating and utilizing new knowledge and
should enhance their capacity to generate and transfer
technology, stimulate new businesses, while at the
same time, providing students with new ideas and en-
trepreneurial skills.
Many universities have embraced this approach and
today there are numerous examples of how the three
sectors—universities, industry and government-can
work together to achieve shared and common objec-
tives. Today the University of Pretoria in South Africa
is known globally for its leading work in forestry and
plant biotechnology; an achievement due to a strong
partnership model with the forestry and paper industry
supported by government funding.
As we move further into the twenty-first century,
however, it is becoming clear that the big challenges
faced by the world are becoming more complex and
vexing to solve. This year there will be renewed high
level focus on sustainable development via the United
Nations Economic and Social Council debates on the
achievements of the Millennium Development Goals
(MDGs) framework and the question of the post 2015
global development agenda. Food, energy and water
security, climate change, poverty alleviation and hu-
man security are among the global challenges that
some have called “wicked” challenges or vexing prob-
lems because solution and resolution lies not only in
the scientifically technical or entrepreneurial interfaces
among collaborating partners, but in a fundamental
shift in how the various sectors conceptualize their in-
terdependence.
In contrast to ‘tame problems’ (problems usually
with clear definition), ‘wicked problems’ are often
referred to as ‘social messes’ or ‘untamed problems’
(Batie, 2008). Grand or wicked challenges include
those that cannot be tackled by singular, linear ap-
proaches to science and require integration across
scales and across actor perspectives. Very importantly,
we must acknowledge that the solutions to the so-
called grand challenges will only be achieved when we
fully accept that the problems facing humanity tend to
be shaped by social and political factors and therefore,
the answers are not merely scientific. This is especially
evident in developing countries where systems and in-

Jul. 2015    057

Public Policy
stitutions are relatively weak due to under-resourcing,
poor capacity and socio-political factors.
For some time now in academic conferences, there
has been a growing voice supporting multidisciplinary
research which would blur the long standing divides
between the natural and social sciences and the hu-
manities. More recently, the call for trans-disciplinary
perspectives is growing louder arguing that multidis-
ciplinary work does not go far enough. The point of
departure in tackling seemingly intractable issues must
be framed by the problem itself in all its dimensions
and not by disciplinary lenses alone even if they are
multidisciplinary.
For universities this means a paradigm shift in how
and what we teach and research; moving away from
the silos of disciplinary divides and recognizing that
our graduates need to be better prepared for a world
where cooperation, team work and an ability to work
successfully in dynamically complex and sometimes
contested contexts are essential. Mining engineering
graduates, for example, not only need technical and sci-
entific skills, but also need some understanding of the
environmental implications of extractive industries, the
contested terrain of mineral rights, occupational safety,
labor relations and so forth.
In this complex and dynamic context multi-sectorial
cooperation and partnerships are more important than
ever before. In many cultures there is a long-standing
common sense rationale in support of cooperation of-
ten expressed in slogans and even popular songs: there
is strength in numbers; many hands make light work;
together we can; united we stand, divided we fall etc. In
recent years, the advent of the information society and the
knowledge-based economy, coupled with explosive pop-
ulation growth and exponentially increasing demand for
ever-dwindling resources, have not only strengthened the
need for working together to address the grand challeng-
es faced by humanity, but have made partnerships and
collaboration a non-negotiable imperative to ensure the
future of humankind and our planet.
From the perspective of higher education globally,
specific factors converge to intensify the rationale and
need for collaboration. Increased emphasis since the
second half of the 20th century on the societal role of
higher education institutions, specifically as engines for
economic growth and as agents for community devel-
opment, social justice and social cohesion, fuel the al-
ready incontrovertible arguments in favor of embracing
058    Jul. 2015
and further developing the so-called triple helix model
in order to maximize the benefits of collaboration for
all of these institution and for the communities they
serve.
The triple helix approach to outcomes
The big issues such as energy, water and human
security have an impact on all sectors – government,
industry and academia – and this recognition of shared
interest must propel us to greater levels of cooperation.
Furthermore, this cooperation must extend beyond
national and regional boundaries as it is blatantly ob-
vious that with increasing mobility and globalization
problems affecting one locality have widespread impli-
cations. One only has to refer to Ebola to underscore
this point.
A newer perspective of the Triple Helix model sees
government, universities and industry as evolving
subsets of a larger social system and focuses on the
interactions between them, which has the potential to
reshape existing institutional arrangements. But al-
though there is widespread agreement on the need for
cooperation and partnerships, this is not always easy to
achieve. Key to unblocking obstacles are the processes
of communication between the role players and an
open mind on the part of the leadership to be creative
and innovative in how they see their functional roles
and accepting that the nature of the collaborative rela-
tionships between the participating institutions and the
interactions between them may reshape old notions of
organizational differentiation and distinctiveness. What
we need is a generative model of cooperation where the
respective role-players act proactively and are prepared
to adapt their traditional roles in the interests of higher
impact outcomes.
Perhaps, the ultimate ‘grand’ challenge lies in insti-
tutions successfully working together to build capacity
and harnessing knowledge to develop shared perspec-
tives that can be translated into meaningful and posi-
tive action.
Note: The original references have been omitted for consistency of style. They
are available upon request.
Cheryl de la Rey
Vice-Chancellor and Principal, University of Pretoria
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Jul.2012 Boao Review 103

Public Policy

International Tax Policy TAX

in the 21st Century
By Gary Clyde Hufbauer
T
Recent developments show that international tax policy
faces a difficult patch. Policy makers should not devise new
TAX
international tax rules; they should seek to scrap corporate
taxation. This can be achieved by treating corporations as
pass-through business entities where income is taxed not at
the business level, but the individual.

T
he central concern of international tax policy
is the division of tax revenue paid by corpo-
rations that operate in two or more countries.
Said differently, international tax policy is an auxiliary
feature of corporate tax policy as it affects multination-
al corporations (MNCs). This necessitates assigning a
geographic “source” to each type of corporate revenue
and expense, and agreeing on which jurisdiction has
the primary taxing right and which has the secondary
right.
The oldest “modern” MNCs (leaving aside the East
India companies) originated in the 19th century. How-
ever, the question of allocating taxing rights did not
gain prominence until The League of Nations fostered
the adoption of model tax treaties in 1928. After the
Second World War, contesting model tax treaties were
published by advanced and developing countries. The
United Nations now acts as the “custodian” of model
treaties favored by developing countries, while the
OECD plays the same role for advanced countries.
Some 2500 bilateral tax treaties are in force, with “mix
and match” elements from different model treaties.
These treaties, together with national tax laws, furnish
the backbone of international tax policy.

Table 1: Global Outward FDI Stock, by Industry Table 2: Real World FDI, Exports, and GDP, relative to 1970

1966 1990 2012 1970 1980 1990 2000 2010

Agriculture, fishing 1% 0% 0% FDI 1 3 7 36 40

Mining and Oil 29% 9% 8% Exports 1 3 4 6 11
Manufacturing 42% 44% 19% GDP 1 2 3 3 5
Services 29% 47% 69% Sources: World Bank, WDI
Sources: 1966 figures refer to US outward FDI. Lipsey (1992).
1990 and 2012 figures are world outward FDI from UNCTAD (2014)

060    Jul. 2015

 WWW.BOAOREVIEW.COM

Gary Clyde Hufbauer

Reginald Jones Senior Fellow, Peterson
Institute for International Economics,
Washington D.C.

Facing an era of rapid change
TAX
Bilateral tax treaties are periodically reviewed and
renegotiated, but the landscape of world commerce is
changing at a faster pace, so international tax policy is
forever catching up with business realities. It’s worth
highlighting important changes since the Second
World War.
Immediately after the Second World War, foreign
direct investment (FDI) in natural resources were the
dominant MNC activities. Soon, manufacturing be-
came more prominent. By 2012, business services were
the leading form of FDI (Table 1).
The global stock of FDI grew much faster than world
GDP, and even faster than world trade (Table 2). Con-
sequently international tax policy plays a much bigger
role in corporate taxation.
In the 1950s and 1960s, it was commonly believed
that the rate of taxation did not affect the location of
business activity. Within developing countries, MNCs
were regarded as conduits of colonial exploitation.
Such attitudes fostered high corporate tax rates world-
wide and a reluctance by developing countries to allow
tax relief for dividends, interest or royalties paid abroad
to a parent company.
By the 1980s, public officials began to realize that
high corporate tax rates adversely impact the location
of business activity. Tax rates were slashed (Table 3),
but the share of total taxes paid by corporations stayed
about the same in most advanced countries (Table 4).
Links between trade, MNCs and FDI became pro-
gressively stronger. Some 8000 MNCs worldwide con-
duct 80% of global trade and account for an even larger
share of FDI.
Intellectual capital contributed a far larger share of
corporate assets, relative to physical capital. Patents,
copyrights, trademarks and trade secrets furnish the
lifeblood for MNCs.
Tax challenges in the new era
Taken together, these changes explain why interna-
tional tax policy faces a difficult patch. Governments
offer tax holidays, special credits, tailored deductions
and other lures, knowing that MNCs respond to tax
incentives when locating factories, R&D arms, back
offices and headquarters. In tandem, the dense net-
work of GVC transactions in a world where comparable
arm’s length prices often do not exist, enables MNCs
to arrange transfer prices so that revenues show up in
low-tax jurisdictions and expenses show up in high-tax
jurisdictions. Given the fact that intellectual property
accounts for a disproportionate share of earnings,
MNCs can book their royalties where taxes are low and
conduct their R&D where taxes are high.
Confronted with these fiscal realities, ministers and
legislators fire their rhetorical guns against MNCs. In
2014, US Treasury Secretary Jacob Lew castigated
MNCs as “unpatriotic”, while Apple CEO Tim Cook was
scorned for booking company profits in Ireland. Euro-

Table 3: Corporate Profits Tax Rate, All Levels of Government Table 4: Corporate Income Tax, Share of Total Government Revenue

1981 1991 2001 2011 1970～1979 1980～1989 1990～1999 2000～2009 2010～2013

France 50% 42% 36% 34% France 6% 5% 5% 6% 6%

Germany 60% 56% 39% 30% Germany 5% 5% 4% 4% 5%
Japan n/a 50% 41% 40% Japan 23% 22% 17% 14% 12%
United 52% 33% 30% 26% United 8% 10% 8% 9% 8%
Kingdom Kingdom
United States 50% 39% 39% 39% United States 11% 7% 8% 8% 9%
Source: OECD Source: OECD

Jul. 2015    061

Public Policy
pean officials took their own potshots at MNCs.
Official responses go beyond hostile words. Presi-
dent Obama’s latest proposal would collect nearly $500
billion through a one-time tax on past MNC earnings
held abroad, and impose a 19% levy on future earnings
whether or not repatriated to the United States. Along
with European leaders, Obama prompted the OECD to
launch an ambitious project titled “Base Erosion and
Profit Shifting” (BEPS)
The ultimate goal of BEPS is to inflict high US and
EU taxes on MNCs that book substantial earnings in
low-tax jurisdictions, such as Ireland, Switzerland,
Bermuda or Singapore. But unlike the United States,
nearly all other countries tax corporate income earned
abroad very lightly, if at all. Sensibly, BEPS does not
seek to equalize tax rates across countries. Consequent-
ly, whatever rules are concocted to attribute GVC and
intellectual property revenue to high tax jurisdictions,
and related expenses to low tax jurisdictions, will not
eliminate the cliff between high tax rates and low tax
rates. When an MNC stares at a difference between a
30% tax rate and a 10% rate, its incentives to book rev-
enue in low-tax jurisdictions and expenses in high-tax
jurisdictions are powerful.
In my opinion, the ultimate goal of BEPS will face
two immutable forces. First, not only the named “tax
havens”, but also the very OECD countries pushing the
BEPS project, along with many emerging countries,
are eager to attract MNCs with tax charms. Tax havens
and emerging countries will not cooperate with BEPS,
and OECD countries will seek to preserve their own tax
incentives. Second, MNCs will fiercely resist the resur-
rection of high tax regimes, and they will quickly hire
the best talent – including the legal alumni of revenue
agencies and BEPS itself – to work around any new
rules.
Chasing the wrong goal
Apart from these obstacles, officials are pursuing
exactly the wrong goal. Instead of devising new inter-
national tax rules to close leaks in their corporate tax
systems, they should be seeking to scrap corporate
taxation in its entirety. The corporate tax penalizes
successful firms, discourages productive investment,
062    Jul. 2015
drives firms to foreign soil, and is horribly complex to
administer.
Yet people have no idea who really “pays” the cor-
porate income tax. Workers, capitalists or consumers?
Voters vaguely feel that the corporate income tax
amounts to a tax on the rich, especially the top 1%.
Hence the starting point for eliminating the corpo-
rate tax is political recognition that corporate taxation
is not essential to progressive taxation. What is es-
sential is progressive taxation of all income earned by
individuals. This can be achieved by treating corpora-
tions as pass-through business entities. Income earned
by such firms is attributed to the beneficial individual
owners and taxed accordingly – not at the business lev-
el but at the individual level.
To achieve this result, corporations should be al-
lowed a deduction both for dividends paid and retained
earnings deemed paid, to individuals. In turn, individ-
uals should report the income (paid and deemed paid)
on their own tax returns and pay tax accordingly. In the
United States, existing pass-through business entities,
such as Subchapter S corporations and master limited
partnerships, now account for about half of US busi-
ness activity. According to my proposal, Subchapter C
corporations, the traditional sort, should be gradually
transformed into pass-through entities.
My calculations indicate that the pass–through
approach for the United States would raise the same
amount of revenue, but through individual taxes
rather than corporate taxes. This has two highly
desirable features. Since corporate officers, not
shareholders, decide the location of business activ-
ity, the pass-through approach would eliminate the
severe economic penalty paid by high-tax countries,
particularly the United States and Japan, on account
of their oppressive corporate tax systems. After all,
corporate officers worry foremost about the corpo-
rate tax bill, which would come close to zero under
the pass-through approach, not the shareholder tax
bill. Secondly, rich individuals would actually pay tax
at progressive rates on all corporate income,whether
distributed or undistributed. The top 1%, including
Warren Buffett and Bill Gates,would suddenly hand
serious money to the US Treasury.
Note: Tyler Moran provided valuable research assistance for this article.
 WWW.BOAOREVIEW.COM

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Polar bears are running out of safe places.

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Jul. 2015    063
Public Policy

Whither Latin America?

Development Challenges and
Medium-Term Growth
By Monica de Bolle

Most of the decline in potential output in Latin America is

explained by a dramatic fall in total factor productivity stemming
largely from infrastructure bottlenecks. Chinese financial
institutions and companies plan to invest as much as US$ 250
billion in the region over the next decade. To reap the benefits of
China’s pivot to Latin America (USD 2000), countries will need
to strengthen institutions and maintain a sound macroeconomic
framework going forward.

L
atin America has withered. After growing
robustly over the last ten years (Figure 1), av-
eraging about 5 percent per year, activity ex-
panded by only 1.3 percent in 2014, the slowest pace
since 2002. In its latest Regional Economic Outlook
report for the region, the IMF projects underwhelming
growth for 2015 – possibly dipping below 1 percent –
and medium-term prospects are not much better.
What has happened to Latin America? Why has
growth slowed so dramatically, and more importantly,
why is it currently expected to remain modest at best
over the medium-term? How will this impact develop-
ment for the region and the aspirations of the growing
middle class?
Growth and the commodity super-cycle
Many attribute Latin America’s growth woes to the
end of the commodity super-cycle. The end of the com-
modity boom brought to light long-standing fiscal and
structural challenges in some countries, diminished
the rate of investment growth, impacted the current
account, and had substantial implications for economic
activity more generally. While most accounts of the Lat-
in American debacle focus on a dramatically changed
external landscape following the global financial crisis,
the region’s problems appear to run deeper than these
interpretations would suggest. Specifically, a narrative
focused on commodity prices and the phasing-out of
external windfalls fails to account for why systematic
forecasting errors by multilateral institutions have been
so significant over the past several years, especially af-
ter the boom was over.
To better illustrate this point, it is useful to con-
sider the case of Brazil, the region’s largest economy,
accounting for some 40 percent of its GDP. Only two
years ago, In April 2013, the IMF projected Brazil’s
growth in 2014 to be 4 percent. In the event, the in-
stitution erred by 3.9 percentage points, as the coun-
try grew a dismal 0.1 percent last year. Since at the
time of the forecast the commodity boom had largely
ended, the error cannot be wholly attributed to the
drop in commodity prices – something else must
have been at play. Forecasting errors by multilateral
institutions were also seen in other countries in the
region, as discussed in De Gregorio (2015). Although
Brazil stands out as the country where forecasts were
off the mark by the widest margins, 2014 growth
projections for Mexico, Chile, and Peru were also
unduly overoptimistic, developments in commodity
markets notwithstanding.
What explains Latin America’s wavering perfor-

064    Jul. 2015


Figure 1: GDP Growth: Selected Latin American Countries (Period Averages)
7 1995-1999
6 2005-2009
5
4
3
2
1
0
Brazil Chile Colombia
Source: IMF and World Bank
mance? While the fall in commodity prices and the
rapid drop in Chinese growth certainly explain part of
the story – China accounts for roughly 10 percent of
the region’s exports – the main problems generally fall
under the broad umbrella of slow productivity growth.
Leaving aside Venezuela and Argentina, countries
where macroeconomic mismanagement and political
upheavals have been rampant, most other countries
have experienced significant productivity shortfalls
over the past several years due to a number of fac-
tors. Low productivity generally stems from pervasive
problems in infrastructure, cumbersome tax systems,
rigid labor laws that weigh on firms’ ability to grow and
invest, security issues, among many other factors. A
growth accounting exercise for Brazil further illustrates
the point (Table 1).
As Table 1 shows, most of the growth slowdown in
Brazil is directly attributable to a sharp drop in total
factor productivity, which turned negative in 2014.
Although this exercise has not been replicated for other
Latin American countries, the recent literature suggests
a broadly similar trend. The IMF’s latest flagship World
Economic Outlook report devotes an entire chapter to
exploring what has happened to potential GDP growth
in several countries since the global financial crisis. The
conclusion for emerging markets, and for Latin Amer-
WWW.BOAOREVIEW.COM
2000-2004
2010-2014
Mexico Peru
ica in particular, is that most of the decline in potential
output is explained by a dramatic fall in total factor
productivity stemming largely from infrastructure
bottlenecks. Arguably, adverse trends in total factor
productivity are not new phenomena but rather were
masked by the exceptional external windfall period that
ended in 2010 – particularly in Latin America.
Raising productivity
Unfortunately, there’s no one-size-fits-all recipe for
restoring productivity growth. Countries need to tackle
their specific impediments to growth by clearly identi-
fying priorities and laying out a coherent medium-term
agenda for resolving them. A necessary though not suf-
ficient condition is maintaining a stable macroeconom-
ic framework. While most countries in Latin America
have kept their macroeconomic frameworks fairly
intact during and after the global financial crisis, oth-
ers resorted to faulty policy experimentalism. Brazil’s
attempts to stimulate household consumption through
a combination of fiscal stimulus and lax credit poli-
cies led to rampant inflation and increased economic
weakness – this partly explains the wide discrepancy
between growth forecasts for 2014 and realized out-
comes discussed earlier. Thus, Latin America’s largest
Jul. 2015    065
Public Policy

Table 1: Brazil – Contributions to Growth

Use of Demographic Labor Market Total Factor
Education Growth
Disposable Capital Factors Dynamics Productivity
2003 0.85% 0.76% 1.31% 1.90% -3.59% 1.22%

2004 1.30% 0.60% 1.26% 0.76% 1.75% 5.66%

2005 0.89% 0.58% 1.22% 0.58% -0.13% 3.15%

2006 0.53% 0.90% 1.19% 0.23% 1.14% 4.00%

2007 1.49% 0.85% 1.15% 0.57% 1.95% 6.01%

2008 1.32% 0.80% 1.12% 1.22% 0.57% 5.02%

2009 -1.59% 0.77% 1.07% -0.51% 0.02% -0.24%

2010 2.46% 0.62% 1.03% 1.54% 1.93% 7.57%

2011 0.49% 0.42% 0.98% 0.56% 1.46% 3.92%

2012 0.55% 0.80% 0.94% 0.67% -1.20% 1.76%

2013 0.78% 0.73% 0.90% -0.23% 0.56% 2.74%

2014 0.33% 0.70% 0.86% -0.92% -0.83% 0.14%

Sources: IPEADATA and the author’s own calculations

economy now needs to undergo substantial adjustment
before it can resume productivity growth.
Other countries in the region do not have to deal
specifically with macroeconomic balances. For coun-
tries like Chile, Colombia, Peru, and Mexico, inflation
has remained relatively modest or subdued while fiscal
accounts have not undergone any substantial weaken-
ing. These countries appear better placed to rebuild the
foundations for productivity growth, especially as they
pursue greater integration with the rest of the world
through international agreements under the Pacific Al-
liance or the Trans-Pacific Partnership championed by
the US.
This said, there is an overarching consensus that
Latin America urgently needs to revamp its infra-
structure, specifically in transports and logistics. Enter
China. While the US “pivots to Asia” under President
Obama, China has increasingly turned to Latin Amer-
ica. According to recent reports, Chinese financial
institutions and companies plan to invest as much as
US$ 250 billion in the region over the next decade. Co-
lombia, Peru, Chile, and Brazil, the four countries that
Prime Minister Li Keqiang has recently visited, are al-
ready the recipients of some 60 percent of total Chinese
investments in the region. According to data from the
Inter-American Dialogue, since 2005 China has pro-
vided more than US$ 119 billion in loan commitments
to Latin American countries and firms. The China-Lat-
in America Finance Database further highlights that:
(i) in 2014 alone, China invested over US$ 22 billion
in the region; and
(ii) Chinese finance to Latin America in 2014 was
more than that of the World Bank and the Inter-Amer-
ican Development Bank combined.
China’s “geopolitics of infrastructure” presents a
great opportunity for Latin America. If investments
materialize as promised, medium term growth sce-
narios may turn out to be substantially improved from
current expectations of lackluster growth. Increases
in growth and productivity will pave the way for social

066    Jul. 2015

 WWW.BOAOREVIEW.COM

Monica de Bolle
Visiting Fellow, Peterson Institute for
International Economics

inclusion and falling inequality, a resumption of the

favorable trends that dominated most of the 2000s.
On the other hand, the region will need to learn to
cope with substantial capital inflows, especially if
Chinese financial account liberalization, once com-
pleted, unlocks large flows to Latin America. Wobbly
institutions and other regional and country-specific
weaknesses imply that significant capital inflows
coming from China will be a challenge to maintain-
ing financial stability.
Latin American growth has stalled and countries
can no longer rely on the resource boom of the 2000s
to promote the type of inclusive expansion that was
a hallmark of the last decade. Nevertheless, there are
new opportunities on the horizon. To reap the benefits
of China’s pivot to Latin America, countries will need to
strengthen institutions and maintain a sound macroe-
conomic framework going forward. Although replicat-
ing the past is not an option, building the future may
turn out to be less daunting than it currently seems.

Jul. 2015    067

 Energy

Creating an Oil-Climate Index:

Key Lessons for Asian Policymakers
By Deborah Gordon, Wang Tao, Matt Ferchen

The changing nature of oil will lead to changes in

its climate impacts. Oil policies in Asia will drive oil
development practices and protections worldwide,
but they require transparency and data disclosure so
that Asia’s decision-makers can better weigh their oil
options.

O
ver the next two decades, the countries in Asia
are expected to remain oil import dependent
while China, India, and Southeast Asian na-
tions are projected to account for most of the world’s
oil demand growth. Moreover, much of the Asian con-
tinent—with its vast coastlines second in length only to
Canada—is at risk for sea level rise, intensifying storms,
and other effects of climate change.
It is therefore imperative for all Asian leaders, al-
ready increasingly attuned to the need to improve
energy and climate policies, to adopt high environ-
mental standards for oil—especially their imports. A
good place to start is to demand better oil information
from producers and exporters so that policymakers can
factor the actual climate footprints of oil into their deci-
sion-making.
Why is this important? It turns out that climate
impacts vary significantly among global oils. Some of
these alternative oils’ greenhouse gas (GHG) emission
footprints are nearly twice as large as others. And the
range of GHG emissions between oils is expected to
grow as new, unconventional oil resources are identi-
fied.
In an era of abundant oil choices, Asian policymak-
ers would benefit from the information provided by the
new Oil-Climate Index (OCI). Developed by the Car-
negie Endowment for International Peace along with
partners from Stanford University and the University

068    Jul. 2015


Figure 1: Potential Resources of Future Global Oil in Place
(Currently estimated at 24 trillion barrels—over 500 years at
current production levels)
26% Conventional Oils 74%Unconventional Oils
Sources: Carnegie Endowment for International Peace; EIA; USGS; NETL; Oil & Gas
Journal; World Energy Congress
of Calgary, the OCI can be of immediate practical use
for Asian policy makers in reducing flaring and venting
of gassy oils, rethinking extra heavy oils, and managing
petroleum coke.
Projecting Asia’s shifting oil demand
The global distribution of oil demand is projected
to change markedly between 2013 and 2040, with re-
newed attention on Asia. Developing Asian countries
along with China and India could account for nearly
three in four barrels of the global increase in liquid fu-
els consumption within a generation.
Asia’s net energy imports will likely be dominated by
oil—80 percent of which is imported region-wide and
90 percent in the case of India. These levels are almost
as large as OPEC’s current oil production. Asia’s oil
imports are expected to increase by 60 percent over the
next two decades, faster than either coal or gas.
Breaking down Asia’s oil demand patterns point first
to China, whose oil growth is forecast to grow by 8 mil-
lion barrels a day (mbd) to 18 mbd in 2035. India’s oil
demand is slated to grow nearly 5 mbd between 2013
and 2035—eventually overtaking China as the largest
source of demand growth. Non-OECD Southeast Asia’s
WWW.BOAOREVIEW.COM
Tight 15%
Extra Heavy 5%
26%
Conventional
Bitumen 11%
Oils
Kerogen 13%
Gas to Liquids 12%
Coal to Liquids 18%
oil demand growth is projected at 3 mbd in this time-
frame.
Just where the resources that will supply this surge
are sourced—as well as exactly what form they take in
the ground—is entirely unclear. Mounting competition
for a heterogeneous array of global oils underscores
why it will be critical for Asian nations to plan ahead to
meet energy and climate security goals.
Lessons for Asia
Know your oil
Asian decision-makers will need to make wise deci-
sions about how best to meet their oil demands while
reducing climate change impacts. Progress has been
made in increasing the fuel efficiency of vehicle fleets
and advancing renewable energy sources. But when it
comes to alternative oils, more needs to be done. Tril-
lions of barrels of oil in place are only becoming more
unconventional as twentieth century oil sources deplete
(Figure 1).
The changing nature of oil will lead to changes in
its climate impacts. As such, it will be increasingly im-
portant to “know your oil.” In a sample of 30 test oils,
the OCI maps an 80 percent difference in total GHG
Jul. 2015    069
Energy 

Figure 2: GHG Emission Ranges for 30 Test Oils

(By Oil-Climate Index Category)
Total GHG Emissions (kg Co2 eq./bbl crude)

900

800

700

600

500

400
Oil-Climate Index Category
0
t

as

vy

O /

am

vy
na

y d
gh

ee

ar
er te

il
ea

ea
G
io

te
Li

Fl
D

at ple
h

-H
nt

S
a-

h
ig
ve

W e

ig
h
H

ra
ltr

ig

H
on

xt
U

E
C

Source: Carnegie Endowment, "Know Your Oil: Creating a Global Oil-Climate Index"
Note: represents average GHG emissions for OCI test oils in each oil category; Extra-heavy oils include oil sands.

emissions between a barrel of the lowest and highest polluting processes.

emitting oils. And the GHG emissions within each oil’s Many Asian countries have developed increasingly
supply chain also vary widely, as follows: upstream close trade ties to extra-heavy oil producers. In the
extraction (factor of 10), midstream refining (factor of 2000s, two countries in particular, Venezuela and Can-
5), and downstream combustion and end (nearly 50 ada, shot to the top of the global oil reserve charts in
percent). large part because of newly-bookable, extra-heavy, sour
Four oil categories that impose high climate risks are oil reserves increasingly supplied to Asian countries
currently identified, including: (Figure 3).
(1) gassy oils whose methane is flared and/or vented A decade ago, China imported very little oil from
such as from China’s Bozhong and Nigeria’s Obagi oil Venezuela. By 2013, over 5 percent of the country’s oil
fields; was sourced there. In that same year, India received
(2) extra-heavy oils that must convert excess embed- over 400,000 barrels per day (bpd) of Venezuelan
ded carbon in bituminous deposits from Venezuela and extra-heavy oil imports, more than China. Canada, for
oil sands from Canada; its part, is stocked with an even more challenging ex-
(3) depleted watery oils that require significant tra-heavy resource than Venezuela—sandstone infused
steam and other energy inputs to extract such as in with a tarry bituminous material known as “oil sands.”
Indonesia’s Duri field and California’s San Joaquin Today, Canada is a major oil supplier to Asian coun-
Valley; and tries.
(4) oils in extreme environments such as Arctic per- China also has the potential to be a top-tier uncon-
mafrost, rainforests, or at extreme depths (Figure 2). ventional oil producer that could one day push it to be-
come a supplier of these difficult oil reserves, similar to
Rethink extra-heavy oil imports and production the path Canada has pursued with Alberta’s oil sands.
The heavier and more sour (high sulfur) an oil, the
greater its hidden environmental costs. Extra-heavy Manage petcoke consumption
oils come with a climate penalty due to their naturally Petroleum coke, or petcoke—a refinery byproduct
embedded carbon that requires significant energy in- from the processing of heavy conventional oils and ex-
puts to either reject it as petcoke (discussed below) or tra-heavy unconventional oils—is generally high in car-
treat it with hydrogen, which is currently generated by bon, sulfur, heavy metals, and other contaminants. As

070    Jul. 2015


Figure 3: Trends in Proved Oil Reserves, 1980-2015
350
300
250
Billion Barrels
200
150
100
50
0
1980 1985 1990 1995 2000
Source: U.S. Energy Information Administration,"International Energy Statistics, 1980-2015"
greater supplies of heavier, high sulfur oils make their
way to a growing number of complex refineries in the
U.S. and China, larger volumes of high-sulfur petcoke
are being produced. This high-sulfur petcoke is being
used as a cheaper alternative to coal, natural gas, and
renewables to generate heat and power.
The U.S. currently leads the world in petcoke ex-
ports, which totaled 36 million metric tons in 2014.
China was the largest importer of U.S. petcoke in 2013,
claiming one in five barrels. Japan, South Korea, and
other Asian countries also import large volumes of pet-
coke. Petcoke is also sourced locally. As of 2013, more
than two-thirds of China’s 33 million metric tons of
petcoke consumption was domestically produced.
Petcoke combustion emits 10 percent more GHGs
than coal, twice that of natural gas, and vastly higher
emissions than renewables. Petcoke can contain up-
wards of 7 percent sulfur (whereas Chinese coal aver-
ages 1 percent), imposing significant risks to Asia’s air
pollution. International accords will be needed to effec-
tively control petcoke’s climate risks. Local regulations
will also be needed to reduce and offset air pollution
from petcoke.
Asia’s policymaking imperative: reduce oil-
climate impacts
The recent drop oil prices provides a window for
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Saudi Arabia
Venezuela
Canada
Iraq
United States
China
Indonesia
2005 2010 2015
policymakers in the changing oil market, and the up-
coming 2015 United Nations Climate Change Confer-
ence in Paris is an opportunity for Asian countries to
show leadership and cooperation on this issue. Carneg-
ie’s Oil-Climate Index is an essential tool that can help
Asian policymakers formulate oil policy to effectively
address climate concerns.
As today’s largest oil-demand center, policies in Asia
will drive oil development practices and protections
worldwide. Including individual GHG footprint of dif-
ferent oils in emission trading schemes, for example,
would more accurately account for their external costs.
China, India, Japan, Indonesia, South Korea, and oth-
ers could adopt policies that require transparency and
data disclosure so that Asia’s decision-makers can bet-
ter weigh their oil options. Oil decision-making in Asia
must be underpinned by durable oil-climate policies in
order to manage complexity, inform capital expendi-
tures, and tackle climate challenges that lie ahead.
Deborah Gordon
Director and senior associate in the Energy and Climate
Program at the Carnegie Endowment for International Peace
Wang Tao
Resident scholar in the Energy and Climate Program based at
the Carnegie–Tsinghua Center for Global Policy
Matt Ferchen
Resident scholar at the Carnegie–Tsinghua Center for Global
Policy
Jul. 2015    071
Development

The Blue Economy Transforms

Economic Growth into a
Competitive Job Generation
How China Can Inspire Africa
By Gunter Pauli

The Blue Economy philosophy proposes that everything gets used, nothing
is wasted. This is achieved by cascading and interconnecting just like nature
does. It concentrates on generating more value with readily available
resources embracing innovations in technology, and also adopting new
business models and payment system that ensure that more money remains
circulating in the local economy.

T
he working population of Sub-Saharan Africa
will triple to 1.25 billion by 2050. By 2035 the
number of Africans joining the working age
from 15 to 64 years will exceed that from the rest of
the world combined. The 100 million African workers
who will join the work force in the next decade re-
quire a fresh economic development approach if the
world wishes to avert a social, economic and ecological
collapse. This size and magnitude of the challenge is
comparable to the challenges China and India faced
two decades ago: how to create a growth economy that
can absorb a dramatic increase in labor. In addition,
people under 15 account for about 60 percent of the to-
tal unemployment and the informal sector provides 90
percent of the 400 million jobs today. It is no surprise
that 40 percent of the desperate young that join rebel
movements are motivated by the lack of jobs.
The globalized economy only reaches 10 percent of
the African working population. All job generation in
the next decade will be concentrated in 10 countries,
and none are located in Africa. This implies that if Af-
rica embraces the world stage of industrialization and
the service economy, it will never generate the jobs
required to alleviate poverty, and evolve from scarcity,
poverty and misery to a society that offers its citizens a
chance to evolve towards dignity. Should we only look
at Africa as a stable supplier of raw materials or can we
envision an African leap forward comparable to what
China achieved?
Zero emissions philosophy in action
The Blue Economy , which has been described
as “the philosophy of Zero Emissions in action”,

072    Jul. 2015

 WWW.BOAOREVIEW.COM

Gunter Pauli
Founder of ZERI; author of The Blue Economy

does not embark on a strong critique of the present

development models, nor do we propose that Africa
should follow the Chinese path towards modernity.
The Blue Economy philosophy points out that there are
opportunities to do much better provided we change
the business model. If we pursue the growth models
proposed by the Western logic, then we know Africa
will not get out of the poverty trap. When I proposed
Zero Emissions and Zero Waste as a standard for a new
competitive industry in 1991, it was considered by many
a dream. With the support of the United Nations Univer-
sity between 1994 and 1997, Zero Emissions turned into
a new concept of development. Now 21 years later since
its initiation, having implemented nearly 200 projects,
including pioneering and game changing industries in
China, mobilizing $4 billion in capital and having created
3 million jobs, it is clear that a better approach to inclusive
growth and fast track development is possible.
Zero Emissions proposes that everything gets used,

Jul. 2015    073

Development
nothing is wasted. This is achieved by cascading and
interconnecting just like nature does. Instead of a blind
focus on cutting costs and eliminating people in the pri-
mary and secondary sector, pursuing growth through
productivity we concentrate on generating more value
with readily available resources embracing innovations
in technology, and also adopting new business models
and payment system that ensure that more money
remains circulating in the local economy. The concept
of the Blue Economy is best illustrated by a concrete
example.
Mr. Parks Tau, the Executive Mayor of the City of
Johannesburg embarked on a pragmatic review based
on this Blue Economy approach: what material and
financial resources does the City have which could
generate more water, food, power, health, and jobs, al-
leviating poverty and building a community? A team of
135 members of the Blue Economy network associated
with the ZERI Foundation reviewed in detail the local
resources, matched it with needs, tradition and culture
and proposed 29 initiatives. These initiatives were sub-
sequently integrated into a system’s dynamics model,
based on the same computer platform that was used
for the first Club of Rome Reports in the 1970s. Instead
of using macro-economic data looking for trends in the
global economy, this model searched for equations,
feedback loops, multipliers providing the Mayor with
a tool to make transparent decisions on obvious op-
portunities for meeting basic needs, growing the local
economy at double digit rates and improving purchas-
074    Jul. 2015
ing power.
The projects that generate the most number of jobs,
secure the quickest results and have the most profound
impact on the livelihood, were prioritized. Decisions
were not based on stand-alone food or energy projects,
all initiatives were integrated into models that unveiled
and empowered the interconnections that reinforce
themselves. We unraveled a myriad of synergies that
strengthened decisions and expanded the impact since
the extra value generated circulated in the emerging
local economy.
The initial portfolio of clustered initiatives are only
the beginning of a long term strategy to dramatically
transform the economic tissue of the City of Johan-
nesburg which is the industrial powerhouse of Africa
ensuring equity, participation, transparency and deliv-
ery. The first initiatives described below set the direc-
tion, both in content and process, that ensures impact
through the creation of an inclusive, yet competitive
local economy.
One of the largest initiatives is based on the suc-
cessful implementation of the stone paper industry
pioneered in China, an innovative process that con-
verts rocks (from mining) or construction waste (from
demolished buildings) into paper using polymers as a
binder eliminating the need for fibers from trees and
reducing the energy consumption to 40% of the most
efficient factories today. Rubble is converted to stone
paper diverting thousands of tons of waste to an in-
come and job engine as has been proven in China (Benxi

City) without the consumption of water or cellulose
from a tree.
The cluster includes the creation of local micro-bak-
eries that operate on solar thermal and electric power.
Building up 13,500 bakeries produces local bread that
includes fruit seeds and peels eliminating sugar and
salt while maintaining taste and improving mineral
and vitamin content. This triggers the creation of a
“multifunctional oven” that produces bread heated
by oil from a hybrid solar that provides heat and
power, permitting light at night, as well as charging
power for cell phones, creating a meeting place in
the community. The system is locally manufactured
triggering industrial growth.
The Mayor’s Blue Economy initiative addresses food
security by complementing starch from bread with pro-
tein from mushrooms. Cultivating mushrooms through
7,000 small urban farms working with local organic
waste streams from parks and gardens. The left-over
substrate is an ideal chicken feed, and the fresh sub-
strates and produce are processed and dried in the
multifunctional oven that in the winter also provides
heat for the families. This model is also inspired by the
Chinese scientific and entrepreneurial leadership in
the set-up of thousands of family-owned mushroom
farms in the peri-urban regions as we have been able to
observe in Qingyuan, the shiitake mushroom capital of
the world.
The City is facing major shortages of power and
water. An integrated approach will ensure more of
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both. Instead of considering water management sep-
arate from power, both are integrated. Power will be
generated from the flow of water through the City us-
ing gravity and depressurizing valves’ sites to provide a
smart network that generates energy especially at peak
time for powering the pumps, but also clinics, police
stations and operate an information network on water
consumption, autonomous from the grid. More ener-
gy is generated from the creation of biogas for public
transportation blending sludge from waste water with
organic solid municipal waste that cuts the load on the
landfill, while adding value. The imposition of tough
by-laws set a new standard for very water-efficient toi-
lets saving billions of liters of water and megawatts of
power.
These clusters of initiatives focusing on the basic
needs, agriculture and industrialization will generate
an estimated 100,000 direct jobs short term, and
+300,000 longer term. This program is part of the
“bottom up scenarios” that the ZERI Foundations
are organizing to design sustainable cities around the
world based on the methodology designed by the Blue
Economy that starts with initiatives that are locally via-
ble, driven by readily available resources and a leverage
of the purchasing power of the City to kick-start new
industries.
If we want to achieve a better world, then we cannot
do more of the same and expect different results. We
must embark on a creative approach, based on science
while being prepared to assume calculated risks.
Jul. 2015    075
Development

The Remarkable
“Laboratory
for the World”
That Lee Kuan
Yew Leaves Us
By Kent E. Calder

S
ince the untimely recent passing of Lee Kuan
Yew, extravagant praise has been lavished, by
global figures like Henry Kissinger, on Lee’s role
as an international statesman. Lee was, without doubt,
one of the key figures mediating the peaceful rise of
post-imperial Asia in world affairs, including balanced
understanding in the West of China’s Four Moderniza-
tions. Yet he also achieved enduring, if less recognized,
successes in domestic policymaking, pioneering hybrid
approaches that address with remarkable vision the
central social, economic, and environmental problems
of the world today. Indeed, leaving Singapore a small
yet highly dynamic “laboratory to the world”, with a
creative, humane focus on government support for pri-
vate housing, may be Lee’s most enduring legacy.

The social welfare laboratory

Three major domestic challenges confront nations of

the world, for which Singapore provides creative, prag-
matic answers inspired originally by Lee Kuan Yew.
There is, first of all, the challenge of the welfare
state —how to support the elderly, the ill, and the infirm
with decency, yet at acceptable cost to society. Eco-
nomic growth and fiscal solvency are being badly im-
paired today in both Europe and North America by the
heavy costs of funding health and pensions under an
entitlement-based system, as their populations steadily

076    Jul. 2015


Leaving Singapore a small yet highly dynamic
“laboratory to the world”, with a creative,
humane focus on government support for
private housing, may be Lee Kuan Yew ’s
most enduring legacy.
age. In Britain, for example, the pension obligations of
providers total five times current GDP, and unfunded
pension obligations amount to 58 percent of GDP. Chi-
na in another decade will face even larger challenges,
and simply must find a more efficient model of social
welfare.
Singapore, with Lee Kuan Yew’s inspiration, appears
to have found that model, through an eclectic, pragmat-
ic combination of social concern and private incentives,
focusing on savings and housing programs. Within two
years of becoming Chief Minister in 1959, Lee had sig-
nificantly transformed a colonial-era savings program,
the Central Provident Fund, into a much more dynamic
and future-oriented, yet low-cost welfare self-help pro-
gram. All employees make mandatory contributions
from their wages, matched to varying degrees by their
employers. Since 1968, employees have been able to
use these compulsory savings not only for retirement
purposes, but also to finance housing. More recently,
they have been able to pay medical costs and to flexibly
invest remaining proceeds, beyond a basic minimum.
Through their CPF savings and appreciation on the val-
ue of their homes, all Singaporeans have thus been able
to build assets that liberate them from the need to rely
so heavily on Western-style welfare entitlements.
Soon after taking power, Lee’s government created
the Housing and Development Board (HDB), which
began actively providing public housing. Today over
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80 percent of Singaporeans live in such housing, with
90 percent of that group now owning their own homes.
And over 96 percent of HDB households indicate satis-
faction with their housing.
Creative urban solutions
A second epic global challenge of the twenty-first
century is the historic migration from the countryside
to the city . That movement began in Europe during the
eighteenth century, and helped provide workers there
for the Industrial Revolution. For the past half century
and more urbanization has been accelerating across the
developing world, and could potentially generate not
just human misery but crime and political instability, if
not managed properly.
Since 1950 over three billion people have migrated
from the countryside to the city, and by 2050 another
2.5 billion will do so. Ninety percent of those new ur-
ban migrants will prospectively live in Asia and Africa.
Orderly urbanization is a particular difficulty for large,
populous nations like China, India, and Indonesia,
where around half of the world’s people live, and where
urbanization levels are still relatively low. India still has
well over 800 million rural dwellers, and China over
600 million. Bangladesh, Indonesia, and Pakistan all
have over one hundred million rural candidates for ur-
ban life as well.
Jul. 2015    077
Development
Singapore, rated frequently as one of the most
livable major cities on earth, has pioneered impor-
tant and creative solutions to the epic challenges of
urbanization. Inspired by Lee Kuan Yew, it has at-
tacked the problem in holistic fashion, adopting in-
ter-related transportation, energy efficiency, indus-
trial location, health care, and public-safety policies,
that take jobs to where people can comfortably and
safely live. Once again, those policies are linked to
one another—and even back to welfare policy also—
through the core priority on publically supplied
private housing. Singapore places a strong focus on
first-rate public transportation, and then locates
industry and services in close proximity to housing
estates, while also penalizing the ownership and use
of private motor vehicles. This unusual approach,
contrasting sharply to patterns in most Western na-
tions, reduces energy use, improves the environment
by reducing emissions, and simultaneously enhances
both public security and political stability.
Not everyone, of course, can live next to their
work, or would desire to do so. Many people would
naturally like to use cars as a convenience and for
pleasure. To manage the tensions between auto-
mobile use and sustainable urban life, Singapore
has adopted a creative combination of quotas on
car ownership, auctioning of permits, influx tariffs,
and using transponders to impose surcharges in
high-density zones during rush hours, to inhibit traf-
fic jams and rationalize automotive use.
Water supply has been a classic problem in the rap-
078    Jul. 2015
idly expanding urban areas of the developing world. It
has special complexity in Singapore, where over five
million people live in the tiny island city state, necessi-
tating major imports of a vital livelihood necessity from
surrounding states with which it had delicate political
relations. On independence half a century ago, Singa-
pore imported virtually all its water. Over the past fifty
years, however, the island nation has remarkably en-
hanced its self-sufficiency, erecting massive cisterns to
catch rain water, restraining industrial usage, building
huge desalinization plants, and even recycling sewage.
Today it markets some of the purest water in the world,
derived from that sewage (NEWater), and generates
over 75 percent of its entire water supply from domes-
tic sources.
Stable, equitable ethnic relations are a classic urban
challenge, not least in the United States. Singapore has
a population even more diverse than that of America,
and much more so than most Asian nations. Yet it has
been remarkably successful at stabilizing ethnic rela-
tions, once again through policies pioneered by Lee
Kuan Yew.
Positive social policies—based once again on
housing—have been central to Singapore’s approach,
although assuring public safety against crime and ter-
rorist acts have naturally been important as well. Public
housing is distributed on a quota basis, meaning that
all housing complexes are integrated with similar por-
tions of different ethnic groups. Key positions in gov-
ernment service are also distributed in a balanced fash-
ion—Singapore’s Cabinet, for example, has six Chinese,

two Malays, one Indian Hindu, and one Indian Tamil.
The holidays of various ethnic groups are recognized
in balanced fashion. Although Singapore has a Chinese
majority, its national anthem, Majura Singapura, is
sung in Malay.
Distinctive approach to globalization
Singapore is, of course, developing itself as
an urban hub for knowledge-intensive sectors—
science and technology, international finance,
consulting, and education itself. After pioneer-
ing many creative urban solutions, with impetus
from its visionary founding leader, Singapore has
also begun facing a third challenge: globalization ,
expressed by learning from others, and then ex-
porting its expertise to the broader world, through a
synergistic combination of development assistance
and market-oriented commercial adaptation. Its
distinctive approach involves diverse bodies such as
the Singapore Cooperation Program (SCP), and the
Singapore Cooperation Enterprise (SCE). Singapore
has also appointed one of its most gifted diplomats,
former Ambassador to the United States Chan Heng
Chee, to head the Lee Kuan Yew Centre for Innova-
tive Cities, a newly created institute for global urban
development that focuses on the integrated use of
technology and design, to derive solutions for urban
planning, design, and management, and then to
spread its creative solutions around the world.
Singapore also pursues intellectual globalization
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by engaging in strategic research cooperation with
major global universities and think tanks, including
MIT, Tsinghua University, Peking University, and
the Oxford Research Foundation. To encourage col-
laborative international networks, it has established
a complex of research parks throughout the northern
part of Singapore Island, including One-North and
Biopolis. In these cosmopolitan centers, specialists
from many nations work together in search of solu-
tions to emerging challenges, creating a veritable
international laboratory, in the broadest sense of the
term, based on the future-oriented thinking of Lee
Kuan Yew.
It is not given to many in this world to pioneer a
social system that not only addresses the local chal-
lenges of one’s time, but that lives on to address the
broader problems of the world to come. Lee Kuan
Yew will sadly never live to see the fiftieth anniversa-
ry of his remarkable city-state, to be commemorated
this coming August. Yet his vision is still creatively
defining the future, and has nurtured leaders, includ-
ing his own elder son, who are eminently capable of
carrying on in that world he will never see.
Kent E. Calder
Director, Reischauer Center for East Asian Studies(SAIS), Johns
Hopkins University; Author of Asia in Washington (2014),
The New Continentalism: Energy and Twenty-First Century
Eurasian Geopolitics (2012), and Singapore as a Global Policy
laboratory (Forthcoming)
Jul. 2015    079
Development 发展

A Nepalese man brandishes the national flag in Kathmandu's Durbar Square for visitors.
The Nepalese flag is the world's only nonrectangular flag, and is also unique in the fact
that its vertical side is longer than the horizontal. It was first adopted on 16 December
1962. The two overlapping triangles represent the Himalayas, while the Sun and Moon
indicate Nepal's Hindu heritage, and also reflect the nation's hopes that it will last as long
as the Sun and Moon. The deep red color is inspired by Nepal's national flower, the Azalea,
while the blue border symbolizes peace and nature.

080    Jul. 2015

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C U L T U R E
07/2015

Jul. 2015    081

Photo Story
Nepal – A Country of Eternal Impressions
By Nyainqên
I
finished my journey through the three ancient capitals of
Nepal and the birthplace of Buddha in early March 2015, be-
fore returning to Beijing. When a friend asked me about my
impressions of Nepal, I had a clear response: I loved it, but I hated
it too.
First, the hate…
My first trip to Nepal was during the Spring Festival in 2006, a
time when its civil war had intensified and the entire country was
a battlefield. Heavily armed military police roamed the streets,
and there were barbed wire and high barricades of bulletproof
sandbags as far as the eye could see. Machine-gun fire flared up
unbidden in every corner of the city. By then, the civil war had
been raging for a full decade. The Maoist Communist Party of
Nepal (CPN) had occupied more than half of the country, and had
surrounded its capital, Kathmandu. My journey took me across
Nepal into India, and I had to endure numerous searches along
the way. We were already halfway along our journey when we
received an emergency message from Nepal: the border would
be closed the next day, although no one could tell us what time it
would reopen. So, I paid triple fare in for a seat in an unregistered
taxi, and found myself that night squashed into a broken-down
old car smaller than a tin can with several other Chinese as we fled
Kathmandu, rushing for the border crossing at Zhangmu before it
was closed.
That trip made me understand some of the shock and pain of
those left displaced and destitute by war.
Up until the second half of the 18th century, this ancient country,
founded in the 6th century BC, had only undergone three dynasties
in its entire 2300-year history – from the Kirat to the Lichhavi to
the Malla. But in the 200 years since, it has undergone a change of
dynasty, the British invasion, government restructuring, the Royal
massacre and a decade of civil war. This continued until 2008, when
King Tribhuvan’s monarchy was abolished and the Federal Demo-
cratic Republic of Nepal was formally established. For the past seven
years, however, the new government has failed to implement various
082    Jul. 2015
co-operative initiatives, mainly due to the differences separating the
main political parties, with the Constitution having yet to be enacted.
On my trip to Nepal this year, I even witnessed thousands of people
out demonstrating for the CPN.
Under such circumstances, it is inevitable that the nation’s
administration will suffer, the worst impression which backpack-
ers like myself gained was of the extortion that we endured from
public officials. At immigration, customs, airport security – bribes
had to be paid wherever I went, and these became the most un-
pleasant experiences during my trip to Nepal.
But now for the love.
When it comes to my love for Nepal I can feel my frown imme-
diately turn upside down and my melancholy transform into joy –
and what joy!
In the absence of any polluting industries, Nepal’s sky is always
bluer than blue. With the Himalayas to the north as a giant barrier
to the cold and the Indian Ocean to the south as a provider of hot,
humid air, the climate is warm and sultry, feeding the lush vege-
tation and flowers that bloom all year round. It is for this reason
that Nepal’s national anthem is ‘Made of Hundreds of Flowers’,
which is sung in praise of freedom, progress, peace and unity.
Between heaven and earth sits the breathtakingly spectacular
scenery of Nepal, with the snow-capped Himalayas rolling as far
as the eye can see, at an altitude of 4877 – 8844 m. With eight
peaks over 8000 m above sea level, this imposing barrier forms a
line along Nepal’s border, their brilliant white peaks visible on the
horizon from almost any part of the country. Once seen, they are
a sight that instantaneously fills the heart with a vast, boundless
peace. What a lucky nation indeed that can claim the majesty of
these mountains as a backdrop!
But let’s drop our gaze to ground level: from the 3rd century
BC to the 19th century AD, Nepal has amassed a considerable ar-
chitectural legacy, with a total of eight UNESCO World Heritage
Sites. There were two periods of great cultural prosperity in Nepali
history – the Lichhavi dynasty (4th–8th centuries AD) and the
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Flipping through the colorful, vivid photographs brought back the peace and tranquility
of the scenes captured on them as if it were only yesterday: row upon row of houses lined
up along the vibrant Kathmandu Valley, beneath the towering Himalayas; a Kumari
of Kathmandu looking distantly down from her beflowered window at the people
prostrating themselves in the courtyard below; the dusk-lit tenderness in two lovers’ eyes
as they gazed at each other by the stairs of the Black Temple in Patan, beside a carelessly
abandoned bicycle; in Kathmandu at night in front of the temple, flower-hat-wearing
Hindus, lighting candles and pounding tambourines, lost in devout chanting…

Mara dynasty (14th – 18th centuries AD). However, almost nothing
of the architecture and sculpture from the Lichhavi period remains,
and the majority of what can now be seen is from the Mara dynas-
ty. This marked a high point of Nepalese art and culture, and is
called the Renaissance period of the country’s art and culture.
After the 6th king of the Malla dynasty died at the end of the
15th century, his three sons established themselves as kings in their
quarters of the Kathmandu valley, dividing it into the kingdoms of
Kathmandu, Patan and Bhaktapur. All three kings turned out to
be art lovers, and poured every effort into the construction of their
palaces and temples. The three kings were also devout Hindus,
and maintained a constant flow of temple construction, using the
very best craftsmen and designers as they competed for the favor
of the gods. The three kingdoms existed in a state of mutual hostil-
ity, however, and conflict was incessant. In the mid-19th century,
the Gurkhas seized power, supported by the British, and the Malla
dynasty collapsed, leaving behind only a collection of architectural
treasures to tell of their former glory.
These three ancient kingdoms are known to people today as ‘The
City of Temples’, ‘The City of Art’ and ‘The Open-Air Museum’
… vibrant Kathmandu Valley, beneath the towering Himalayas; a
But none of this explains why I love Nepal.
The reason I love Nepal is the atmosphere created by the way in
which its people and their history blend together.
The Durbar Squares are the places I love to frequent most. There
are three Durbar Squares in Nepal, located in Kathmandu, Patan and
Bhaktapur respectively. The squares were intended as Palace squares,
the location of the royal residences and the heart of the ancient cap-
itals. All of the architecture, sculpture and art from Nepal’s period of
blossoming glory can be found here. All three Durbar Squares are
World Heritage Sites, so one might think that the buildings might be
left to gather dust, fenced off and festooned with signs reading ‘No
photography’, ‘No climbing’, ‘No noise’, ‘Do not touch’, ‘Do not sit here’
and so on, everything suffused with the cold aloofness of a ‘legacy’.
But the reality could not be more different! There are no fenc-
es, no signs – you can sit wherever you want, and photography is
permitted! Apart from a ban on non-Hindus entering the inner
areas of the Hindu temples, there are effectively no prohibitions.
Hawkers set up their stalls and roam around the stone stairs of the
temple; children play around, riding the backs of the giant stone el-
ephants; students passing by the temple after class rest on the steps
for a snack; young people rest their motorcycles and bicycles and
climb the steps for a chat, or to seek out romance in the hidden cor-
ners and corridors of the temple… Not only do people roam freely;
cats, dogs and sheep have all found their favorite spots in these
World Heritage sites. In my opinion, this is where you witness and
admire the real daily life of Nepal.
In this country there is no separation between the people and
their history, between modern life and ancient buildings, between
great art and the bustle of the marketplace.
I had begun to think about this article, but had not yet had the
chance to put pen to paper when that disaster struck Nepal – two
enormous earthquakes tore a hole in the country, and almost all of
the architectural heritage of the Durbar Square has vanished.
Flipping through my series of colorful, vivid photographs con-
jured up the peaceful and tranquil atmosphere of the scenes as if
it were only yesterday: row upon row of houses lined up along the
Kumari of Kathmandu looking distantly down from her be-flow-
ered window at the people prostrating themselves in the courtyard
below; the dusk-lit tenderness in two lovers’ eyes as they gazed at
each other by the stairs of the Black Temple in Patan, their discard-
ed bicycle momentarily forgotten; in Kathmandu at night along the
arcade in front of the temple, flower-hat-wearing Hindus lighting
candles and pounding tambourines, lost in devout chanting… Of
all of this, Bhaktapur is my favorite city. I travelled there to shoot
countless photographs, staying an extra day simply to hear the
chants of the people in the night as they spoke to their gods.
But, the moment the earth split open, all of this was gone.
After visiting the ancient sites of Nepal, famous British explorer
E. A. Powell had this to say: “Were there nothing else in Nepal,
save the Durbar Square of Bhaktapur, it would still be amply worth
making a journey halfway round the globe to see”.
Now, Bhaktapur is gone forever.

Jul. 2015    083

 Kathmandu

A bronze statue in the Swayambhunath pagoda. Their

unique style is Nepal's most important contribution to
Buddhist art, perfectly capturing the optimal proportions of
the human body, in complete harmony with contemporary
aesthetics.

084    Jul. 2015

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Jul. 2015    085

086    Jul. 2015
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The Himalayan mountain range, which extends

over 2450 km in length, with a width of 200-
350 km, from the southern margin of the Tibetan
plateau, and spreads across Tibet, Pakistani, India,
Nepal and Bhutan; its main area forms the border
between China and Nepal.

Kathmandu, located in the southern foothills of

the Himalayas; blocks the winter winds from the
north, while the warmth of the Indian Ocean from
the south gives the city its pleasant climate, fresh
with year-round green trees and blooms.

The Kathmandu Valley.

Legend has it that Kathmandu was once a
great lake, and Buddhists believe that the
God Manjusri cleaved a gorge through the
surrounding mountains, and drained the waters
of the lake to create the present-day Kathmandu
Valley. Hindus claim that the Hindu God Krishna
harnessed lightning to split open the mountains
and form the Chobar Valley. Scientists believe
that the Kathmandu Valley was originally indeed
submerged, but that the waters of the valley slowly
drained southward through the Chobar Canyon.

Jul. 2015    087

Kathmandu, located in the southern foothills of the Himalayas, blocks the winter winds from the north, while the warmth of
the Indian Ocean from the south gives the city its pleasant climate, fresh with year-round green trees and blooms.

088    Jul. 2015

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Jul. 2015    089

Photo Story 图片故事

Kathmandu's Durbar Square. The area brings together Nepalese traditional architecture ranging from the 16th to the 19th centuries; the square itself features more than 50 temples
and palaces, and retains an architectural form and style dating from the Middle Ages.

Taking a selfie while feeding the pigeons on Kathmandu's Durbar Square.

090    Jul. 2015

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The Boudhanath is the world's largest stupa, with a height of 38m and a circumference of 100m. Built in the 14th century, the stupa marks the terminus of the ancient trade route from Tibet to
Kathmandu. Tibetan merchants of old strove to make their way to Kathmandu, where they would circumnavigate the stupa, thanking Buddha for his protection. Even today, the stupa remains
a place of pilgrimage for Tibetans. Massive Buddha eyes are painted onto the square top of the stupa, representing Buddha' s omnipresent, all-seeing nature.

Nepalese wooden god puppets. In the Hindu pantheon, these are the gods of wisdom and wealth, and can drive out evil spirits.

Jul. 2015    091

 Bhaktapur

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Night-time Bhaktapur is alive to the sound of Hindu chanting.

Jul. 2015    093

The Vatsala Durga Temple in Bhaktapur. The small bell on its plinth, known
as the Barking Bell, was minted in 1721 by the Malla King Bhupatindra; it is
said that when it is rung, one can hear the sounds of dogs barking.

094    Jul. 2015

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A group of Hindus singing in the evening. This is a form of social organization unique to Nepal, known as Guti. Gutis are
divided into three types, depending on their purpose – religious exchange, collective solidarity and entertainment.

There is no ban on touching Nepalese heritage – humans and animals alike can climb and sit wherever they like.

Jul. 2015    095

 Bhaktapur's Nyatapola Tower is the
tallest Hindu temple in the entire
Kathmandu Valley, and is dedicated
to the god Vishnu's wife, Lakshmi.
Each pedestal is guarded by a pair of
stone guardians, comprising, from the
base to the top, Deva kings, elephants,
lions, eagles and goddesses.

The lintel of the Golden Gate at the former palace at Bhaktapur. The semicircle above the gate represents the
mount of Shiva and giant serpents, while beneath stands the four-headed, sixteen-armed Goddess Taleju.

096    Jul. 2015

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Bhaktapur's Taumadhi Square is also a bazzar and souvenir market.

Jul. 2015    097

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Bhaktapur's Durbar Square. From the 13th to the 18th centuries, the city was the capital of the Independent Malla Kingdom. The
Square is the site of the 500-year-old Malla Dynasty palace, which houses a wide number of palace halls, gardens, temples and
carvings, each with their individual artistic characteristics. The Square is known as "the essence and treasury of Nepalese art".

Jul. 2015    099

 Patan

Patan's Durbar Square. The buildings here are superb, and hold a unique position in the history of world architecture; the
area is known as "an open-air Museum". Behind the stone elephants stands the Vishwanath Mandir.

100    Jul. 2015

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The Mahaboudha Temple in Patan. Probably built in 1583, the building was severely damaged in the 1934
earthquake, and was subsequently rebuilt. The temple itself is hidden away within a narrow courtyard.

Jul. 2015    101

 The Hari Shankar Temple. This is the tallest temple in Patan's Durbar Square, and is
dedicated to Hari Shankar, a god with the dual divine natures of Vishnu and Shiva.
The roof beams are carved with scenes of the torment of cursed souls. The temple
was constructed in 1704 for the daughter of King Yoganarendra Malla.

102    Jul. 2015

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Patan's Krishna Temple. This is one of the highlights of Patan's Durbar Square,
and was built in 1636. The pagoda, the entire building of black stone, and building
carvings are a highlight of the Kathmandu Valley, and are known as a pinnacle of
Nepalese architectural art.

Jul. 2015    103

 Investment
Solving Strategic Risks in the
“One Belt, One Road” Eurasian
Connectivity Initiative
By Sameh El-Shahat
T
he One Belt and One Road initiative is a wel-
come vision for China and is potentially the
first major developing world common market
proposed and managed by developing nations. When
combined with the Asian Infrastructure Investment
Bank, the proposal foresees the creation of a network
of infrastructure projects and Special Economic Zones
(SEZ) centered on ports linking China, South East Asia
and the Northern Indian Ocean, and on land through
Central Asia to Europe.
Promotion of connectivity in the Silk Road
Project
The Silk Road initiative is not about one country im-
posing its will on others, but about a group of develop-
ing countries from the South with very different cultur-
al backgrounds choosing to develop together based on
their commonalities and by aligning their economies.
This is a new kind of world order that caters to the
needs of the underdeveloped because it is initiated by
themselves.
While connectivity and the essential nature of in-
frastructure should be emphasized, there needs to be a
deeper kind of connectivity, one of ideas between coun-
tries with some marked differences To do so, obstacles
to communication need to be removed or minimized to
104    Jul. 2015
create a base of shared values and shared development.
In promoting the connectivity of ideas, education
through better and timelier exchange of information
between the respective countries involved in the Silk
Road is paramount. Different organs of the govern-
ments, such as embassies, ministries of commerce,
foreign ministries will need to create more efficient
mechanisms for people and organizations of other
countries on the Silk Road to obtain information about
each other, such as:
Coordination of development policies between the
different governments;
The creation a supranational organization for Silk
Road Affairs, with subject-specific secretariats (e.g. de-
velopment, trade, culture), along the lines of a common
market organization, with full-time rather than ad-hoc
structures that can provide a point of reference for in-
formation and resolution mechanisms
Better coordination between ministries of different
countries within the Maritime Silk Road by creation of
specially dedicated crisis management and defusion
mechanisms
Risks encountered by businesses doing
overseas investment
Even with the best of intentions, governments and

While connectivity and the essential nature of infrastructure should
be emphasized in the “One Belt, One Road” initiative, there needs to
be a deeper kind of connectivity, one of ideas between countries with
some marked differences. In this effort Chinese companies have an
important role to play.
supranational organizations are limited in influencing
events in other states, and more so for countries like
China which have made non-interference a corner-
stone of their foreign policy. Thus, the lion’s share of
the responsibility for resolving trade and other disputes
which may hinder the New Silk Road strategy and its
implementation, lies with the companies themselves,
the same companies responsible for making connectiv-
ity a reality.
However, around the world, resource nationalism
has been a rising impediment to doing business abroad
for the world’s top mining and energy companies.
Countries and local communities have been demand-
ing greater share of the proceeds and more guarantees
from the foreign investor. Long after contracts have
been signed, the same contracts have been either de-
layed by national governments, due to protests, or even
rescinded in extreme cases, leaving the investor with
little recourse but legal action. This can create sensitive
diplomatic repercussions on the investor and investee
countries.
Often, when political or economic uncertainty reach-
es a climax, foreign investments can be taken hostage
by the local situation, such as the indefinite delaying
of a large hydropower dam and a two-year delay in the
construction of a mine project, both Chinese projects in
Myanmar.
WWW.BOAOREVIEW.COM
Sameh El-Shahat
President China-I Limited
Strategic Risk Management and
Communications Advisory Company
Admittedly, not all of the challenges encountered
by developing countries are unique to Chinese com-
panies. The geopolitical dimension of wariness and
bias towards China needs to be addressed by Chinese
companies operating abroad, especially State Owned
Companies, who will play an important part in the in-
frastructural connectivity of the Silk Road.
Companies throughout the world are increasingly
talking about stakeholder and less about shareholder,
but most of this talk is veneer because there is little
political will and courage, to implement the changes
needed, especially in the West. In Asia, the political will
is more available, especially in China, which has the
means and the vision to set the tone for a new kind of
agile, strong and caring corporate entity, which can be
the catalyst for this development.
Companies, in particular Chinese companies, wheth-
er state owned or otherwise, by virtue of their size, will
play a very important role in helping the connectivity
between the countries along the BELT and Road. But
they are also meeting complex strategic risks abroad,
namely in issues of social license and stakeholder en-
gagement.
Chinese companies, as bearers of a different and,
more caring economic order, can improve their chanc-
es of success in the Silk Road by adopting a more
proactive code of Corporate Social Responsibility. It is
Jul. 2015    105
Investment
important that they establish mechanisms for widening
the group of stakeholders on which they depend for
their success. Better mechanisms for dealing on the
grassroots level in the countries they work are a recipe
for success for Chinese companies.
I recommend a three-pronged approach, which I call
A-S-C
A-Alignment – Chinese “philanthropic” projects
have been either carried out at the behest of the host
government and were not needed by the actual people,
or were decided by the Chinese companies themselves
second-guessing what the locals might need. Align-
ment between national development goals, community
needs and corporate commitment, requires careful
planning and a business strategy that incorporates
development as not only as a business goal, but also a
business enhancer. Alignment optimizes the efficiency
of the company’s contribution and ensures that it tar-
gets the community’s needs as well as the company’s
long term goals.
S-Social License –A social license is the social
contract a company has with the people of the land or
country where the company operates, the EXPLICIT
popular approval of the company’s presence, giving
the company much needed “social legitimacy” to work,
especially in projects which entail disruption or relo-
cation of local people, such as mining, hydroelectric
projects.
Not a clear event or document, the social license is a
continuous process which requires an understanding
of social risks in extractive and other industries such as
banking. “Social legitimacy” is as important as “legal
legitimacy” and environmental laws and regulations,
which hitherto Chinese companies give far too much
importance to. Resource nationalism and social license
are the biggest obstacles to Chinese State Owned En-
terprises (SOEs) today and for the next decades. Social
106    Jul. 2015
license is also the best protection when the political
climate changes.
C-Communication and Consultation –Com-
munication is the tool that builds and cements the trust
that allows alignment and social license to bear fruit.
This means implementing systematic and continuous
communication mechanisms with surrounding com-
munities and, more widely, with the national popula-
tions of the host countries.
Dialogue also means consultation with the locals on
CSR development projects that affect them directly.
What matters is often not only buy-in from the govern-
ment for a particular project by a Chinese company,
but more importantly buy-in by the locals. People who
feel they have been consulted, feel more respected and
are more likely to see their interests as aligned with
those of the investor.
In dialogue, other stakeholder will have to play a
more active role, such as Chinese media, which will
need to up its game to become more attractive to for-
eign audiences. Chinese NGOs shall play an important
role abroad in the Silk Road, to bring help, relief and
support, and also values and ideas.
Social risks are the biggest threat facing Chinese
companies, especially state companies, abroad and
dealing with them requires creating awareness at the
top of Chinese institutions at board level.
In many ways, the Silk Road project is a welcome
and salutary wake up call to Chinese state companies
as they are currently in the process of being reformed.
Integrating social guidelines and a code of conduct for
doing business abroad into their business plans should
be part of the package of reform.
Companies are not only vectors of trade, but also of
ideas and values, and will be playing a unique role in
creating shared ideas and values across the Silk Roads.
Connectivity is best served through them.
WWW.BOAOREVIEW.COM

Jul. 2015    107

 Business
Simple Rules:
How to Thrive in a Complex World
By Kathleen M. Eisenhardt and Don Sull
Simple rules can tame the complexity that many
people and businesses face. By understanding what
simple rules are, why they work, and how to develop
them, people start coping more effectively.
W
hen Mary Barra became CEO of General
Motors (GM), she became the leader of a
global corporation known as much for its
complicated organization as for its exemplary cars.
Despite these challenges, the Stanford graduate led
the auto giant to its highest sales ever in 2014 and
simultaneously continued her quest to make GM
faster and leaner. At the 2015 Catalyst Awards, Barra
observed that her “smallest biggest change” at GM
surprisingly was the dress code. In 2009, she was
named the head of Human Resources for the global
giant. An HR team had developed 10 pages of rules
to govern dress for GM’s employees, from sales peo-
ple to manufacturing staff. One rule, for example,
was “No T-shirts with words that could be misin-
terpreted”. Making a symbolic statement about the
need to be lean and fast-moving, she replaced the 10
pages of rules with the simple rule of “dress appro-
priately”.
Mary Barra is not the only executive to use simple
rules. Facebook’s Mark Zuckerberg, U.S. Federal Re-
serve Chair Janet Yellen, and Lean LaunchPad guru
Steve Blank all rely on simple rules. For example, Yel-
len relies on her “mind the gap” rule that simply focus-
es on inflation and unemployment rates to inform in-
terest rates. Zuckerberg hires “only people for whom he
would work”. In fact, simple rules have come in handy
in many situations – from helping burglars to choose
their victims to protecting killer whales and beating
108    Jul. 2015
insomnia. In all of these situations, simple rules tame
complex situations.
Our book, Simple Rules: How to Thrive in a Com-
plex World, is grounded in research conducted over 10
years - at Stanford, MIT and London Business School,
and in over 100 companies.
Why do simple rules matter?
Simple rules counter the natural progression to
bureaucracy that plagues organizations. For exam-
ple, Wikipedia is both a success story and a caution-
ary tale. Wikipedia was founded with the idea of
creating a free encyclopedia without physical limits.
Stifled by too many rules, its predecessor, Nupedia,
had barely 12 articles in its first year. The founders
spun off Wikipedia to attract more contributors, and
created three simple rules for contributing content:
“maintain a neutral point of view”, “content must
have a published source”, and “ignore all rules”
which meant if a rule inhibits improving Wikipedia,
the contributor should ignore it.
But as so often happens, the rules grew. New con-
tributors found it difficult to figure out these rules,
slowing the growth of contributors.
What are simple rules?
Simply put, simple rules are short-cut strategies that
 WWW.BOAOREVIEW.COM

save time and effort by focusing attention and simpli-

fying thinking. Simple rules allow people to act quickly
and effectively without re-thinking every decision. They
are helpful in new enterprises like Airbnb where some
structure is needed to scale operations. Simple rules
are essential in big organization like General Motors
and Cisco where bureaucratic complexity can strangle
innovation and growth. Simple rules have several dis-
tinguishing features.
First, simple rules are simple – i.e., they are a hand-
ful of two to five rules. For example, some Twitter ex-
ecutives have two rules for meetings: no power points
and no canceling. Power points take too much time to
prepare and canceling disrupts the calendars of those
expected to attend. By keeping the number small,
simple rules improve the likelihood that people can re-
member the rules and follow them.
Second, simple rules are unique to the person and
situation. Take the crowdfunding sites, Indiegogo
and Kickstarter. Indiegogo entrepreneurs had val-
ues that emphasized the openness of the Internet.
Consistent with these values, their early rule for se-
lecting crowd-funding projects was anything goes as
long as it is legal. An early rule for selecting featured
projects called for balancing the sponsor’s effort and
the project’s popularity using an objective computer
algorithm.
By contrast, Kickstarter was founded as a way to
fund public art projects. The early rules stated that pro-
jects must fit into 13 categories which led to about 25%
of submitted projects being rejected. The early rule for
selecting featured projects called for subjective choices
by staff members. Our point is that these organizations
had unique rules that fit their situations.
Third, simple rules focus on a key decision or ac-
tivity like picking crowd funding projects, conducting
meetings, developing products and hiring. Simple rules
are not broad platitudes like the customer comes first.
Likewise, they do not address large issues like improv-
ing national health care. Rather, they center on specific
processes and activities. KATHLEEN M. EISENHARDT
S.W. Ascherman Professor at Stanford University; Co-director of
the Stanford Technology Ventures Program; Recently named the
Why do simple rules work? most widely cited strategy and organization theory scholar in the
past 25 years

Simple rules work best when people have to cope

with substantial complexity and do so quickly. Simple
rules lead to surprisingly accurate decisions, and can
sometimes outperform decision processes that use
extensive data and take more time for analysis. Simple
rules are effective for decision making because they
DONALD SULL
Senior lecturer at the MIT Sloan School of Management;
Formerly professor at Harvard and London Business School;
Listed among the next generation of management gurus by The
Economist and Fortune

Jul. 2015    109

Business
focus on what is important rather than on everything.
When people have too many choices, they become para-
lyzed. Similarly, when people are asked to consider many
decision variables, they often overweigh less relevant
factors and become dissatisfied with their choices. Simple
rules are also effective because they can be proxies that
crystallize complicated information. For example, the
investor Warren Buffet’s rule of “don’t invest in what you
don’t understand” is a proxy for deep understanding any
particular asset class before investing.
Simple rules also work because they enable capture
of opportunities by balancing efficiency and flexibil-
ity. The rules provide coherence that is efficient, and
a repeatable formula. Yet, their small number leaves
room for the flexibility needed to address diverse op-
portunities. For example, Nike relied on simple rules to
enter athletic markets by making shoes first, then add-
ing clothing endorsed by leading athletes in the sport,
and finally entering high-margin products. Although
markets such as golf and tennis differed, Nike had a
repeatable formula of simple rules to capture diverse
opportunities. Similarly, Airbnb balanced between effi-
ciency and flexibility by giving their hosts simple rules
to follow like using professional photographs of their
properties and yet the rules fit accommodations from
tree houses to castles.
Finally, simple rules work because they help large
groups to stay coordinated. They are easy to remember
and communicate which is why simple rules are so
common in nature. For example, starlings use simple
rules like go in the same direction and maintain a con-
sistent distance apart to fly together. Similarly, simple
rules are helpful in shared economy companies that
rely on the coordinated action of many people who are
otherwise strangers. They help explain the success of
companies like Zipcar that rents cars by the hour and
began with simple rules like return the car on time, fill
the gas tank, and keep pets in containers.
Simple rules do not, however, work for every situa-
tion. A detailed checklist is more effective for routine
tasks such as a packing list for a business trip or aircraft
take-off. Simple rules also do not fit unique decisions
like getting married.
110    Jul. 2015
Creating simple rules
While rules can come from many sources, we have
developed a three-step process for creating simple
rules.
Step one is to define the objective. Although it may
seem obvious, most people start with objectives that
are too vague to be helpful. For example, instead of a
growth objective, executives might set the goal of be-
coming the number one producer of residential solar
panels in their home market.
Step two is to choose a bottleneck. A bottleneck is
an activity that stymies achieving the objective. Bottle-
necks are often challenging to see because there can be
many possible ones. For example, Yahoo has focused
on developing mobile products, but the true bottleneck
may be finding terrific computer scientists. A key is to
choose a substantial bottleneck that is a genuinely clog-
ging and repeated activity.
Step three is to craft the simple rules. The best rules
are usually not the ones that seem initially right. Rath-
er, it is most helpful to use diverse information sources
like experts, asking colleagues, and tracking your own
behavior to develop the rules. It is also helpful to realize
that there are 6 kinds of simple rules. Some like bound-
ary rules for picking what to do are easy to develop. For
example, many burglars have learned an effective rule
for choosing victims: never burgalarize a house with a
car outside. Companies may have boundary rules about
which customers to target or what products to develop.
Other rules like timing rules that specify rhythms and
deadlines are harder to learn. For example, Pixar’s
rules to do a movie per year took significant time to
develop. The hardest rules to learn are stopping rules .
The tragic Mt Everest climb that resulted in 8 deaths as
described in Jon Krakauer’s book, Into Thin Air ” is an
example. Although the climbing team had a stopping
rule to get off the summit by 2 pm, they left much later
on this tragic day.
Overall, simple rules can tame the complexity that
many people and businesses face. By understanding
what simple rules are, why they work, and how to de-
velop them, people start coping more effectively.
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Jul. 2015    111

 BETTER POLICIES FOR BETTER LIVES

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