China’s Changing Commercial Landscape on the Eve of the Summit: A Conversation with Eric Zheng

[music] >> Understanding China has become more difficult than ever. Yet also more important than [music] ever. Hardening geopolitics has made travel to China more difficult, but not impossible. >> [music] >> Join me, Scott Kennedy, for an on-the-ground look at China, for conversations with people shaping China and scholars exploring the country firsthand. What makes China tick? Where is the country going? How should the US respond to the China challenge? We'll dive into all this and much more on this podcast. Welcome to China [music] Field Notes. Good morning, good evening, good afternoon, wherever you are. Welcome to this recording of China Field Notes. I'm Scott Kennedy, and delighted today to have with us Eric Zheng, who is president of the American Chamber of Commerce in Shanghai. It seems like we could always say US-China relations are at a major intersection, >> [snorts] >> but that is doubly or triply true for right now. We're talking during the second week of September, about 2 weeks before the scheduled meetings between President Donald Trump and Xi Jinping in Washington, and the US-China relationship has had its share of ups and downs. We are now officially in a period of a constructive relationship of strategic stability, potentially parentheses, based on fairness and reciprocity, but this doesn't feel like a very stable stability. The US-China relationship commercially has evolved dramatically over the last quarter century, and although still highly interdependent, the economies are also highly competitive. There's no better person to break down where things stand right now in the relationship and where it's heading, particularly on the commercial side, than Eric Zheng. His bio is on our website, so I won't go into all of the details, but Eric spent almost two decades at AIG and eventually became the president of AIG China. He has more recently become deeply involved in public service for the American business community, first on the Board of Governors for AmCham Shanghai and since 2022, the president. He also serves on the Committee of 100 and a variety of other organizations to support their growth and development to address fundamental social issues in China and elsewhere, and he is one of the keenest observers of what's going on on the ground in China and in the relationship. Eric, welcome to China Field Notes. >> Thank you, Scott. It's always good to see you. >> Let's get started first just to talk a little bit about your background because you didn't originally get, you know, start academia and your studies working on insurance and business. You originally got were more interested in politics. I know you went to Fudan University originally and then at the University of Tennessee in Knoxville before you went on to study business. How did you, first of all, get interested in the United States and decide to come study in the US and then eventually move towards business? >> Well, I was born and grew up in Shanghai during the Cultural Revolution and then in the early 1980s, China resumed higher education under the leadership of Deng Xiaoping. So, I was very lucky to be able to go to Fudan after pretty difficult entrance examination. And so, I majored in English and spent 4 years as a student of the English language. And after graduating from Fudan, I actually spent a year teaching English at Fudan to students there. And then I got a chance to go to the US actually to teach Chinese in 1985 at the University of Tennessee in Knoxville. And that was certainly a great opportunity for me to go abroad. As you may recall, in those years China was just opening up and young people like me wanted to explore the outside world. And so, again, it was because of the opening up policy initiated by Deng Xiaoping. And so, I was able to join that first wave of Chinese students to go abroad. I did spend several years at the University of Tennessee teaching Chinese. And at the same time, I could take study international relations, political science for a few years. So, that was basically how I went from China to the United States. I didn't plan it my career that way, but I just got very fortunate to be able to study both at Fudan and then also to go to the United States. >> Well, there are a few select people who have a plan that they begin to implement from when they're 5 years old and they see it through. Most mortals like you and me, we make it up as we go along. But your first experience in the United States in Tennessee in Knoxville, and I should say I have an aunt and uncle that still live there. What was it like being in the southern United States in the late 1980s? >> I was probably one of the few very few Asian-looking young fellows uh in Knoxville. And for me, it was hard it was a hard transition language-wise because at Fudan and I was supposed to study British English. And when I got to Knoxville, and that Southern accent was not easy to understand, but I tried to adapt, try to lose my British accent and try to pick up a few local accent, but it was a great experience. One big impression that I had when I got there was people had lived in these gigantic houses. I was coming from Shanghai. In those years in the '80s, we didn't have big apartments to begin with. So, just the living standards, you know, people the wealth level was quite a impression. I wasn't prepared because I didn't really know much about the US before I moved there. So, China was still very much behind the United States was in the early stage of development and even the city like Shanghai. Back then when I left the tallest building in Shanghai was 24-story Park Hotel which is still standing on Nanjing Road and so first time when I went to New York from Knoxville, you know, that was certainly another interesting experience looking at all those skyscrapers and all the subway trains and uh that was really a great experience for me coming from old China back then. >> How did you then end up [clears throat] eventually at AIG and working on the insurance business in China? >> Beginning from the early '90s, so I started working for PWC. In fact, the predecessor of PwC called Coopers & Lybrand, and it was one of the big eight back then. And so, I was hired to focus just on China business because in the early '90s, many of Coopers clients started to explore the China market. So, their audit clients, their tax clients, they wanted to do business in China, and Coopers didn't have a particular service to work for those clients. So, they put together a what they call a China desk. So, I joined them as part of that service. So, I got into, you know, management consulting with a focus on market entry strategy for China. So, I stayed with them through the merger in '98. Then, we had PwC, you know, Price Waterhouse Coopers with Coopers & Lybrand. So, stayed there, then I got an interesting opportunity right before China joined the WTO at the end of 2001. I was offered a job to work for the US Department of Commerce as a commercial officer in China. Now, I always wanted to work in China because I worked on projects, worked for clients, traveled back and forth. I saw the growth in China, and I was looking for an opportunity to relocate to China around that time. So, I joined the US government as a commercial diplomat, and then I relocated to Guangzhou in 2002, right after China joined the WTO. So, my job was to promote US exports to China, but also to help US companies do business in China. Stay there and work with many US companies, including AIG, and then after China joined the WTO, China was committed to gradually opening up its the insurance sector. And AIG actually got to China in 1992 as the first foreign insurance company to be allowed to establish a presence in China. But with China's accession to the WTO, AIG felt that it was time to expand its coverage its operations in China. So I joined AIG in 2004 initially Hong Kong, then I moved to Shanghai in 2005. So I worked for AIG most of my career was with AIG, the non-life insurance side of it. >> So then you got to move back home. >> Exactly. >> And so you've been able to merge both sides of your life and then watch Shanghai grow and evolve. I've seen the Park Hotel on my last trip and is still there as you say, but there's a lot of other buildings next to it and across the river in Pudong. >> Exactly. >> And yes, things have changed dramatically. >> When I left China, there was nothing on the Pudong side. It was all flat with rice paddies and no bridges, no tunnels, and there was no reason to go to the Pudong side. Everybody was on the Puxi side. But then all started in 1990s and in fact I met Zhao Qizheng who was the first head of the Pudong district when he visited New York and Coopers and Lybrand hosted him and having dinner looking out of the windows, looking at Manhattan skyline and Mr. Zhao said, "You know, we have a place called Lujiazui. We would like to develop Lujiazui into something like a Manhattan." So you know, coming from China originally, I didn't quite get the vision. I said, "Wow, the tallest building was only a 24-story, but how are you going to do a Manhattan out of Pudong?" But now, even you look at the skyline of Lujiazui, it's just as dramatic as Manhattan, if not more. >> 100% agree. In the late '90s, was doing my dissertation research and part of the time in Shanghai, and my host, Danwei, was the Pudong Institute for the US economy, and they were relatively new, and my friends lived in Pudong, very, very quiet neighborhood. But, almost three decades later, you have to go very far out into Pudong to find a quiet neighborhood. So, yeah. And any case, so then you joined AmCham Shanghai. You've been the president for the last four years, and you joined, you know, before that you began to serve, but you took over in 2022, of course, after the pandemic began. So, you've seen a lot in the last few years. Just very briefly, before we start to dig in some of the numbers of what's going on now and the US-China relationship, there's several AmCham offices in China or organizations. You know, AmCham China in Beijing, there's AmCham Southern China in Guangzhou, and Hong Kong. What's the role of AmCham Shanghai? >> So, our role is really to provide value-added services to our members in three areas. First of all, is to inform our members on business issues, you know, regulatory environment, and so forth. So, inform is one. And the other one is to connect our members, providing a kind of a network of companies, people. So, connect and inform. And the third one which is becoming more and more important is advocate. So, advocacy has become a very important role that AmCham Shanghai plays in terms of really to work with both governments and to voice our opinions when needed. So, basically those are the three roles is to inform, connect, and advocate. And I always value AmCham's services even when I was in Guangzhou. You mentioned AmCham South China. So, I was actually on their board as a honorary governor because I was with the US Consulate as the commercial council and I was on their board. Once I moved to Shanghai in 2005, I joined AmCham as a member on behalf of AIG and then I ran for the board. Play several roles, different roles. 2018 and 2019 I was the chairman of AmCham Shanghai. So, I think this certainly AmCham Beijing or AmCham China, they all play similar roles. You know, during good times our members needed us. During difficult times probably they need us more. So, I think, you know, we're here to really to help our members succeed in China. And you mentioned my current tenure you know, I mean started you know, around COVID time. It was very very challenging plus trade wars and those two COVID very very difficult difficult times for the chambers. So, I felt like I wanted to help our members and so I left AIG and then joined the chamber full-time. So, I'm running the chamber as the president which is a full-time role uh appointed by the board. >> Well, let's turn to one of those three roles in form. The American Chamber of Commerce in Shanghai conducts a survey every year of its members. You also interact with them one-on-one and in small groups. So, you get to hear really what's going on inside companies, also between their headquarters and operations on the ground. What is business sentiment like now for American companies based on these various sources? What are the highlights of how they're feeling and doing in China right now? >> So, maybe I could start with the challenges first. In the past few years, there are basically three challenges. One is geopolitical tensions, bilateral relationship. It was very, very difficult for our members. And number two was domestic competition becoming very, very fierce. Number three is the slowdown of the economy. So, those were the three big challenges for our members. But now increasingly, domestic competition is becoming even more challenging. You know, given the recent summit in Beijing, our companies felt better because of the truce. And we're certainly hopeful that the truce will continue. So, I think as far as bilateral relationship, our companies feel somewhat better than, say, a year ago. But domestic competition is still a very, very serious challenge because 20 years ago, 30 years ago, it was easy for a multinational company to succeed here in China commercially. You could just replicate your products and services here. But now, there are a lot of players, and domestic companies are very, very good, very, very innovative. So, I think we're learning from our competition. But overall, I think our business sentiment is improving. COVID and the trade wars, those were probably the worst time. And our companies are bouncing back just from a business result standpoint. I think our profitability levels has improved quite a bit since the COVID times. Now, we're still struggling with our bottom line in terms of our, you know, margins and even top line growth, we're struggling because the market is so competitive. But overall, 3/4 of our companies are profitable, which is a good number. But there are still other structural issues here, certainly. I think the consumption is not quite there yet, domestic consumption. The confidence level is not quite there yet. So, I think there are some structural issues that we have to live through in the near future. >> So, when you started working for AIG in China and other companies started coming in after the WTO, the goal for many was moving manufacturing to China to produce for the Chinese market or opening up services towards the China market. And, you know, American companies still do that. But over the last few years, what has been the primary draw for American companies to China? Is it about selling in China? Is it about R&D? Is it about other goals? People hear about China plus one strategies. What are your members in China for primarily? >> So, uh still several drivers here. So, one certainly China's manufacturing ecosystem, which is is very very efficient, second to none. It's hard to find a replacement at this point or in the near future because China can make things in a very efficient, cost-effective way. So, I think from a product sourcing standpoint, it's a good place to be. But, I think increasingly our companies look at China as end market. You try to sell to this market. So, people talk about in China for China in the past few years, that seemed to be a popular strategy. But, now we also see a new trend is in China for the world, basically leveraging its manufacturing ecosystem to produce products for China, for the China market, but are increasingly for other markets, including the United States. So, I think right now in China for the world probably is the most popular approach to this market, followed by in China for China. So, if you are Disney, so you are totally here, you are in China for China because we have a Disney theme park in Shanghai that's doing so well, right? So, you're not going anywhere. So, if you are Tesla, we do have a Tesla Gigafactory here, you're probably in China for the world excluding the United States, of course, here because of the tariffs. So, Tesla could make cars here to sell to the China market, but it can also sell its cars to Asia-Pacific, other countries in this region. So, I think those are probably the two primary strategies. In China for China and in China for the world. Now, I also want to mention a third emerging kind of strategy is in China for China and for the world excluding the United States. Because given some uncertainty, uncertain regulatory trade policies, it's hard to sell products to the US. So, when companies plan their business strategy, they probably keep the US market as a separate place. So, increasingly they'll just focus on the China market and other markets excluding the United States. So, that's a kind of a emerging strategy for some companies. >> So, that's very interesting. So, that suggests that even that obviously US-China tensions have had a huge effect on businesses and their strategies and the amount that they sell to the US and what they do in China. But, what I hear you saying, Eric, tell me if I'm wrong or not, is that despite all of those tensions, companies are finding ways to engineer still having global businesses. It's not all entirely unified, but they have a tech stack which is for China and other countries ex-US, and then they have a tech stack for the US, which is probably based on designs and manufacturing and sourcing that is increasingly outside China. So, does that sound correct or am I missing something? >> Yeah, I think companies here continue to view the United States as a very strategic market. They wanted to sell products to the US, but you know, given the uncertain trade policies, different tariffs, and including 301 and so forth. So, it's hard for companies to plan for the long term. So, at this point when they plan for their supply chain and markets, they oftentimes stay away from the US by focusing on other markets such as, you know, Southeast Asia and other Asian markets including European markets by excluding the United States. >> Yeah. Now, you said one of the other challenges for American companies is the slowdown in China. I mean, you're in one of the most vibrant cities on the planet. How do you American companies experience that and feel that slowdown? And how do you other staff members at AmCham Shanghai perceive what that is like on a daily basis? >> Yeah, I think in the past the domestic economy here, the growth of the economy relied heavily on the real estate sector and we've seen some changes in the past few years. So, I think the real estate development is no longer a driver, right? It's become a liability. So, consumers in China are reluctant to spend. We notice bank deposits are going up, but people are not spending as much because they are concerned about some big-ticket items such as, you know, health care, uh retirement, education, even housing. Imagine if you live in Shanghai, if you own a few apartments, in the past you were pretty confident, right? I know people who would easily just sold one apartment to fund a kid's high education, college education in the US for 4 years, just one apartment. But now, if you have three, four apartments, you can't sell them. And if you have a mortgage, then you'll be in trouble. So, that's probably why people are very reluctant to spend and the so-called social safety net is not quite there yet to protect them. So, that's why consumers, we have a pretty weak consumer demand at this point. Now, the government is trying hard to stimulate the growth and demand and domestic consumption has to play a role in driving the growth of the economy because exports alone will not make it. You know, it's already having many headwinds in other countries, right? So, domestic consumption has to play a critical role in growing the economy, but consumers are not quite ready to spend, unfortunately. >> So, that puts you in a difficult position. I mean, one of the things one hears in Washington occasionally, and I know that you come to Washington often for your door knocks, is that the door to doing business in China is gradually closing for American companies because of Chinese industrial policy, the goal of replacing foreign businesses with domestic ones. Do you think in 5 or 10 years there will still be opportunities for American companies? >> I think so. You know, certainly we recognize the competitive nature of the bilateral relationship and uh these We're talking about number one and then number two economies in the world with two kind of very different development models, right? When one is free market, the other is state-led free market. So, you know, the competition will be there. We still see opportunities for cooperation. But, certainly not in sensitive areas, right? Even in AI and and in technologies, and there are some areas that they will be very difficult to cooperate given the, you know, national security considerations by both sides. But, if you're, you know, in the consumer product space, even in pharmaceutical, chemicals, I mean they feel pretty good about the market right now. I mean, give you an example. So, even the bio farmer, certainly there could be some national security considerations, but the Chinese companies are these startup companies are so innovative and they can do early stage drug development in a very cost-effective manner. And our big farmer companies would love to work with them, even to buy their pipelines because they could focus on phase two clinical trial, phase two, phase one. And our big farmers can buy them out and then take to the US for phase three and phase four trials and then go through FDA approvals. And so, ultimately, you could developed a blockbuster so-called drugs in a much shorter period of time with a lot less money. And I think the popular approach is for the Chinese company to retain the domestic market here then for the international farmer company to cover the rest of the world. It looks like a win-win proposition if you don't get into politics. So, I know for a fact that many European pharmaceutical companies are doing that, too. They even have set up funds to invest in these Chinese companies in their pipelines. So, you know, if we don't stay here, if for any reasons have to give up on this growth market, then our competitors will take over and they will easily buy out these pipelines. And fortunately, some of our companies are running out of pipelines. And it takes a big farmer company 10 years to develop a blockbuster drug, billions of dollars investment. But working with these Chinese companies, it will be win-win, right? Very cost-effectively. >> Sure. This has been very helpful conversation so far to discuss where you've come from, where China's come from, where the relationship is commercially and otherwise, both upsides and downsides, opportunities and risks. In May when President Trump visited China in Beijing, the two sides announced that they were establishing a constructive relationship of strategic stability parentheses US edition based on fairness and reciprocity. We've now had a few months under the halo of this constructive relationship. The two sides are scheduled to meet again very soon. What do you think of this framing and how stable is this stability? >> Looking at pretty short-term, can we extend the current truce, right? Because I think it's as far as rare earth exports and and other export control rules, we need to have an extension. So hopefully by later this month when the two leaders meet in Washington, we could see some positive outcome in terms of extending the truce beyond end of this year, November. So, you know, I think it's in the interest of both sides to establish more of a stable relationship, at least to manage the differences. We were happy to see that the two sides decided to establish these two boards, right? In Beijing, so board of investment and board of trade. And we see some more details as far as the board of trade. At least the two sides have agreed to give each side $30 billion worth of non-sensitive products at a very low tariff level. So, I think that will be a good starting point, but we I think 30 billion plus 30 60 billion, it's still like 10% of the total trade relationship, but it's a starting point. The board of investment, I think at this point we don't really have a whole lot of details, but I think it would be good to have some sort of a framework to some guardrails to allow Chinese companies to invest in the United States. Because there are many Chinese companies that are interested in the US market. And the current tariffs and so forth hard for them to sell to the US market, so they would like to set up an operation in the US. So, if the United States government comes up with some sort of a guardrail, so you know, these even a negative list, these are the sectors that are off limit to Chinese investment, but other sectors are open or they could even require a JV structure. So, you cannot exceed a certain equity cap level, say 50%. It would be helpful to have some more specific guidelines so that Chinese companies will have more visibility in terms of how to go to the United States to invest. And they've got capital, they've got manufacturing know-how, and they've got good products, some very innovative products. So, it would be good for both sides, I think, to have this more transparent rules as far as Chinese investment, direct investment in the United States. >> So, the way you describe those things, the desire for greater stability, extending the truce, these seem like some of these are relatively short-term aims. It sounds to me like you'd agree that this is a relatively fragile ceasefire in which competition is still sort of very central to the bilateral relationship. Let me ask about one area where there's competition, but also need for cooperation. That's artificial intelligence. You're in Shanghai, you've got MoonShot, which had Kimmy K3 come out recently. You're just down the train tracks or highway from Hongjo, where Deep Seek, Alibaba, other tech companies are. Chinese uh companies are putting out LLMs and applying them to many parts of the economy, but people are also really worried about the safety side of AI, the loss of control, the potential dangerous uses of AI, etc. There was recently a big summit in China on AI that Xi Jinping spoke at and announced this initiative to promote global standards. Where do the US and China stand in AI right now? Are there prospects for collaborating, for interacting, for setting some boundaries and guardrails? Where do you come down on this? >> Well, the two countries seem to be going in slightly different directions as far as the approach to AI. And here, certainly, some of these language model large language models are mostly open-sourced. The US frontier models are mostly closed-source. You mentioned this big conference in China, in Shanghai, in fact, not too long ago called WAIC, the World AI Conference, and then they certainly try to be very inclusive by inviting many participants from global South countries. And they even offered, I think, 5,000 opportunities to train people from those countries. So, at least China is positioning itself as a more embracive kind of inclusive country as far as AI development. They are also setting up this permanent organization in Shanghai called WAIC or organization. It's really to work with other countries, particularly countries in global South. So, this seems to be China is going a very different direction. I certainly hope that the two governments can work together at least on AI governance because as we can all understand, you know, we're talking about the machines, you know, versus human beings. So, it doesn't matter whether you are United States or China, we need to make sure that we can make sure it's a good technology for people. So, there are certainly some risks. We have already seen some potential risks there, and I'm very happy that I think one of the outcomes from the May summit in Beijing was for the two sides to set up a mechanism to discuss AI governance. Now, I'm not sure how far they can go, but at least there is a mechanism set up for the two sides to discuss these issues. So, hopefully later this month in Washington at the summit, they can also deal with this issue, at least to start a conversation because obviously the United States and China are the two leading players in the AI space and they need to figure out a way to set some guardrails as as far as AI development. So, so I think AI governance will be very very critical. It will be in the interest of both sides to work together on that. >> So, you mentioned the summit and we will all see what happens and you've touched upon a whole variety of different policy issues. If there was one thing that was most important that AmCham Shanghai hopes comes out of the summit, what would that be? >> Well, we certainly hope that the two leaders could continue to engage with each other by meeting and talking to each other to work out the differences and to stabilize the relationship. We're more stabilized than before, but more stable than before, but we need to extend this period. So, stability is very important for members because our members have to plan for the long term. If geopolitical environment keeps changing, keeps shifting, it's very difficult to plan. So, that's why a lot of our companies are still on the sideline. They're not putting off their decisions because it's not clear how the regulatory trade policy will be in a few months' time. So, I think having the summit is very important and also there are other opportunities for the two leaders to meet later this year. Certainly the APEC leaders meeting in November in San Jen and G20 in Miami. So, hopefully the leaders can continue to talk to each other and to meet with each other to uh find a good, positive, stable future for the two countries because, you know, China is not going away. It is the second largest economy and it's growing and the United States is still the dominant is the number one economy with a very vibrant private sector such as the AI space in Silicon Valley. And these two countries are very strong in their own ways. I hope the two leaders will continue to talk to each other and this is really up to the bilateral relationship now is really up to the two leaders to decide. So I think the summit later this month in DC will be very very important. >> Eric, this has been a really fascinating important conversation. Learned a lot about how American companies are doing on the ground in China, why they're there, how their geopolitical factors shaping the relationship affecting companies and what your hopes are for the relationship in the short term at the summit, the meetings rest of the year and going forward. We will have to wait and see how things go. I would like to be optimistic, but I also know that it's important to prepare for downside risks, which I'm sure that you and your members are also aware of. So again, thank you for joining us on China Field Notes. This has been a really helpful conversation. >> Thank you, Scott. >> [music] >> Thanks for listening to China Field Notes. Stay up-to-date with our latest releases by following us on Spotify, Apple Podcasts, or wherever you listen to great content. Until next time. >> [music]