I was recently in China for the World Economic Forum’s Annual Meeting of the New Champions 2015, and I couldn’t help but think the Forum has chosen an incredibly suitable location for its summer conference. While the Forum’s global focus at Davos was on the economic impacts of climate change, inequality, and sustainable development, the Summer Davos 2015 in Dalian, China is about charting a new course for growth for China and emerging markets. And if you thought that course was going to be a straightforward one then, well, strap yourself in.
WEF’s focus on a “new path for growth” seems especially relevant at this time. Recent upheavals on China’s stock markets have made Charting a New Course for Growth seem like exactly the right path for China to take. For China growth is inevitable, it just depends on what kind of growth you’re talking about. What we want to see is a new path - economic growth in parallel with a focus on other areas that underpin strong economies.
The fundamentals that create trust in institutions to be able to manage that economic growth responsibly. Two things are clear: trouble in China’s markets threatens the entire global economic system and China’s economy is cooling off, spurring concern - and at times outright panic - in global market systems. So how can China deal with the current crisis and reduce further market volatility?
To do so, it’s crucial to address the root causes of the market problems, not just the symptoms. My role as the Chief Executive of GRI is to convey the message to government and business leaders that trust is a necessary foundation for market growth and stability. This trust can be built by ensuring transparency is a fundamental part of the new course for economic growth.
On 24 August of this year, China’s “Black Monday” arrived as the main stock market in Shanghai experienced its largest collapse in nearly a decade. The turmoil swept across the world, with markets in the West reeling and emerging markets exposed as particularly vulnerable to a slowdown in China. Many people claimed that a full-blown crisis was at hand, one that would make the 2008 crash seem minor. But so far, the doomsayers haven’t been proven right.
So. Is China’s economy really in crisis?
I don’t think so. Unlike the US and other countries, Chinese stock markets represent a relatively small part of the overall economy and often experience significant ebbs and flows. Also, China’s markets are actually up in year-on-year figures. While it’s true that China’s GDP growth is slowing, at 7 per cent, it is actually slightly ahead of what analysts predicted, which isn’t all that bad.
Money market rates haven’t significantly changed, and China’s banks are not at risk. In this light, China’s actual economic situation doesn’t really reflect a crisis, which leaves one wondering why so many people have lost confidence and are panicking following Black Monday and the days that followed. In my view, the problem isn’t the fundamentals of China’s economy, the problem is a lack of trust.
A crisis of trust
In my view, the problem isn’t the fundamentals of China’s economy, the problem is a lack of trust.
China is experiencing a lack of corporate trust, both domestically and globally. When Premier Li Keqiang first expressed the need for equity markets to provide a larger share of corporate financing, he wasn’t just talking about finance – he seemed to herald a new China and say to the world that reforms were working.
My impression was that Chinese markets were becoming a place that could be trusted to do business, a place that supports economic growth with less centralized control over markets and more prosperity for all. But China still has a way to go to reach this goal. This can be seen not only in its market turmoil but also in the government’s reaction to it.
Compare that with action taken the same day by Apple CEO Tim Cook. Apple shares plummeted on Black Monday, losing over $60 million in value. In response to this, Cook sent an email to the media. In the email, he issued a strong vote of confidence in China and its markets, saying that Apple was still experiencing impressive growth and that the company still saw China as an excellent long-term investment.
The result? Apple’s shares regained their losses demonstrating the importance of transparent and open communication with stakeholders. Trust builds the credibility that fuels markets. And when you’re charting a new course for growth, you need that credibility as a foundation to build and maintain strong, resilient markets.
Treat the cause, not the symptoms
It’s important that China’s business and government leaders focus on the root cause of the problems, not the symptoms of the economic turmoil. Short selling, interest rate manipulation, halting IPO’s – none of this will fix the China’s core issues. Re-establishing trust in these markets is the key and it’s the most promising way to address the cause of China’s current economic problems.
This will take more than intervention. It will require a focus on transparency, reporting, education, and building trust among corporations and their stakeholders. This will help ensure risks are being understood by companies and investors, and managed properly. Rather than focusing on short-term, or transactional economic issues, China should be focusing on its long game – the ability for the global investors to understand - with confidence - that Chinese business is taking corporate risk issues into account.
Just look at how some of the world’s largest pension funds and other long-term investors make this determination through a mix of financial and non-financial indicators as a filter for investment. Increasingly, this is the level of transparency that is required by global investors to establish trust in companies and markets – it’s becoming “table stakes”. China can instill trust in its markets by bringing these issues to its corporate lexicon.
This isn’t just about the earnings you’ve made, it’s about what you’ve done, and what you plan to do as an organization. That’s what sustainability reporting is all about. Building and maintaining trust in businesses and governments is fundamental to achieving a sustainable Chinese and global economy.
Every day, decisions are made by businesses and governments which have direct impacts on their stakeholders, such as financial institutions, labor organizations, civil society and citizens, and the level of trust they have with them. These decisions are rarely based on financial information alone. They are based on an assessment of risk and opportunity using information on a wide variety of immediate and future issues.
The value of the sustainability reporting process is that it ensures organizations consider their impacts on these sustainability issues, and enables them to be transparent about the risks and opportunities they face. All stakeholders play a crucial role in identifying these risks and opportunities for organizations, particularly those that are non-financial and require special expertise and insight to identify. This increased transparency leads to better decision making, which helps build and maintain trust in businesses and governments.
I urge all leaders in China and around the world to focus on transparency as a path to build trust as you chart a new course for growth. Building trust in your companies, your policy, your markets, and your role in the global economy.
Michael Meehan is chief executive officer of GRI. This piece was written exclusively for Eco-Business.