Joint venture with China
Asia has realised that, contrary to Western thinking, it is necessary to combine state and market logic, says Mihály Patai. We sat down with the Deputy Governor of the Magyar Nemzeti Bank (the central bank of Hungary) to discuss the importance of digitalisation and greening, the internationalisation of the renminbi and the regional role of Budapest.
Joint venture with China

Joint venture with China

Photo: Róbert Hegedüs
Mariann Őry 21/06/2023 08:01

Asia has realised that, contrary to Western thinking, it is necessary to combine state and market logic, says Mihály Patai. We sat down with the Deputy Governor of the Magyar Nemzeti Bank (the central bank of Hungary) to discuss the importance of digitalisation and greening, the internationalisation of the renminbi and the regional role of Budapest.

- During your career, you have gained a wealth of experience in the financial world, both in the East and the West. What is different about negotiating with Eastern and Western partners? What do you need to succeed?

- The most important thing is to be able to represent your interests very clearly. This is valued by both types of thinking. An important difference is that in Eastern business, it is more important how long the relationship has been established, how well it has been tested, and how durable and consistent it is. In the West, rationality is usually the deciding factor. If a business proposal suits the client, it is easy to close the deal. In the East, it takes more time.

- Have you had any business negotiations in the East that provided a memorable lesson?

- Not a business negotiation, but definitely a memorable one. In the late eighties, György Szapáry, then head of the IMF's China Department, held a workshop in Washington, DC. There were twenty or thirty of us there. He talked about the rise of Asia in the coming decades and gave examples of the growth that was expected in Korea, Japan, China and India. I remember the audience was astonished at the claim that China would be the world's second or even first economic power by 2030. We did not take it seriously at the time, but I still remember that this is exactly what happened. Even then, we could see that something unstoppable was happening in Japan, but it was not clear to most people - including me - what was happening in China or South Korea.

- What do you see as the main reason for this rise today?

- In Western economic thinking, there has always been a pendulum effect - mainstream economic thinking has stuck to a doctrine for decades and then changed it. From the mid-1930s to the mid-1970s, the thinking was dominated by a mindset that attached great importance to the role of the state. Then, from the mid-seventies, when Hayek and Friedman were awarded the Nobel Prize, a new phase began, which lasted until 2008-2009, when the market was seen as the dominant factor. The issue is always the relationship between the market and the state, ultimately, the primacy of the 'invisible hand' and the 'public hand'. In this way of thinking, Asia has broken new ground in the last thirty or forty years, showing that the state mindset must be combined with the market mindset. I think this is the key to the success of Japan, Korea and especially China. In Asia, they have combined these two mindsets, which have always alternated in the West.

Photo: Róbert Hegedüs

- Is the West willing to learn from Asia, or does it see it as a rival?

- There are many signs that it is learning from it. In recent decades, for example, Western companies have been offshoring, outsourcing part of their activities. It is well known, for example, that Nike manufactures its shoes in Asia or that all its microchips are manufactured in Taiwan, which is a bit of an exaggeration. This is now beginning to be replaced by onshoring, i.e. the drive to bring part of the production home to Western countries. The West, and the United States in particular, is trying to stop China's advance, which is also the result of thirty to forty years of cooperation between the East and the West.

- China is spectacularly ahead of many Western countries in financial innovation. Why are these developments important? In what direction should Europe move forward?

- The two big megatrends in the world right now are digitalisation and sustainability, greening. The East is somehow responding to these better than the West, despite the fact that the vast majority of Nobel Prize winners still grew up in Western civilisations. In financial innovation, the East has caught up with and outpaced Western digitalisation, for example, in payment methods. We still use credit cards, something that has long been surpassed in China's big cities.

- How is Hungary involved in promoting the internationalisation of the renminbi?

- After the Hungarian government announced the policy of Eastern Opening thirteen years ago, the Magyar Nemzeti Bank has also stepped in, having signed an agreement with the Chinese central bank ten years ago and launched its renminbi programme in 2015. In other words, we use the renminbi as a world currency. So the Monetary Council has decided that we will also hold renminbi assets in our reserves. From the same year onwards, we will also organise the Budapest Renminbi Initiative Conference.

- Why is this effort important?

- Today, the renminbi accounts for about three per cent of total world reserves and total world trade, while the largest trading nation in the world today is China. They are also by far the largest exporters and importers; for some thirty countries, China is the most important export market, including the major Euro-Atlantic countries, and for some seventy countries, China is the largest import market. But the function of money does not support this. So there is an inevitable need for the renminbi to internationalise.

Photo: Róbert Hegedüs

- More and more news is coming out about the decline of the US dollar in trade. How clear is this process?

- It will be much slower than we think, and the reason is very simple. Mao used to say that power comes from the barrel of a gun. That is also true of the power of the dollar. For the dollar to have such a dominant role, the Americans had to win two world wars and have one hundred and fifty military bases in eighty countries. This position of the dollar must be backed up by arms. Today, nearly fifty per cent of the world's total financial turnover is in dollars, twenty to twenty-five per cent in euros, and the rest in yen, pound sterling or renminbi. It's one thing to be a challenger in trade and economics but to be a world currency, you need to be a world power.

Photo: Róbert Hegedüs

- What are the common goals of the Hungarian and Chinese central banks?

- In addition to the agreement I mentioned ten years ago, which has since been extended, our cooperation is also well-established for the future. Both banks attach importance to digitalisation, and greening the economy, which is our duty under the Central Bank Law adopted two years ago.

- Why is Hungary an attractive destination for Chinese banks?

- Hungary is located on the eastern edge of the European Union, so it can be a kind of geographical hub. There are traditional Chinese-Hungarian relations that go back a very long time. The Chinese have always been intellectually interested in the Hungarian experiment, starting in the 1970s. As for banks, first, the Bank of China appeared twenty years ago, followed by the China Development Bank and the China Construction Bank. We are making progress, but it is a piecemeal process that started twenty years ago and will continue for a long time, and my successor will also be dealing with it. We Hungarians are also more open to Chinese thinking than Western cultures in general. Hungarian culture also has a kind of arrogance, pride, and pride in itself, but there is no feeling of superiority. To the West of us, pomposity is still associated with a sense of superiority, and this is not something that Easterners tend to appreciate.

The author is editor of Eurasia Magazine

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