Yesterday around 350 investment professionals gathered in London to discuss, “China, Navigate the New Silk Road” and developments interrelated to China’s renaissance as a nexus for the global economy. The event’s broadly affirming tone and professional insights contrasted somewhat with recent media anxiety, whose serial misinterpretation of recent events - including August’s currency liberalisation, December’s basket announcement, the global and historical context of recent volatility, the major factors of shrinking FX reserves, the burgeoning of domestic private business, the potential growth within the accelerating service sector, local government funding, China’s net foreign debt position and the long term reform goals of the Chinese authorities – seem to be getting systematically debunked. The panels and speakers deconstructed the vulnerabilities of current transitions but within the context of the clear long term benefits of ongoing reforms (alongside the customary propaganda).
Hosted by Michael Bloomberg - who (having come directly from a meeting with Boris Johnson) dispelled speculation by confirming he would, “not to run for Mayor of London” - the event brought together a number of key representatives and long term participants in the China markets including: The Minister Counsellor from the Chinese Embassy in the UK, Chief European Representative for the PBoC, Policy Chairman of the City of London Corporation, China/Asia heads across major banks and investors either concerned or sanguine about the prospects for this nascent superpower.
Mr Bloomberg, as chair of a new committee for establishing yuan clearing in the US, advocated for the future partnership of the US, UK and China and the broad long term benefits of open economies and investment in trade networks; specifically China’s new “one belt one road” initiative that will construct vast infrastructure along the dusty and blustery routes that for 1800 years have promoted mutual trade - in goods from silk and china to now oil and luxury products. What was most rousing was the consensus of optimism amongst participants (even more than what we would expect) that China would emerge from the current challenges and transition volatility; noting that many current and past positives have not received as much attention as the recent mishandlings (of what had otherwise been quite a successful run) of reforms and the associated recent volatility.
Markets now realise that the renminbi liberalisation was not a competitive devaluation to nurture exports; that the basket announcement was transparency of an established policy; that recent FX volatility should have been expected in the context of liberalisation and is still below historical developed country levels; that private business assets and productivity are rapidly growing. Also many are beginning to extricate that a significant amount of the $1tn contraction in reserves is due to transitory paying down of dollar debt, overseas Chinese investment, the relative decline of non-dollar reserves in dollar terms and not just due to capital flight. This also is being placed in the context of major pull factors from an economy that constitutes half of global growth and yet only represents around 2% of global FX reserves and often insignificant fractions of global bond and equity indices. Moreover the concerning narrative of excessive corporate credit growth is caveated with admittance that the country is (and should remain for years) a substantial net foreign creditor. Perhaps most significantly the recent jolts have been put in the context of long planned reforms and astounding successes in improving income levels and market participation since 1978. Even though the country still remains vulnerable to a credit rating downgrade the long term prospects for its economy and currency remain strong.
Notwithstanding the many crises in China over this period of reform (*1958 great leap forward famine, 66 Cultural Revolution, 80 financial crisis, 87 hyperinflation, 89 Tiananmen Square, 92 Hainan property bubble, 98 Asia Crisis, 03 SARS, 2015 stock market crash) the past 4 decades have been a great opportunity with multiplying returns for foreign investors and for China itself. The recent 13th 5 Year Plan and “Lianghui” reiterate the ongoing ambitions and growth potential as China pushes past the “middle income trap” in order that its citizens might reap more of the benefits of being a wealthy nation.