President Xi Jinping recently called for China to open its market further by improving the investment and market environment for overseas companies at the Central Leading Group on Finance and Economic Affairs meeting. He went on to say that China should look to ‘create a stable, fair, transparent and predictable business environment, and speed up efforts to build an open economy in a bid to promote the sustainable and healthy development of the Chinese economy.’ The recent slippage in net FDI inflows has triggered a push to make China more appealing to foreign investors, with Premier Li Keqiang stating, ‘The inflow of foreign capital has been pivotal for China to maintain a relatively quick growth rate. Our industries are in general at the lower end of the global value chain. We must send a strong message of welcome to foreign investment.’
Having made leaps and bounds in strategically opening up its economy, over the past 40 years, China is now in the midst of the government's 13th Five-Year Plan, which aims to achieve a fully open market by 2020. Some may call this ambitious, in fact, a number of market makers did comment that achieving an open market economy within those five years, especially whilst transforming the world's second largest economy, could be somewhat challenging. However, the Central Leading Group gathering is a high-level meeting, thus we believe that President Jinping would not reiterate a push towards these targets if he did not think it possible; particularly with the recent robust economic data reads. The anchor of global growth witnessed 6.9% expansion in H1’17, which came in-line with the five-year plan’s 6.5%-7% target. Also, PMI data has remained stable to positive, and in expansionary territory so far this year suggesting that growth momentum could continue into the end of the year.
It's very easy to be negative on China’s outlook, with growth at ‘only 6.9%yoy’ versus double digit expansion a few years ago. However, the country’s growth reading is just one indicator of economic expansion, particularly as Beijing continues to transform the country’s economy away from industry and towards consumer-led sustainable growth. Recent deleveraging and property tightening measures have been further causes for concern to pessimists, however, the likes of the housing and land sectors continue to prove resilient with sustained demand, and deleveraging can only really be a positive in the longer-term. The shorter-term pinch doesn’t seem to be affecting the economy as much as some might have suggested, or in fact hoped.
A stable currency coupled with heightened profits from the industrial sector, for example, have also allowed policymakers further room to drive forth with financial sector reform; which now includes investigations into public sector debt, namely local governments and SOEs. China is also a nation of high savings; according to the IMF, China’s national savings are forecast to reach 45% of GDP this year; a debt buffer. The country’s huge fx reserves at ~USD3tn should not be underestimated, they allow the PBoC sufficient room to maintain currency stability, and the ability to counter incidents of material capital flight. Another positive to take away is Moody’s upgrade the country’s banks to stable, noting that ‘our expectations that non-performing loan formation rates will be relatively stable at current levels’, adding that the ‘government's adoption of more coordinated policy measures to curb shadow banking will help mitigate asset risks for banks, and address some key imbalances in the financial system’.
Yes, China is currently faced with a huge task in fully opening up its economy, especially in terms of transparency and predictability, however, this is not to say that it is unachievable. After all policymakers have taken the necessary steps to initiate economic change and openness, and clearly, have sufficient buffers to counter slower short-term growth. The Chinese economy is also in a much stronger position compared with other BRIC economies... But, it may just take a little more than two and a half years to achieve a fully open market economy.