Many of the challenges China faces in the New Year have been gestating for a decade. But by 2007, the country found itself at a crossroads, at once among the world’s richest and the world’s poorest nations. Leaders accelerated efforts to improve the sorry lot of the entrenched rural poor and, at the same time, found themselves with more than US$1.6 trillion in foreign exchange reserves and overseeing the fastest production of billionaires anywhere on Earth.
The time between Western and Chinese New Year is a good one to address the key challenges facing China. Top of the pile is the liquidity surplus washing across all asset classes and driving bubbles and inflation, potentially at rates not seen since reforms began. To this can be added the steadily appreciating renminbi and the declining US dollar – and how these may be affected by a global slowdown in consumption.
China remains committed to its hybrid socialist-market vision, and the state is still not shy of intervening on economic issues. Policy is trained on sustainability of growth, while market forces increasingly shape the drive toward long-term objectives of privatization, consolidation and globalization.
The scientific approach
Is the policy process itself facing reform? President Hu Jintao has repeatedly called for more scientific decision making. This is backed up by improved statistical gathering methods, analysis and communication. Just as a good map of a physical terrain ends the need to “cross the river by feeling the stones,” good economic data will help China evolve from gradualist policy processes to more decisive ones.
Multinationals can hope to benefit from increased clarity in policy directions and increased transparency in policy-making process.
Through measures like the labor law changes and the enterprise tax reform, China is now looking to reduce the intense competitiveness of low-end exports. Most value added tax export rebates are being phased out, and in some cases, export penalties are being imposed. This will lead to higher-value exports which are less dependent on enormous energy consumption, imported inputs and cheap labor.
But the greatest leap for a former socialist economy may be the marked interest in the use of marketplace capital. In fact, changes in policy and practice will boost the value and portability of Chinese capital.
There is already a bedazzling surge of equity deals and new investing entities, new ownership schemes and new buyers and sellers. It’s said that in every major city 30-40 new funds have been set up, and some involve new forms of state and private sector cooperation.
Some familiar players have a new face and role. Substantial amounts of capital now lie in the hands of listed state banks, retail funds and the newly established sovereign wealth fund, China Investment Corp (CIC). While CIC’s US$200 billion in startup capital could reach US$400 billion by midyear, retail funds are expected to have US$626 billion under management by the end of 2008, up from US$451 billion in 2007.
What will this buy? Resource security remains a focus of overseas investment, but interest in financial services is surging. Outside, the unexpected scale of subprime losses, the crushing of the securitization dream and the severe contraction of credit have created an irresistible draw on Chinese capital.
China has become the lender of first resort for financial institutions in crisis. It is mildly ironic that when CIC and its predecessor fund, Central Huijin, bailed out China’s major banks, it was widely seen as market distorting. Now as CIC positions itself to bail out troubled US and EU banks, the door is wide open.
Well, almost wide open. There is sensitivity about CIC and large state banks. As US Senator Charles Schumer noted recently, “Because sovereign wealth funds, by definition, are potentially susceptible to non-economic interests, the closer they come to exercising control and influence, the greater concerns we have.”
Every major Chinese investment abroad comes with loud claims of passivity, but it is hard to believe a US$10 billion investor will not, over time, exercise some influence over its investee.
This New Year not only presents us with some intriguing new directions but an important increase in the clarity of China’s developing policies at home and role abroad. We may not have to wait long to see how deeply these changes will reach.