What Xi's vow to open markets means for investors

China says it will allow more foreign and private capital into some state monopolised industries, but are they opportunities investors should take?

Chinese President Xi Jinping is re-fashioning himself in the shape of the People's Republic’s founder Mao Zedong and has an equally clear vision for his country. On Wednesday, he told 2,300 delegates he wanted China to become an “innovative country” by 2035 and a “modernised” one by 2050.

To hit his first goal, China’s gross domestic income per capita needs to rise by an average of 6.6% in real dollar terms from 2017 onwards, according to an October 18 ANZ report, which benchmarks China against South Korea. 

To be a modernised economy by 2050, China’s average growth rate needs to be 4.9% and 3.3% per year over the next 35 years, according to the World Bank standards of a high-income country.

At the pace of China’s growth today – expanding by 6.90% year-on-year as of June – that vision is not out of the question.

But Xi is well aware the formula which has constituted China’s economic expansion to date – debt and then more debt – is not sustainable over the long-term.

In June, the International Monetary Fund  (IMF) revised its Chinese growth forecast to an average of 6.4% per annum from 2017 through 2020, compared to a 6% estimate the organisation made one year earlier. It believes that household, corporate and government debt will soar to almost 300% of GDP by 2022 from 242% last year.

It concludes that rising debt could cost China growth going forwards.

“Reform progress needs to accelerate to secure medium-term stability and address the risk that the current trajectory of the economy could eventually lead to a sharp adjustment,” the IMF said.

In his speech, Xi said that, “the economy is shifting from a high-growth regime to one that’s seeking high-quality development.”

He promised a further opening-up led by the Belt and Road Initiative, and a “substantial” relaxation of market access. “All the enterprises registered in our country should be equally treated,” he said.

“Sustainable growth is the key,” David Qu, China markets economist at ANZ, told FinanceAsia on Wednesday. He said Beijing wants to have a good-looking growth figure on one hand, but make sure that no crisis will occur on the other.

Qu said greater freedom (in trade, rather than a political sense) makes a lot of sense. “It’s about balancing the left hand and right hand,” he noted. Prior to joining ANZ, Qu was deputy division chief of the central bank’s Financial Stability Bureau.

Earlier this year, a chief executive at one lending institution under a state-owned conglomerate told FinanceAsia that, “We’ve been asked to rigidly contain M2 by cutting credit volume” in order to contain risks.

Attractive opportunity, or national service?

“Attracting external capital will be the major goal of the opening-up,” said Qu.

Among the tasks indentified by HSBC analysts are the need to upgrade China’s manufacturing sector and strengthen its infrastructure network, including air travel, electricity grid, information communication and logistics.

Many industries are still controlled by state monopolies. “The authorities are already testing reforms, with China Unicom being one of the companies undergoing significant reform,” wrote Eric Moffett, portfolio manager of Asia opportunities equity strategy at T. Rowe Prices, a $948 billion investment manager, in an emailed comment this week.

“This could be a catalyst for more reforms,” he added. The question is whether investors should tap those opportunities.

In mid-August, China Unicom, the weakest performer among China’s three state telecom providers, sold $11.63 billion of shares in a Shanghai-listed subsidiary to private names including China’s tech triangle – Tencent, Alibaba and Baidu – in a re-structuring known as mixed ownership reform.

Many are divided on whether private investors are getting value from the deal, or whether it is just a form of national service.

“What on earth is good about being a private investor in a loss-making state company, which doesn’t pay out dividend, and there’s no say in decision-making,” one analyst said of mixed ownership reform.

The state’s overall ownership in Unicom declined just a little, from 63% to 58%, according to Gavekal Dragonomics.

However, in the financial services sector, foreign parties are definitely gaining broader access.

In June, for example, HSBC finally won regulatory approval to own a majority stake in a securities joint-venture business. It got a green light to establish HSBC Qianhai Securties, in which it owns 51%.

Qu is positive that China will further open up access to foreign institutions in its domestic financial markets “especially when it comes to establishing new entities.”

He argued that this would hardly impact the core of China’s financial system. “It’s not like Beijing will allow foreign majority ownership in the big four state banks,” he concluded.

¬ Haymarket Media Limited. All rights reserved.
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