A New Era for China
Davos World Economic Forum has revealed many new messages from various world economic and political leaders. In the mist of debate on new tax initiatives, globalization and trade protectionism, there is no doubt that China and US's speech and any sign of new policy initiatives they revealed are watched closely by the world.
In my opinion, China's representative, Liu He's speech has revealed an important signal - China's economic and social growth has entered a whole new era. What the world can expect in the coming years will be very different from the past 20 and 40 years. Its implication, particularly to Australia, is significant. Many new opportunities will arise, albeit imminent issues faced by China. Businesses which are interested to participate in the second stage of the great shift from West to East would need to approach differently.
What Liu He Said and Why it is Significant
In Liu He's speech, he clearly laid out the government initiatives and policy emphasis in the coming years. This is revolved around the following:
- One Requirement
- One Theme
- Three Critical Battles
One Requirement -- an over arching transformation from quantity to quality.
China's Open Door policy started in 1978. In 1980s, China's economic reform focused on transitioning rural workers to manufacturing jobs, building the basic facilities around eastern seaborne cities and learn by trial from the Western factories. In 1992, China confirmed the direction to develop market economy and further implemented a series of trade, finance and economic reforms. In the 90s, the focus was on urbanisation and opening up various industries for foreign investments. From early 2000s, China's economy entered the fast lane, growing at double digits year on year. China poured large quantity of resources and capacities into building fixed assets, infrastructures and real estate. The fast economic growth is built on investments and key performance indicators focused on delivering fast accumulation of capital. This focus on rapid growth was not and outcome by chance. During the economic downturn in the late 90s, there was a fierce debate about the focus of economic policy within China. Liu He was one of the open voices. His opinion was that China's high growth could be maintained. Chinese policy should continue to focus on urbanisation rate, increasing which from 29% to 50% by developed industrial world standards. The large urban population will improve Chinese economy's manufacturing capability, and form a solid foundation for the next stage. This view was brave at the time and was against many popular voices in the media.
Now, the time has changed.
For the coming years, China will be transitioning from a phase of rapid growth to one of high-quality development. This will have profound implications on its macroeconomic, social and political reform and policies. As Liu said, this is an inherent transition of the course of economic development. This transition is urgently needed as China is facing a number of economic challenges that accumulated during the last stage of the mass accumulation phase. Like a household that has accumulated enough wealth for its basic needs, it turns focus on emotional well being and quality of life. With 400 million middle class population, the largest in the world, this will and is already creating huge opportunities for a great range of new industries, especially in service sectors. In the coming years, we can expect China to open up even more on finance, technology, clean energy, even immigration. These opportunities are not only for Chinese businesses, but for the world. Australia has great potential to benefit from this new wave of demands.
However, this is not the first attempt by China to transition to quality. It is worth noting that the right transformation requires the right team and policy stability. The 19th Congress is significant as it established China's new central leadership with Xi at its core. Any economic reform requires the stability of political power.
One Theme -- Supply side reform
Over the rapid growth phase, China's supply side failed to evolve in line with the demand, resulting in reduced marginal benefit from investments, waste resources and structural imbalance in the economy. Fail to re balance can potentially trigger large financial and leverage risk that has accumulated in the system.
The supply side reform is mainly delivered through two venues. One is to improve the quality of the supply by cutting excess capacity where necessary (e.g. steel productions), reduce overall leverage especially in real estate industry, lower costs for businesses and making public services and institutions more robust.
The other venue is utilizing the know-how and export excess capacity to other countries which are in need of infrastructure upgrade through the Road and Belt policy.
Three Critical Battles -- lesson learnt from other crisis
The three mission critical battles identified in Liu's speech are
preventing and resolving major risks: this include contain financial risks by resolving local government's ponzie debt problem as well as regulating shadow banking. Re-focusing financial industry to serve the real economy and better facilitate the flow of economic activities.
conducting targeted poverty reduction: This
controlling pollution.
The question is: can these battles be won? Especially the first one. IMF has just put out a report saying China's debt problem although can be delayed, it is not going away. A large part of the local government ponzie exposure lies in the implicit and explicit guarantees it gave on various shadow banking and wealth management products. These created huge moral hazards in the investment and finance industry. At a time of rapid change in global market, from monetary policies to fiscal policies, China will need to carefully maneuver its reform according to change of global market condition. This includes a wide range of policies on financial regulation, foreign exchange policies and capital markets. It will continue to deepen its capital market through bond and share issuance, which would deliver huge opportunities in the future.
In relation to poverty reduction, 1929 and 2008 crisis has shown us that all crisis share some similarities:
There were significant technology revolution which ignited unprecedented economic boom, during which governments adopted rather loose economic policy
Technology increased income inequality initially, and sew the seeds for economic crisis. The government was then faced with populists, nationalism and politicize the economic issues after the crisis.
The overly easy monetary policy is instrumental to economic bubbles, heightens greed and lift the bubble to the point of bursting.
All crisis is an economic phenomenon. A recovery is not possible until the crisis has run its own course.
So Liu and the Chinese government is very aware of that wealth polarization is a potential fuse for social unrest. Ignorance of it could derail the whole plan of China resurgence.
Implication to Australia and Australian Businesses
There is no doubt that shifting gear and change of focus from the world second largest economy will have profound implication to the world, especially to Australia. Australia is indeed a lucky country. It is not only well placed for the rapid growth phase of China, but also the transition to service and consumption phase. The opening up of service sector, especially finance industry as stressed in Liu's speech will provide a gateway for Australian businesses to catch the second wave of the massive demand.
However, it is not all straightforward. The delivery of services is much harder than goods, as it includes much greater element of human interaction, business cultural alignment and quality communication. All services is eventually a product, which require careful design and delivery of customer experience. For Australian businesses to take advantage, this is a crucial consideration in the strategy.
However, there are opportunities on Australia's door step. 2016 Census data reveals that there are around 500,000 (Note 1) Chinese immigrants in Australia. They are in need of good services, delivered by someone can understand their culture and is trust worthy. Capital Longevity firmly believe that this is a good opportunity for Australian businesses to align with such an organisation to achieve an coherent growth in this significant market segment.
The End Note
A new era for China has started with the shifting of focus from quantity to quality. this is a natural accumulation journey required by a prominent country navigating through its plan of resurgence. This can not happen until the transition of political power is completed and cemented with the 19th Congress and establish the new central leadership. As investors and business, this is a good time to start taking notice and transition into new approach with it.
There is no doubt that China is facing significant uncertainties in the coming year, at a time just as the world is facing some of the most significant challenges since WWII. These challenges not only include low economic and productivity growth, but also a deep seeded social unsatisfaction and political instability. These unfavorable external environment can further complicate the task of China's reform, however, it may well allow China the opportunity to focus on solving its own problems, on the way forward through reform and development.
Footnotes:
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Disclaimer:
This article does not create an advisor-client relationship. The comments, opinions and information included in this article and expressed by its author is general information only, and has not taken into account of anyone’s personal situation. You should always consult with your adviser.
