China’s vision for expansion will shape global markets

Thursday, November 9th, 2017

The opening ceremony of the 19th National Congress of the Chinese Communist Party (CCP) was a rare and extensive opportunity to assess the political and economic intentions of China under President Xi Jinping. Not only will the conference have profound ramifications for China as the next global superpower, but as a result, will also shape global markets. Though there were 14 distinct points made within Xi’s doctrine, which is now included in the country’s constitution, it essentially boiled down to several key implications. First and most obviously, the CCP will tighten its political control over its country, further centralising all major governing bodies around the party. Second, quality of life for the average person will become a much greater focus, both in terms of eradicating poverty and reducing pollution. Finally, there were explicit comments made about creating a level playing field for foreign businesses which could have far-reaching implications.


Figure 1. Xi Jinping, the king of the hill in the CCP

Source: South China Morning Post

Xi’s centralisation of power around the CCP is the bedrock of his so-called ‘socialism with Chinese characteristics for a new era’, the guiding principal for the country over the next five years. The government firmly believes the economic success of the country over the preceding decades would not have been possible without communism and has begun to pivot away from the sort of market-led capitalism that began to enter China under Deng Xiaoping. Instead, Xi’s China will most likely resemble a hybrid model, with the CCP allowing the market to drive the economy within a tightly supervised and regulated framework. Importantly, the government has reserved the right to directly control prices, freeze markets and restrict investment. In addressing concerns over rising property prices for example, Xi argued houses were for people to live in, not for speculation, a clear message to would-be property investors. Direct interference also extends to currency, equity and bond markets, further cementing the layer of political risk present when investing in China.

Ironically, this could be at odds with Xi’s pledge to give equal treatment to foreign business, promising ‘the China which has opened up will not close, but will open wider and wider’. Chinese political thought has, for centuries, emphasised the need for balance. It is fitting then that finding the balance between the CCP’s need for control with its desire to modernise the economy should shape the country over the coming years. Australian businesses operating in or exporting to China would benefit from a more transparent, structured regime, particularly one in which they were not hamstrung by hostility towards foreign investment or influence. Should China indeed open its market as promised, it could create a host of exciting expansion opportunities for companies of many types and sizes. Again, the willingness of such companies to invest there will depend heavily on their confidence in political and regulatory transparency and consistency.


Figure 4. The Chinese economy is shifting further into tertiary industries

Everyday life in China will also be shaped by Xi’s vision. The CCP’s mission to eliminate poverty by 2020 and continue to raise living standards thereafter, will have profound effects on the global economy. Expanding the Chinese middle class by several hundred million in less than a decade will drive massive demand for products and services as we have already seen with Australian vitamins, baby formula and other wellbeing products. Global tourism will shift even further to satiating wealthy Chinese, with 2017 expecting to see at least 135 million Chinese tourists globally, spending more than US$260 billion. These are not new trends but it is important to note they are not slowing and may in fact accelerate over the next few years.

Improving everyday life also means cleaning up the environment, one of the biggest issues in the country today. Pollution in most major cities today is so bad that it has become a serious health hazard, particularly in colder months. This has led the CCP to finally introduce major pollution controls, ordering plant closures, restricting production times and banning certain highly polluting commodities. This has already begun to move global commodity markets in everything from iron ore to rare earths to waste paper (a packaging feedstock). This obviously directly impacts the Australian resources sector and will create a larger spread with greater premiums, or discounts, depending on purity. Essentially, the extent of environmental controls under Xi’s regime will determine the proportion of supply (in terms of purity) that is allowed to enter the Chinese market.


Figures 5 & 6. Beijing and Shanghai, air pollution vs. WHO guidelines

 

China is forging a largely unprecedented path under Xi Jinping. It is a successful autocratic state with no bottom-up accountability or influence. Yet it strives to be a modern, prosperous nation with a relatively open and transparent economy, and eventually a global political and economic thought leader. Xi’s China lies at the intersection of socialism and capitalism, and of the state and the free market. The interaction of these competing forces is shaping China, and the point at which they reach an equilibrium will go a long way to shaping global markets as well. As Australian investors, we must be particularly aware of China’s intentions – it is our largest trading partner, our biggest source of tourism and is vital for any sustainable economic growth. We should all be acutely aware of the threats and opportunities China poses for Australian businesses as it seeks to balance growth and development with tighter and more centralised control.

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