x Abu Dhabi, UAEThursday 27 July 2017

All focus as China aims to further open up economy to the world

Building Brics: Six months into the president Xi Jinping and the premier Li Keqiang's leadership, the calls for reform in China have not gone away.

Workers assemble computer mice at a Logitech factory in Jiangsu Province. China has indicated that reform is on the cards. Nelson Ching / Bloomberg News
Workers assemble computer mice at a Logitech factory in Jiangsu Province. China has indicated that reform is on the cards. Nelson Ching / Bloomberg News

Six months into the president Xi Jinping and the premier Li Keqiang's leadership, the calls for reform have not gone away.

Mr Li promised back in March, when he was fresh in office, to cut back the government's role in the economy and markets and corporates are keen to see if he delivers on these promises.

"Reform is about curbing government power. It is a self-imposed revolution. It will require real sacrifice and will be painful. But this is what is wanted by the government and demanded by the people," he said.

The Beijing government has made strong indications reform is on the cards, with policy changes planned that would open up more of the economy to private investment and upgrade a controversial household-registration system seen as impeding urbanisation.

A big focus, and the likely platform, for reform efforts will be the third plenum of the Communist Party's central committee, which takes place later this year although no dates have been announced yet.

Nothing of significance is likely to be announced before that.

The third plenum can be an event of huge importance. At the event in 1978, Deng Xiaoping kicked off a series of economic reforms that began to open up China to foreign investment and loosen state controls over the economy.

Seven working groups are reportedly coming up with reform proposals that will cover the financial sector, the fiscal system, land tenure, prices, government bureaucracy, income distribution and household registration, according to a report last month by Barclays.

Then, also last month, Mr Li said at a state council meeting on the reform of government China would allow the market to play a bigger role in economic innovation. He said there should be a better balance between the government and the market, and between the government and society.

He made an explicit link between the reform of government functions and maintaining growth, controlling inflation, reducing risks, and encouraging healthy and sustainable economic development.

One of the bodies seeking reform is the IMF. Late last month, the IMF cut its forecasts for China's growth to about 7.75 per cent this year and next, and the lender said only "decisive" policy changes would put the economy on a more sustainable path.

"While China still has significant policy space and financial capacity to maintain stability even in the face of adverse shocks, the margins of safety are narrowing and a decisive impetus to reforms is needed to contain vulnerabilities and move the economy to a more sustainable growth path," said David Lipton, the first deputy managing director of the IMF.

He said China needed a "decisive push for rebalancing toward higher household incomes and consumption" and it also should open up competition in industries currently considered strategic while increasing dividends from state-owned enterprises to "improve financial discipline and provide additional fiscal revenue".

European firms are downbeat on profit and revenue growth in China because of rising labour costs and regulatory barriers, according to the European Union chamber of commerce. At the same time, China remains the one really bright spot in a gloomy world economy and there are growth opportunities there if the new government embraces reform, the group said at the launch of its 2013 report in Beijing.

"The overall sentiment is that China remains a key market. Ninety four per cent of companies on aggregate said China was a priority market, while 84 per cent said they were considering expanding their current operations," said the chamber president Davide Cucino. "It is not an issue of lack of opportunities, it is an issue of offering those opportunities in an equal way to everybody." The survey was conducted in March by the EU chamber and Roland Berger Strategy Consultants, and was compiled with input from more than 550 European companies operating in China.

"Despite increasing rhetoric from senior Chinese leaders that efforts will be undertaken to transform and level the regulatory environment through allowing greater play to market forces, European companies have so far perceived few concrete changes," Mr Cucino said.

The number of EU companies reporting revenue growth shrank to just 62 per cent and those noting profitability growth decreased to 44 per cent, leaving only 54 per cent of European companies in China profitable.

"The survey shows optimism on profits in the next two years fell to 29 per cent of companies, the lowest since the report started a decade ago," said Mr Cucino.

The report was issued on Thursday, a gloomy time for China's growth outlook, one day after both the IMF and the Organisation for Economic Co-operation and Development cut their growth forecasts for China, and various private sector economists said it could miss its own 7.5 per cent growth target this year.

Approximately half of European companies noted missed business opportunities due to market access and regulatory concerns, thus challenging the government's assertion China has a level playing field.

A report by the Nikkei showed per capita labour costs climbed by more than 60 per cent between 2009 and last year, which would make it higher than all its significant competitors in Asia.

Mr Cucino said meaningful changes needed to be swiftly implemented to mitigate cost escalations through productivity increases, unlock market opportunities and to establish an efficient and well-functioning business environment that has equal competition at its core.

"We at the Chamber have made conservative estimates that our members lost a collective €17.5 billion [Dh83.5bn] in revenue last year because of market access difficulties," he said.

European companies also say they are facing increased competition in China from privately owned local firms improving in sales and marketing and brand recognition.

Tough as the Chinese market may be, it is still highly attractive in what is a challenging global situation.

"European companies are resigning themselves to this reality and remain committed to the Chinese market," said Mr Cucino.

Approximately half of European companies note China now accounts for more than 10 per cent of their global revenues; and, while optimism on growth has decreased, 71 per cent of companies are still optimistic about growth prospects.

Mr Cucino admitted he was worried China might retaliate in some way in a simmering trade row over solar panels and wireless equipment, where the EU accuses China of pricing its solar panels and mobile telecommunications devices too cheaply and "dumping" them in Europe to corner the market.

"Who would not be worried?" he said.

For members of the American Chamber of Commerce in China (Amcham), China's ranking as a destination for global investment declined slightly compared to year-ago levels, although more than two thirds of respondents still list it as at least a top-three global priority.

"Against a backdrop of relatively slower growth and rising costs in China, our member companies are paying close attention to the potential impact of government policies," wrote the Amcham chief Greg Gilligan in the group's business climate report.

"In this year's survey, the percentage of respondents who say China's investment environment is improving fell markedly, in line with the widespread impression that market reform and opening has slowed in recent years."

Specifically, Amcham members who responded to the survey voiced continued concerns over difficulties in obtaining business licenses, pressure to transfer technology, inadequate protection of intellectual property rights, and the potential for corporate data breaches.

"Taking heed of the changing realities outlined above, we will continue to advocate for policies that promote more competitive and open markets, with the goal of helping our members succeed and building a business climate that benefits all companies, domestic and foreign, in China," he wrote.

"The main reason foreign companies are slowing the pace of investment in China is that they anticipate a relative slowdown in its GDP growth relative to other geographies," the survey noted.

"Against this backdrop of more moderate growth - which is, Amcham considers inevitable as China rebalances its economy - foreign investors are likely to be especially concerned by the prospect of regulatory difficulties.

"Policy reforms that further open markets and increase regulatory transparency would create a more business-friendly environment that might help to revitalise FDI flows into China."