China's new opening up helps foreign companies - Arthur Kroeber

Arthur Kroeber

After decades of promises for China's economic and financial opening up, foreign companies have been careful before they start cheering. But veteran economist Arthur Kroeber, author of China's Economy: What Everyone Needs to Know®, optimistic about the latest changes, he tells in an interview for the China Daily.

The China Daily:

China's decision to ease market access for foreign companies and expand imports will not only provide a boost to foreign businesses but also benefit domestic companies through competitive pressure, according to a senior US researcher of the Chinese economy. 

Arthur Kroeber, founder of the China-focused Gavekal Dragonomics research service, said in an interview that foreign businesses had already felt the benefits from China's new round of measures to expand opening-up by gaining greater market access. 

He gave the example of Exxon-Mobil and BASF establishing wholly owned petrochemical ventures in southern China's Guangdong province, and the relaxation of equity caps in the automotive sector. 

"In the financial sector, where there are going to be quite substantial market openings, companies from the United States, Europe and elsewhere will benefit." 

Kroeber, who is also a senior nonresident fellow of the Brookings-Tsinghua Center in Beijing and the author of China's Economy: What Everyone Needs to Know, contended that individual Chinese companies will also be able to improve themselves through competitive pressure. 

"Particularly in the financial sector, I think the increased competition will be beneficial for the Chinese economy as a whole," he said... 

As China tries to become a more innovative economy, there is a need for increased competition and stronger IPR protection, he said. 

Kroeber also hailed the measures to cut corporate taxes and fees by 2 trillion yuan ($300 billion) which were unveiled by the Chinese leadership in March. 

"The tax cuts will be beneficial in a longer term time horizon, regardless of the impact that the tax cuts have in this particular economic cycle. 

"I think the signaling by the government is that, in the future, they will rely more on tax policy as a mechanism for macro economic adjustment." 

He said that this would be "very beneficial" as the tendency in the past had been to rely on infrastructure and property stimulus to support the economy when times were tough, "and that just is not an appropriate tool anymore". 

Kroeber also highlighted the role of innovation in driving future economic growth. 

"If China wants to maintain high-speed economic growth, it needs to shift away from a capital intensive form of growth to one that is more focused on productivity growth and innovation."

More in the China Daily.

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Xi's road for China to become a global power - Arthur Kroeber

Arthur Kroeber

President Xi Jinping is effectively replacing former leader Deng Xiaoping as the thought leader of China's development, and he is well on his road to set the road for the country as a global power, says economist Arthur Kroeber, author of China's Economy: What Everyone Needs to Know®, at Bloomberg.

Bloomberg:

When President Xi Jinping assumed power in 2013, many hoped he’d turn out to be a leader in Deng’s reformist vein. But while Deng wanted his market-based reforms to make China rich, Xi has reasserted the control of the state in an effort to turn the country into a political and technological superpower. 

“One of Xi’s overarching goals in terms of economic management is to effectively, if not formally, declare the end of the era of reform a la Deng Xiaoping,” said Arthur Kroeber, a founding partner and managing director at research firm Gavekal Dragonomics. Whereas Deng and subsequent leaders bolstered the role of private businesses in the economy and reduced that of the state, Xi seems to think the balance is now about right, Kroeber said.... 

The economy expanded 6.5 percent in the third quarter, the slowest pace since the aftermath of the global financial crisis in 2009. But if China can keep the rate above 5 percent well into the 2020s, per capita income levels will close the gap on developed nations, said Kroeber, who is the author of “China’s Economy: What Everyone Needs to Know.”

More at Bloomberg.

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Xi Jinping ends the Deng Xiaoping reform era - Arthur Kroeber

Arthur Kroeber

China's former leader Deng Xiaoping has been celebrated as the architect of the country's economic reform. But current president Xi Jinping is no longer following Deng's track, but defines his own state-dominated economy, says economist Arthur Kroeber, author of China's Economy: What Everyone Needs to Know®, to Bloomberg.

Bloomberg:

When President Xi Jinping assumed power in 2013, many hoped he’d turn out to be a leader in Deng’s reformist vein. But while Deng wanted his market-based reforms to make China rich, Xi has reasserted the control of the state in an effort to turn the country into a political and technological superpower. 

“One of Xi’s overarching goals in terms of economic management is to effectively, if not formally, declare the end of the era of reform a la Deng Xiaoping,” said Arthur Kroeber, a founding partner and managing director at research firm Gavekal Dragonomics. Whereas Deng and subsequent leaders bolstered the role of private businesses in the economy and reduced that of the state, Xi seems to think the balance is now about right, Kroeber said.

More in Bloomberg.

Arthur Kroeber is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers' request form.

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Reform: not a key point in China's economic development - Arthur Kroeber

Arthur Kroeber

Is China moving ahead or stalling in economic reforms? That question is often asked by Western observers of the country, and a profoundly wrong one, says leading economist Arthur Kroeber, author of China's Economy: What Everyone Needs to Know® at the Asia Society. He blames his fellow economists for wishful thinking that is not helping to understand China.

The Asia Society:

So I think the position of [Chinese President] Xi Jinping is that reform is a game that the Chinese don't really have to play. The current balance in China has as much to do with optimizing the performance of the state sector than it does optimize the performance of the market. 

I think there was a lot of wishful thinking in the West that the universal laws of economics would inevitably force the Chinese state to liberalize the economy because otherwise, they wouldn't be able to forge economic growth. But China has shown that it's perfectly able to achieve six to seven percent growth annually with large state sector involvement, and as long as that keeps happening they won't be forced to do anything. 

The grand strategy for the U.S. and the West over the past three decades has been to integrate China into the global economy. Given the recent struggles of working-class people in the West, was this strategy, in retrospect, a mistake? 

Absolutely not. I think that this was absolutely the correct strategy. Having China as a constructive player in the global economy, with their interests aligned with peace and stability and not with stirring the pot, is a gigantic achievement. Only people who were willfully ignorant of the problems that existed before and willfully blind to the enormous benefits could make that kind of statement. 

However, bringing China into the global economy — which involved moving hundreds of millions of low-wage, poorly-educated workers into the manufacturing sector — was a huge shock and one of the things that contributed to the reduction of manufacturing employment and wage reduction in the U.S. 

To my mind, that's an understandable and practical cost of bringing China into the global economy, which was a massive achievement. But the U.S. has done a terrible, terrible job of helping people adjust to that trauma. The failure wasn't in the China policy. It was in the domestic policy. There could have been a lot more investment in education and infrastructure.

More at the Asia Society.

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Reform state-owned companies lagging - Sara Hsu

Sara Hsu

China might have announced drastic reform of its government, state-owned companies are still lagging behind in reforms, argues financial analyst Sara Hsu. Because their access to state funding is unlimited, they keep on creating new debts and have little incentive to improve efficiency, says Sara Hsu at CGTN.

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Xi Jinping still has to deliver on reforms - Victor Shih

Victor Shih

Much of the first five years of president Xi Jinping's rule saw many promises on financial and economic reforms. But he fell short on delivering on those promises, says financial and political analyst Victor Shih to Quartz.

Quartz:

[W]hile Xi has paid market reforms plenty of lip service, he has yet to deliver on them, as noted by Victor Shih, a professor of political economy at the University of California-San Diego. “From everything we’ve seen, despite his rhetoric about reform and opening, Xi Jinping heavily favors a strong state sector,” says Shih. That raises another possibility: Perhaps China’s chief economic woes stem from Xi’s having too much power, rather than too little. 

“Whatever biases he has will continue to be reflected in the Chinese government’s policies for the duration of his tenure, which now will likely stretch well into the next decade,” says Shih. 

Xi has some good biases—for instance, his seeming commitment to cleaning up air pollution in northern China. But he also has a bias toward heavy state intervention into the economy, as is evident in his efforts to fix problems like dangerous debt levels and deflationary overcapacity—the latter via much-touted “supply-side reform.” During Xi’s tenure, the government took action to control the stock market, bond market, and foreign exchange markets, as well as the supply of coal, steel, and cement, Shih points out.

More in Quartz.

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Stabilizing risks: key for financial reforms - Sara Hsu

Sara Hsu

President Xi Jinping has promised more financial reforms, but financial analyst Sara Hsu says managing risk is key, over the need for reform. Fintech, debts and due diligence are some themes in the next five years of China's financial development, she adds at the state broadcaster CGTN.

Sara Hsu is a speaker at the China Speakers Bureau. Do you need her at your meeting or conference? Do get in touch or fill in our speakers' request form.

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Reducing risk, at the expense of reform - Victor Shih

Victor Shih

China's leadership is setting a new economic agenda halfway July, and much of the measures focus on the reduction on risk, even if - says political scientist Victor Shih at Bloomberg - if that means announced financial reforms will be stalled.

Bloomberg:

China will proactively prevent and resolve systemic financial risks, and step up efforts to reduce leverage in the economy, the official Xinhua News Agency reported, citing Xi. He also called for greater accountability for regulators, saying it’s a “dereliction of duty” if they fail to spot and dispose of risks in a timely manner, and stressed that coordination of financial regulation should be improved, and weak links in supervision strengthened. 

“The heavy emphasis on risk prevention will put a damper on much-needed reform in the financial market,” such as developing derivatives markets, said Victor Shih, a professor at the University of California in San Diego who studies China’s politics and finance. “With the wording on holding regulators for any signs of instability, they will definitely err on the side of caution. But if regulations are too stifling, financial talent may leave the country.” 

Premier Li Keqiang also spoke at the meeting, calling for moderate credit growth and keeping liquidity “basically stable,” according to state television. He backed “professional, consolidated, penetrating” regulation of all financial businesses to reduce risks.

More at Bloomberg.

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Where Xi Jinping has been failing - Ian Johnson

Ian Johnson

China annual political meetings passed without any great upheaval, but not all is well for president Xi Jinping, writes veteran journalist Ian Johnson, author of The Souls of China: The Return of Religion After Mao in the New York Review of Book. No legal reforms, no successor, and then there is the economy.

Ian Johnson:

Equally pressing is the need for significant economic reforms. State enterprises suck in valuable capital from the banking system, which continues to be state-run, to the detriment of more dynamic private enterprises. Urbanization has taken off, but is based on expropriating land at below-market prices. 

Farmers still don’t own their land or have meaningful land transfer rights. Rural residents still have a hard time getting full rights in urban areas. And of course censorship has become so overwhelming that even constructive criticism is increasingly marginalized, causing many moderates to lose hope that their voices can be heard. 

The complete failure to reform the economy means that the government’s argument about low growth—that China’s economy has slowed only temporarily while the economy restructures—appears less and less plausible. Instead, what could be happening is that the country’s inability to reform further is sending it into the feared middle-income trap—a country that cannot take the next step to become a truly prosperous society. 

Will any of this matter to Xi? His popularity could fall if the economy continues to stagnate, while property prices continue to remain far beyond the reach of ordinary people. But leaders like Putin have remained popular despite far worse economic situations thanks to overseas adventures and blaming foreigners for the country’s woes. 

But what is clear is that Xi’s image as a strong and capable leader seems less and less believable. As the country enters its political season and Xi’s reappointment approaches, he begins to look different. Instead of being the transformer China needed, he might yet prove to be little more than a vigorous custodian of the status quo.

More at the New York Review of Books.

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The slow but sure growth of more independent courts - Ian Johnson

Ian Johnson

Despite recent crackdowns on feminists and human rights activists, China´s judicial systems is slowly but surely moving into a more independent force in China´s bureaucracy, says Judge Jiang Huiling of the Supreme Court in an interview with journalist Ian Johnson for the New York Times. Courts get more autonomy, be it limited.

Ian Johnson:

Judge Jiang of the Supreme Court said he had been pushing for this separation of local government and courts for 20 years. Now, he said, the government has taken this step for the first time. “You can’t imagine how this feels for someone who has been working inside the system for this long,” he said. 

Other measures are being tried as well. The government has set up two pilot projects to establish circuit courts, which allow judges from one province to hear cases from others, further reducing the risk of local influence. Dockets are also being made public for the first time, and 50 courts have been allowed to experiment with an “assessor” system that is similar to a jury. 

Judge Jiang said these measures have the highest backing. The key government body that pushes reform in China, the shengaizu, has met 18 times over the past two years, and 13 of those meetings have been about judicial reform. The commission is led by President Xi Jinping, who has spoken of the need for a better legal system. 

“President Xi asks for two things: the courts should be fairer and result in more public confidence,” Judge Jiang said. “If people think the courts are fair, their confidence will rise but if they feel it has nothing to do with them, then it’s not a success.” 

But another of the initiatives — professionalizing judges — illustrates some of the deep-seated challenges facing reformers. China has about 196,000 judges, but many are simply law school graduates with the responsibilities of administrative assistants. Even those judges who hear cases rarely have to make decisions; instead, the cases are sent to senior judges or Communist Party committees to decide. Now, the number of judges is to be winnowed down. and while their pay and autonomy is being increased, their decisions will be subject to greater review. 

That has contributed to a massive outflow of judges. In the municipality of Beijing, for example, 500 judges have quit in recent years. Pay is a key issue. Salaries start at less than $1,000 a month, which judges say is far too low if they are now expected to actually adjudicate cases and be held responsible for their decisions.

More in the New York Times.

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What will China´s economy do in 2016? - Sara Hsu

Sara Hsu

Financial analyst Sara Hsu looks ahead in the Diplomat at 2016 and what the announced economic shift might mean for the country and the world. An overview of the current state of financial reforms in China.

Sara Hsu:

China is moving away from a manufacturing-based economy to a service-based economy, and has ended a period of intensive fixed asset investment. Overcapacity within the steel industry, for example, has resulted in zero profitability of steel companies and insufficient demand, not to mention supply gluts in the global market. Firms that are inefficient are to enter bankruptcy or be merged with other firms. Excess investment in the real estate sector has also led to an oversupply of houses, which has led to falling home prices, especially outside of the larger cities. Promotion of urbanization policies may help to shore up the demand for real estate. 

Much of the oversupply in manufacturing and real estate occurred as a result of or in tandem with overlending to local governments, which accumulated massive amounts of debt building up infrastructure in recent years. The risks of local government debt default are to be controlled in this coming year in order to maintain financial stability. The issuance of local government bonds has allowed local governments to stay afloat despite holding high levels of debt. Certainly, improving the real estate outlook will help local governments to improve the prospect of further land development and land sales for generating revenue. 

Costs for firms are to be cut by reducing taxes and fees, improving administrative procedures, and reducing social security contributions. These steps will encourage growth of domestic firms. New industries will continue to be promoted; the high-tech industry is growing rapidly, and foreign investment in this industry is expanding along with it. Telecommunications, e-commerce, and new energy sectors are growing as well. 

Goals to maintain macroeconomic stability have been a cornerstone of Chinese economic policy since reform and opening up, in an effort to maintain growth and keep inflation under control. Boosting consumer demand is a somewhat newer task, and with consumer demand rising slowly, it may take some time for demand to make up for other types of spending. However, China’s upper middle class is growing, set to almost double as a percentage of urban households by 2020, which will ensure ongoing expansion of consumer spending. 

China’s leadership has stated that its capital account will be liberalized by 2020, and that its exchange rate will continue to reflect market forces. This process will be aided by the RMB’s recent inclusion into the IMF’s basket of reserve currencies, on the condition that further exchange rate liberalization will take place. The move also increases the attractiveness of holding RMB-denominated assets and will help to push forward opening of the capital account.

More in the Diplomat.

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For Xi Jinping, the markets are only secondary - Arthur Kroeber

Arthur Kroeber

One of the reasons financial markets went out of control, is because president Xi Jinping is mostly focused on politics and geopolitical ambitions, says political analyst Arthur Kroeber in the Washington Post. 

The Washington Post:

Kroeber, (managing director of Gavekal Dragonomics in Beijing) is also skeptical. While Xi has talked of markets playing a "decisive role" in resource allocation, he has also reaffirmed the “dominant role” of the state sector. His government has reined in excessive credit growth and excessive investment, but it has failed to make good on promises of deregulation and curbing the power of state-owned enterprises, Kroeber wrote in a note to clients. 

“We are increasingly of the view that this mediocre result arises not because a bold and visionary reform program has broken up on the reefs of political opposition, but because the main aims of China’s leader Xi Jinping are political and geo-strategic, while his economic goals are contradictory,” he wrote.

More in the Washington Post.

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What has happened to the market forces? - Arthur Kroeber

Arthur Kroeber

Two years ago, China promised market forces will enter the financial arena. But is has been a mixed message from the start, and after the government tried to save a dropping stock market, financial analyst Arthur Kroeber looks for the Brookings Institute at what has happened.

Arthur Kroeber:

In countries such as the U.S.—where about half of the population own stocks, equities make up a big chunk of household wealth, and corporations rely heavily on funds raised on the stock market—a big stock-market fall can inflict great pain on the economy by slashing household wealth and spending, and making it harder for companies to finance their investments. China is different: less than 7% of urban Chinese have any money in the market, and their equity holdings are dwarfed by their far larger investments in property, wealth management products, and bank deposits. Equity-raising accounts for less than 5% of total corporate fund-raising; bank loans and retained earnings remain by far the biggest sources of investment funds. 

But hold on—if the market were really so economically irrelevant, then why did the government panic and try to prop it up with such extreme measures? It’s a fair question. One plausible answer is that the China Securities Regulatory Commission (CSRC), which oversees the market, got worried by the chaos and begged the State Council to mobilize support so that it could gain time to deal with the underlying problems, such as excessive margin borrowing. This explanation certainly seems to be the one the State Council wants people to believe. Despite its strong actions, the Council and its leader, Premier Li Keqiang, have stayed studiously silent on the stock market. The implied message is: “Okay, CSRC, we’ve stopped the bleeding and bought you some time. Now it is up to you to fix the mess and return the market to proper working order. If you fail, the blame will fall on you, not us.” If this interpretation is right, we can expect restrictions on trading and IPOs to be gradually lifted over the next several months, and rules on margin finance tightened to ensure that the next rally rests on a firmer foundation. 

The episode highlights the built-in contradictions in China’s present economic policies. Based on numerous statements and policy moves over the last 15 years, there can be no doubt that influential financial reformers want bigger and more robust capital markets—including a vibrant stock market—in order to reduce the economy’s reliance on politically-driven bank lending. Moreover, the success of proposed “mixed ownership” plan for SOE reform likely depends on having a healthy stock market, in which the state shareholding in big companies can be gradually diluted by selling off stakes to private investors. 

But the financial reformers are not the only game in town. As analysts like me should have taken more care to emphasize when it was released, the Third Plenum Decision is no Thatcherite free-market manifesto. In addition to assigning a “decisive role” to market forces, it reaffirms the “dominant role” of the state sector. Like all big policy pronouncements during China’s four decades of economic reform, it is less a grand vision than an ungainly compromise between competing interests. One interest group is the financial technocrats who want a bigger role for markets in the name of more efficient and sustainable economic growth. Another consists of politicians and planners who insist on a large state role in the economy so as to maintain the Party’s grip on power, protect strategically important industries and assets, and provide a mechanism for coordination of macro-economic policies.

More at the Brookings Institute

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Growth over reforms? - Sara Hsu

Sara Hsu

President Xi Jinping entered his tenure with a clear commitment to reform. But slacking economic growth might jeopardize that promise, writes analyst Sara Hsu in the Diplomat. One main reason: central and local governments have very different interests.

Sara Hsu:

One reason that the leadership is in such a bind with local governments is that fiscal imbalances between the central and local governments have still not been corrected. Local governments have been desperate for sufficient revenue to cover their massive expenditures on social services and infrastructure and continue to face no reprieve. The recent fiscal reform appears to have even skewed revenues a bit more in favor of Beijing, as service enterprises will switch from paying the business tax, which generally goes to local governments, to the VAT tax, which is transferred to the central government. 

Another reason why local governments were allowed to use LGFVs is because the attempt to expand the municipal bond markets was insufficient. Local governments rolled out 400 billion RMB in 2014, which proved insufficient to finance local government projects. Land sales have also slowed, resulting in smaller revenue intake. 

China needs additional fiscal reform, particularly with redistribution from central to local coffers, but this is unlikely to happen as both central and local government are pressed for funds to stimulate growth and implement reforms. Certainly the leadership has a challenging road ahead. The reversal on local government debt channels is just one harbinger of obstacles to come.

More in the Diplomat.

Sara Hsu is a speaker at the China Speakers Bureau. Do you need her at your meeting or conference? Do get in touch, or fill in our speakers´ request form.

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Reform is more needed than a financial stimulus - Sara Hsu

+Sara Hsu 

The People´s Bank of China, the central bank, recently pushed 100 billion Renminbi to its five largest banks to stimulate the economy. But China´s economy rather needs reforms than more capital, argues financial analyst Sara Hsu in the Diplomat.

Sara Hsu:

If China’s economy is to be restarted, it will need more substantive reforms. Labor-intensive manufacturing companies are facing rising costs, including increasing wages, and are moving abroad or diversifying to Malaysia and Vietnam. Chinese workers are becoming more sophisticated and consumption-oriented, seeking higher wages and better opportunities. The leadership is in favor of improving the services and high-tech manufacturing sectors, but appears to be stalled in lifting constraints to growth in these areas. 

These constraints abound. In the logistics sector, state-owned enterprises dominate port, rail and air delivery services. The state-owned logistics sectors spans the nation and enjoys an advantage in more regulated logistics areas, such as rail cargo transportation. Similarly, China’s telecommunications industry is dominated by three state-owned enterprises. 

Although these state-owned enterprises have recently allowed private enterprises to lease networks, cooperation with private businesses fails to break up the monopoly enjoyed by these large state telecommunications companies. Finally, barriers to growth in creation and manufacturing of innovative high-tech products include a lack of protection for intellectual property rights. Lack of enforcement of intellectual property rights ensures that innovation by private firms may be easily usurped by imitators who produce the same products. 

To combat its own malaise, China needs real reforms in targeted industries. In general, the state sector remains too pervasive, and challenges to the growth of private sector enterprises are difficult to surmount. In contrast to what other analysts have asserted, the reform process does not have to be stalled in order to combat slowing growth. Slowing growth can only be addressed in a meaningful way by changing policies to promote employment and the expansion of particular sectors. Economic resuscitation and long-term growth need not, and should not, be mutually exclusive.

More in the Diplomat.

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