Finbarr Bermingham talks to those involved in formulating China’s next five years of policy to find out what the future holds for trade and investment.
On March 14, 2011, Hu Jintao and Wen Jiabao, the then Chinese President and Premier, respectively, spoke in flowery terms of the newly-delivered 12th Five-Year Plan (FYP). The document – which is as broad as the anticipation that greets it quinquennially – was “to make the cake of social wealth as big as possible”, and raised the concepts of “higher quality” and “inclusive” growth. In shorthand, China no longer wished to be the production line for the rest of the world and was about to embark on a dramatic economic shape-shift, trying to steer a country away from basic manufacturing toward more value-added, consumption-driven growth.
While much of the language was nebulous, some of the targets were clear and now, as we anticipate its succeeding document in October, we can see that many of the economic targets have been met, even as concerns continue to mount over the health of China’s trade economy, and its economic well-being at large.
The 12th FYP set out to achieve 7% growth, on average. If we include the figure for the first half of 2015 as being indicative of the annualised stats, then China’s mean GDP growth since 2011 has been 7.86% (although it has declined incrementally each year). An inflation target of “below 4%” has been comfortably achieved, with an average of 2.85% over the five years. However, with this year’s inflation lagging at 1.49%, there are plenty of concerns over weak consumption: exactly what China has been hoping to stimulate. The services sector’s contribution to GDP was 48.2% in 2014, according to World Bank data – above the target of 47% set by the National Development and Reform Commission (NDRC – the body that compiles each FYP). 54% of Chinese people are now urbanised, according to the World Bank, well over 2011’s target of 51.5%.
Other areas have been less successful. For example, the country has yet to reach its target of non-fossil fuel sources as a component of its energy mix, and is lagging on its goals for energy efficiency and carbon emissions. Broadly speaking, it has performed in line with expectations. That, however, does not tell the whole story.
For while at the outset of the last FYP, people were looking to China to continue to steer a weak global economy post the financial crisis, the same eyes now gaze towards Beijing bearing all the hallmarks of fear and desperation. China’s structural reform has tried to take some steam out of an overheating property sector which was headed, according to many, for a crash. This resulted in less construction and we’ve all seen the impact this has had on commodity markets.
Its recent forays into the currency markets, in devaluing the Renminbi (Rmb), spooked stock markets the world over. Many believe the move was made to encourage the IMF to include the Rmb in the special drawing rights (SDR) basket of currencies (informally recognised as the world’s reserve currencies), despite the government claiming it was a move designed to boost exports. At the time of writing, the IMF had just announced plans to delay the decision until 2016. Hardly the vote of confidence China’s central bankers had been hoping for.
So although the cold hard data shows that China’s 12th FYP has been a reasonable success, the bleak global trade landscape shows that it’s not enough: China has not been the white knight many had hoped it would be. This means that the 13th edition will be more hotly anticipated than ever. Few official details have been made public, but GTR spoke to some of those close to the planning – which began in 2013 – to find out which areas can be expected to have the greatest impact on international trade and investment.
The green economy
“Clearly, economic growth will be the supreme issue. But they’re on the flipside of the same coin. They can’t continue their GDP growth rate if they don’t address these environmental issues, along with the social issues that go with that,” Deborah Lehr, senior fellow at the Paulson Institute, which has been consulting the Chinese government on its environmental targets, tells GTR. Despite being behind on its targets around coal consumption, carbon dioxide emissions and environmental controls, China has been more proactive than many major western economies in embracing green energy.
Already, China has the second-largest solar PV capacity in the world, on 28.2GW (behind Germany’s 38GW). Those inside the industry, however, are expecting a huge leap forward. The chairman of the Hareon PV group said, upon sealing a large investment deal in China, that there’s no reason why the country shouldn’t set a solar target of 200GW by 2020 – which would amount to 30GW a year being added to the grid, at a cost of almost US$40bn annually. Given that the total global PV capacity was 176GW in 2014, this is an eye-watering figure.
Lehr says that the Chinese government is serious, but that in financial terms, it will need to be creative. “The challenge is, we’re hearing from several different sources, that the government is estimating that it [the total green energy and energy efficiency investment] will cost up to US$1tn per year for four to six years, and the government can only cover about 15% of that. It’s staggering but it does provide amazing economic opportunities for the private sector. That’s one of the reasons for the push to liberalise the private sector, the creation of private banks, the reduction of administrative controls, it’s now easier to start a firm, and all the promotion of SMEs because China recognises this is the engine of growth for the economy, not the SOEs anymore.”
China’s green economy is not to be limited to just energy. Buildings account for 40% of global greenhouse gases and China will be constructing half of the world’s buildings for the foreseeable future. This has led to an influx of US construction companies to the Chinese sector, for while China’s property industry has slowed, the need to house newly-urbanised people and to renovate old, non-efficient buildings, remains stark.
Expect the newly-established Asian Infrastructure Investment Bank (AIIB) and the Asian Development Bank (ADB) to be to the forefront of some of these initiatives. But there are clear opportunities for international lenders too. Rarely are renewables or energy efficiency projects purely commercially financed, but banks are often keen to follow subsidies and government guarantees into such ventures. The policy banks of China were just recapitalised to the tune of US$80bn each, so they will possibly lead the lending. But should the FYP deliver, as is expected, the most ambitious environmental mandate in China’s history, expect private finance to flood in alongside it.
A new lending landscape
Much is made of China’s “shadow banking” system, and the government has actively intervened to curb unregulated lending over the past five years. However, the fact remains that – as with many parts of the world – Chinese companies are being starved of capital. “I hear a lot about lack of liquidity and exorbitant funding costs for SMEs in China,” one banker told GTR recently. Trade finance simply does not flow freely along the lower levels of the Chinese economy and while there have been some steps taken to loosen the purse-strings of late, we should expect the government to pursue further policies post-haste.
As with the green economy, China-watchers are predicting the establishment of new financial houses in order to address the problem. “China’s financial system is still very bank-dominated and there’s a need to balance that by developing non-banking institutions. Microfinance is one, but there are many others. There’s a need to develop bonds and equity markets so that an SME or any other company has more choices: between getting bank loan, and tapping bond markets, etc,” Jurgen Conrad, the ADB’s head of economics in Beijing, who has been advising the NDRC on eight key areas of development, tells GTR.
While this is likely to mean more and smaller IPOs and further government guarantee mechanisms, we’re also likely to see more trade finance disbursed in less traditional ways. Internet finance, says Conrad, ranks very highly on the government’s priority list. Indeed, this year, two of China’s corporate heavyweights have begun to enter the field, pitting themselves against each other with the establishment of their
own internet banks.
MyBank, with a registered capital of around US$650mn, is a spinoff of Alibaba, the e-commerce giant – which already provides international companies with its own trade and supply chain financing solutions. It was launched in June and will rival WeBank, operated by China’s biggest social media platform WeChat. The government has licensed these institutions to fund small businesses, and if they prove to be a success, analysts expect further private banks to enter the trade and working capital lending space over the next five years.
China’s global leadership
While many took the mandate to move to a consumption-based economy as a sign that China would scale back its infrastructure spend, the opposite has happened. Most recently, in incepting the AIIB and revealing plans for enormous spend along the New Silk Road, One Belt One Road (OBOR) initiative, China has placed itself once more as the prime investor in the region’s ailing infrastructure network, with countries of all levels of development and alliance queueing up for a slice of the action. But expenditure will continue at home, too.
“Clearly growth was driven by investment over the last decade,” Conrad says. “But infrastructure is only a relatively small part of it. There’s also manufacturing and real estate investment. We’ll see continuously high levels of infrastructure investment, because the country still needs a high level of infrastructure. What needs to change is the criteria by which the projects are identified. There is a lot of room for improvement, and on the financial side a lot can change. Rather than having local government finance projects in an unsustainable way, windows have to be opened for the private sector to provide financing, and also social services.”
For instance, the three districts of Beijing, Tianjin and Hebei have launched a pilot exercise to combine their efforts towards industrial transformation and environmental targets, by means of connecting their transport networks. Beijing has currently just under 600km of subway mileage and the government wants to double it, in order to link the city to the suburbs. The change in policy could be that investment is more focused and more private sector-oriented. Rather than throwing government money at roads to nowhere and ghost towns filled with empty high-rises, the government is expected to court private capital for more worthy infrastructure projects, Conrad says.
Internationally, China made a huge statement with the establishment of the AIIB and OBOR, as well as its involvement in the Regional Comprehensive Economic Partnership (RCEP) free trade agreement with Asean and Asia Pacific nations, and a rake of bilateral agreements. Other nations will be hoping this more outward-looking stance continues. “What would be most beneficial to the US would be the conclusion of a bilateral investment treaty,” Nicholas Lardy, China expert at the Petersen Institute, tells GTR. “Also, the further opening of the capital account, and regulatory actions that have less adverse impact on foreign firms, including US firms.”
China will assume the G20 presidency next year and many are expecting it to use this platform to assert its role as the world leader in clean technology and environmental investment. President Xi Jinping will visit the US later this year and, having brokered a climate change agreement with his counterpart in Washington DC in November 2014, it’s likely that this will be top of the agenda. If China delivers on its promises around climate change and energy efficiency, there are fewer places for western governments to hide: excuses are already wearing thin. Increased government backing of these sectors could lead to the kind of trade and project financing for projects in the green sector that it has been so sorely lacking in recent years.
The world waits, and while the 12th FYP made very little explicit reference to the trade sector, its implications have been vast. “Making predictions on the forthcoming FYP is a fool’s game,” Ethan Cramer-Flood, associate director at the China Conference Centre warns, but you can be sure that the issues discussed here will be to the forefront of Beijing policymakers’ thoughts.