After 40 years of reform and opening up, what’s next for China?

January 13, 2019

Four decades since it began opening its gates to the rest of the world, China’s economy grew by an eye-watering 42 times between 1980 and 2017, from US$305 billion (S$413.7 billion) to US$12.7 trillion (S$17.2 trillion).

This phenomenal growth was backed largely by foreign investment, which ballooned to an all-time high of US$135 billion in 2017. For the modern businessman, it has become impossible to disregard China.

 

China celebrated 40 successful years of reform and opening up in December. But amid today’s uncertain economic landscape, what will it take for the powerhouse to carry this success forward?

Here’s my take on four challenges China must overcome in its transition into a more mature economy.  


 

 

1. Sustainable growth

The Chinese economy of today is dynamic, bold and innovative. Just look at the Belt and Road initiative. It is a massive project that could address the country’s economic challenges and even reshape the global trade order.

But the one thing that hasn’t changed these years is how China still sets a target for economic growth.

The repercussions could be painful if this continues, particularly if it leads to a situation where local governments and businesses seek growth at all costs.

Already, local government and corporate debt levels are surging. S&P Global Ratings said recently that off-balance-sheet borrowings by local governments could be as high as RMB 40 trillion (S$8 trillion) — “a debt iceberg with titanic credit risks”.

Unsustainable, in other words. Perhaps a rethink of China’s policies, such as replacing the GDP growth target with economic forecasting and assessments of its growth potential, could pave the way for more sustainable growth.

 

2. Protecting the foreign investor

As China accelerated moves to ease foreign investment rules in the last five years, various industries opened up even more.

In some, foreign companies are no longer mandated to form a joint venture with local players. The world’s top hedge funds, Citadel and Bridgewater, for instance, obtained their management licences through the Wholly Owned Foreign Entity regime.

Over 220 A-shares (shares of mainland-based companies) have also been added to the MSCI global and regional indices, enabling foreign investors to trade stocks that were previously mostly restricted to local investors.

But issues in the backend remain, specifically those related to intellectual property (IP) and the enforceability of the law.

In 2012, basketball legend Michael Jordan sued Fujian-based sportswear firm Qiaodan Sports Company for building a brand around the Mandarin transliteration of his name.

It took four years of legal wrangling before China’s highest court overturned earlier lower court rulings and ruled in favour of him.

The truth is, many companies still prefer to use Hong Kong and Singapore as an arbitration jurisdiction, over China.

Enticing foreign capital has to go beyond just dangling the carrot. More measures and procedures should be in place to create a more secure business environment, where the foreign investor knows his interests are being safeguarded.

 

3. Growing the less glamorous cities

When the monumental Hong Kong-Zhuhai-Macau Bridge opened in October, it exemplified China’s appetite for infrastructure.

The world’s longest sea bridge across the waters of the Pearl River Estuary costs nearly US$20 billion. It is 20 times longer than San Francisco’s Golden Gate Bridge.

Infrastructure has consistently been a key focus for the Chinese government — as a hedge against the 2008 financial crisis and to continually stimulate growth today.

But beneath the dazzle lies a stark reality: A lot of the infrastructure is underused, particularly in the second and third-tier cities.

China accounted for 30 per cent of global city rail by track length at the end of 2017, according to the International Association of Public Transport, but it contributed only a quarter of ridership — signalling underutilisation.

A Financial Times article also noted that regional data centres are running at half their capacity as companies spurn sites outside Beijing and other main cities.

One way to generate growth is to replicate the Greater Bay Area (GBA) plan in other areas. The GBA marks China’s ambition to integrate Hong Kong, Macau and nine southern mainland cities into one huge megacity to rival San Francisco, New York and Tokyo.

Successful replication in other parts of China would allow millions more people to take a step closer to fulfilling the China Dream, while ensuring that its massive infrastructure projects are put to good use and reap returns.

 

4. Extending China’s soft power with real innovation

China has done a stellar job in pushing its companies up the global stage. In 1995, only three Chinese companies had made it to the Fortune 500 list.

The list today includes 120 companies from China — with game-changers like Alibaba, Tencent and Geely — trailing just slightly behind the US' 126 firms.

But questions remain: Do these companies offer real innovation? Or are they merely just copying and adapting ideas from the West?

How many of these 120 companies can actually compete head to head with global brands like Coca Cola, Apple or Microsoft?

That many of China’s biggest and most profitable firms remain state-owned puts a lid on true innovation, or the need to meet real market needs.

According to World Bank data, China in 2015 made IP payments that were 22 times more than those it received from the rest of the world. In comparison, what the rest of the world paid to China for IP use was less than 1 per cent of the amount paid to the US.

Where true innovation is concerned, there is plenty more room for China to grow.

 

This article was published on TodayOnline.

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