{"id":5202,"date":"2012-03-06T23:50:36","date_gmt":"2012-03-07T04:50:36","guid":{"rendered":"http:\/\/www.jasonapollovoss.local\/?p=5202"},"modified":"2018-09-21T02:04:27","modified_gmt":"2018-09-21T06:04:27","slug":"change-in-china-hidden-by-subtle-policy-shifts","status":"publish","type":"post","link":"https:\/\/jasonapollovoss.com\/web\/2012\/03\/06\/change-in-china-hidden-by-subtle-policy-shifts\/","title":{"rendered":"Change in China Hidden by Subtle Policy Shifts"},"content":{"rendered":"<p><span style=\"font-size: 16px;\">Last week, the <a title=\"The World Bank\" href=\"http:\/\/www.worldbank.org\/\">World Bank<\/a> and the <a title=\"Development Research Center of the State Council\" href=\"http:\/\/www.drc.gov.cn\/english\/\">Development Research Center of the State Council<\/a>, an official Chinese think tank, jointly released \u201c<a title=\"China 2030: Building a Modern, Harmonious, and Creative High-Income Society\" href=\"http:\/\/www.worldbank.org\/en\/news\/2012\/02\/27\/china-2030-executive-summary\">China 2030<\/a>,\u201d a new paper calling for sweeping economic reforms aimed at preventing China\u2019s growth from stalling. Perhaps most significantly, the report calls for China to dramatically reduce the role of the state in its economy. Many China watchers believe the recommendations have the ear of the country\u2019s next generation of leaders, including <a title=\"Xi Jinping\" href=\"http:\/\/www.chinavitae.com\/biography\/303\">Vice President Xi Jinping<\/a>, who is expected to become the new head of the Communist Party later this year.<\/span><\/p>\n<p><span style=\"font-size: 16px;\">The World Bank report has generated plenty of attention, and rightly so: its recommendations could fundamentally reshape the Chinese economy. But with delegates gathering in Hong Kong in a few days to attend the CFA Institute Asia Pacific Investment Conference, where China will figure prominently into the agenda, now is an opportune time to reflect on the subtle yet important political and economic changes that are already under way in China. All offer important clues to four key questions about the country\u2019s future:<\/span><\/p>\n<ul style=\"margin-left: 5%;\">\n<li style=\"padding-bottom: 3%;\"><span style=\"font-size: 16px;\">How will China play on the world economic stage?<\/span><\/li>\n<li style=\"padding-bottom: 3%;\"><span style=\"font-size: 16px;\">How will China play on its own internal economic stage?<\/span><\/li>\n<li style=\"padding-bottom: 3%;\"><span style=\"font-size: 16px;\">How will China play on the world political stage?<\/span><\/li>\n<li style=\"padding-bottom: 3%;\"><span style=\"font-size: 16px;\">How will Chinese citizens be impacted over the next 10 years?<\/span><\/li>\n<\/ul>\n<p><span style=\"font-size: 16px;\"><strong><em>China on the World Economic Stage<\/em><\/strong><\/span><\/p>\n<p><span style=\"font-size: 16px;\">Investors can be certain that serious change is afoot when political alliances once considered impossible become a priority. Consider China\u2019s relationship with Japan. The two Sino-Japanese wars of the late 19th and mid-20th centuries created such enmity between the two countries that China refused to deepen economic ties with Japan for generations. Yet last year that frosty economic relationship appeared to thaw. In December, China surprised many observers by announcing a deal with Japan to allow the purchase of Chinese debt \u2014 its first ever such deal with a large foreign government. Then, in early February, news surfaced that <a title=\"China Increases Presence in Japan Debt Market \" href=\"http:\/\/online.wsj.com\/article\/SB10001424052970204369404577210491500938280.html?mod=wsj_share_tweet\">China had substantially increased its presence in Japan\u2019s debt markets last year<\/a>, with total transactions amounting to \u00a558.151 trillion.<\/span><\/p>\n<p><span style=\"font-size: 16px;\">This cooperation has intensified. On 28 October 2011, <a title=\"European Sovereign Debt Crisis: Overview, Analysis, and Timeline of Major Events\" href=\"http:\/\/blogs.cfainstitute.org\/investor\/2011\/11\/21\/european-sovereign-debt-crisis-overview-analysis-and-timeline-of-major-events\/\">European Financial Stability Fund CEO Klaus Regling traveled east to enlist the financial support of the Chinese<\/a> to help increase the size of Europe\u2019s bailout mechanism. Regling was told that China would not support the EFSF until Europeans did more to help themselves. Even so, last month <a title=\"Japan, China to Align Aid Stance \" href=\"http:\/\/online.wsj.com\/article\/SB10001424052970204909104577232423201204542.html\">China and Japan announced that they would coordinate their responses to European sovereign debt aid requests<\/a> from the International Monetary Fund.<\/span><\/p>\n<p><span style=\"font-size: 16px;\">As if China\u2019s emerging role in Japanese and European economic affairs wasn\u2019t enough evidence of a major rumble, the Asian giant is also <a title=\"Renminbi Internationalization: Background and Milestones\" href=\"http:\/\/blogs.cfainstitute.org\/investor\/2012\/02\/27\/renminbi-internationalization-background-and-milestones\/\">trying to make the renminbi a global currency<\/a>, while simultaneously <a title=\"Beijing Diversifies Away From U.S. Dollar \" href=\"http:\/\/online.wsj.com\/article\/SB10001424052970203753704577254794068655760.html\">purchasing fewer U.S. dollar-based securities<\/a>. While this goal has been apparent for several years, there are increasing signs of progress. Consider, for example, the financial community\u2019s growing interest in renminbi bond safeguards. When global investors begin to focus on <a title=\"Banks Institute Renminbi Safeguards\" href=\"http:\/\/www.ft.com\/intl\/cms\/s\/0\/74c5e490-5630-11e1-8dfa-00144feabdc0.html#axzz1nbxsBoy0\">the technicalities of bond safeguards<\/a> instead of existential questions about the existence of the market itself, it\u2019s fair to conclude that China is making progress in establishing its currency as a global reserve.<\/span><\/p>\n<p><span style=\"font-size: 16px;\"><strong><em>China on Its Internal Economic Stage<\/em><\/strong><\/span><\/p>\n<p><span style=\"font-size: 16px;\">In the wake of the 2008 global financial crisis, the <a title=\"China's Banks Fail to Dispel Bad Loan Fears\" href=\"http:\/\/www.ft.com\/intl\/cms\/s\/0\/705b4c74-cf0d-11e0-86c5-00144feabdc0.html#axzz1nbxsBoy0\">Chinese government pumped trillions of yuan<\/a> into its economy to insulate it from outside economic shocks. Consequently, China\u2019s property values have soared due to profligate lending. Reports suggest that <a title=\"China to \u2018Strictly Control\u2019 Shadow Banking Risks, Liu Says\" href=\"http:\/\/www.bloomberg.com\/news\/2011-10-19\/china-will-strictly-control-shadow-banking-risks-liu-says-1-.html\">Chinese efforts to calm spasmodic real estate lending have only led to an increase in its shadow banking sector<\/a>, which is fueled by both the banks and informal lenders. Despite prohibitions, banks in China are notorious off-balance-sheet lenders and thus undermine official efforts to cool the overheated economy. In addition, government efforts to constrain lending by increasing reserve requirements are often more than mitigated by the sheer size of informal lending in China.<\/span><\/p>\n<p><span style=\"font-size: 16px;\">Exactly how big is China\u2019s shadow lending sector? The country officially estimates the size at 3.38 trillion yuan, although unofficial estimates are much higher. As a result, despite stringent central enforcement by the Chinese government, the economy must contend with large inflationary and potentially bubble-bursting pressures. Last fall, further evidence of the consequences was starkly illustrated by reports of <a title=\"China's Ghost Cities and Malls \" href=\"http:\/\/www.youtube.com\/watch?v=rPILhiTJv7E\">entirely empty Chinese \u201cghost\u201d cities, which sent shivers through global markets<\/a>. Reports that Chinese businesses are using copper as an alternative real-estate financing vehicle paint a similar picture. Many Chinese firms have stockpiled copper and use it as collateral when borrowing through unofficial lending channels.<\/span><\/p>\n<p><span style=\"font-size: 16px;\">Still, there are encouraging signs of economic progress in China. One key example is that the central government is for the first time allowing <a title=\"China Starts Municipal Bond Sale Trial in Shanghai, Shenzhen\" href=\"http:\/\/www.bloomberg.com\/news\/2011-10-20\/china-starts-municipal-bond-sale-trial-in-shanghai-shenzhen-1-.html\">Chinese municipalities to issue their own debt<\/a>. Still further evidence of liberalization comes in the form of <a title=\"China Poised to Launch Junk-Bond Market\" href=\"http:\/\/www.reuters.com\/article\/2012\/02\/06\/us-china-bond-idUSTRE8150MP20120206\">the Chinese government\u2019s interest in developing a non-investment-grade bond market<\/a>. And the release of the China 2030 report itself suggests that the country is beginning to embrace more transparency with regard to its challenges and opportunities.<\/span><\/p>\n<p><span style=\"font-size: 16px;\"><strong><em>China on the World Political Stage<\/em><\/strong><\/span><\/p>\n<p><span style=\"font-size: 16px;\">China\u2019s leader-in-waiting, Xi Jinping, captured the attention of the global press corps <a title=\"China Vice-President Xi Jinping in US Visit\" href=\"http:\/\/www.bbc.co.uk\/news\/world-asia-china-17036070\">with his recent visit to the United States<\/a>. He seemed to want to project a softer image of China, even going so far <a title=\"For the Vice President of China, Tea Time in Iowa\" href=\"http:\/\/www.nytimes.com\/2012\/02\/16\/world\/asia\/xi-jinping-of-china-makes-a-return-trip-to-iowa.html\">as to visit old friends in Iowa<\/a> \u2014 a U.S. state that is far from the country\u2019s economic and political capitals of New York City and Washington, D.C.<\/span><\/p>\n<p><span style=\"font-size: 16px;\">Despite this grand photo opportunity, China nearly simultaneously thwarted the United States at the United Nations on policy measures related to both Iran and Syria, refusing to support the position of its U.S. and European counterparts. The takeaway here is not necessarily that China\u2019s political direction is discordant with the West, but rather that the country\u2019s desire to be more assertive on the global stage won\u2019t always align. (Contrast this behavior at the U.N. with China\u2019s change of course on the European sovereign debt crisis and its new willingness to partner with Japan to help the E.U. solve its economic problems.)<\/span><\/p>\n<p><span style=\"font-size: 16px;\"><strong><em>China in 10 Years<\/em><\/strong><\/span><\/p>\n<p><span style=\"font-size: 16px;\">Over the next decade, China\u2019s social contract with its people could be ripe for change. In the preceding 20 years, China has pursued \u201cgrowth at any cost.\u201d This policy has favored output and full employment over profitability. Why? Because the current social contract between the Chinese government and its people is one based on full employment in exchange for limited political choice.<\/span><\/p>\n<p><span style=\"font-size: 16px;\">Inevitably, though, economic growth that favors output and full employment over profitability will lead to markets where the integrity of price signals fail. To stave off the resulting economic turmoil, the authorities will need to liberalize the economy so that the central focus becomes profitability. The profit motive, in turn, implies job losses and higher unemployment. And that, in turn, raises the question of how the political system may change so that it is more responsive to the people\u2019s needs. (Interestingly, the &#8220;China 2030&#8221; report is somewhat vague on the future role of the Chinese Communist Party, <a title=\"Blueprint of China Reforms Leaves Role of Party Vague \" href=\"http:\/\/online.wsj.com\/article\/SB10001424052970204520204577249080648933136.html?KEYWORDS=china+2030\">as the <em>Wall Street Journal<\/em> recently reported in this article<\/a>.)<\/span><\/p>\n<p><span style=\"font-size: 16px;\">Examined separately and with too narrow a mental framework, these developments may seem less consequential. But when considered as a whole, this mosaic of change suggests that China is attempting to fulfill its greater promise \u2014 one in which it will take an increasingly active role in global economic and political affairs as it transitions from a centrally managed, developing economy into a potentially more transparent, developed economy. The choices its leadership makes, the challenges that lie ahead, and the economic and financial reverberations that will be felt are sure to challenge investors and China-watchers alike for years to come.<\/span><\/p>\n<hr \/>\n<p><span style=\"font-size: 16px;\"><em>Originally published on CFA Institute\u2019s \u00a0<a href=\"https:\/\/blogs.cfainstitute.org\/investor\/\">Enterprising Investor<\/a>.<\/em><\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Last week, the World Bank and the Development Research Center of the State Council, an official Chinese think tank, jointly released \u201cChina 2030,\u201d a new paper calling for sweeping economic reforms aimed at preventing China\u2019s growth from stalling. Perhaps most significantly, the report calls for China to dramatically reduce the role of the state in [&hellip;]<\/p>\n","protected":false},"author":2,"featured_media":5203,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"","_et_pb_old_content":"","_et_gb_content_width":"","footnotes":""},"categories":[12,3],"tags":[97],"class_list":["post-5202","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-best-of-the-blog","category-the-blog","tag-china"],"_links":{"self":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts\/5202","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/comments?post=5202"}],"version-history":[{"count":0,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts\/5202\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/media\/5203"}],"wp:attachment":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/media?parent=5202"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/categories?post=5202"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/tags?post=5202"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}