Fran O'Sullivan: Changes in China offer us a prize


President’s bid to reform economy will result in shifts in overseas investment policy that will affect NZ.

China's President Xi Jinping cannot afford to delay market reforms for too long. Photo / AP
China's President Xi Jinping cannot afford to delay market reforms for too long. Photo / AP

Xi Jinping's version of what the move to the free market means China-style is said to come down to the "invisible hand of the market guided by the visible hand of Government".

It's a neat phrase, and one that appealed to John Key who delighted in retelling Xi's words after meeting the Chinese President in Beijing this year.

But what the move to the free market means - particularly when it comes to reforming China's major state-owned enterprises (SOEs) - is still an unfolding story and one which is more subject to politics than Western notions of how SOEs should perform when they are subject to market disciplines.

HSBC's Frederic Neumann offered an interesting perspective while in New Zealand as part of the bank's international marketing drive.

Neumann - co-head of Asian Research for HSBC in Hong Kong - has a brief which spans Asia from India through to Mongolia, Northern Asian powerhouses like China, Japan and South Korea, Asean nations and right down to Australia and New Zealand.

He believes it is proving difficult to get the next wave of structural economic change through because the SOE sector is holding back on reforms which are meant to boost productivity.

Neumann's point is that we shouldn't think of China as being like a Western democracy.

Xi has come out swinging against corrupt officials. He couples this with standing up for the Communist Party's heritage.

Thus the Xi campaign has a subtext - to neutralise opposition to reform and strengthen the President's hand when it comes to selling tough choices to the party internally in an environment which lacks an ideological consensus.

Part of the problem is that the Western model of capitalism which China could have followed was to some extent discredited by the excesses of the global financial crisis.

China could have followed the Singaporean model or that embraced by the United States. But it continues to believe a strong state is the best guarantor of the role of the Chinese Communist Party, and giving up control could weaken the state.

The agenda unveiled after the third plenum was meant to move China to a more free-market consumer economy. The SOE reform was one part of the prescription. Other elements included removing price controls in many areas, lifting interest rate caps and moving further towards currency convertibility.

The market was to be granted a "decisive role".

The state was expected to remove price controls ranging from water to oil, gas and power and more.

But progress has been piecemeal. The SOEs will be forced to step up through the requirement to post higher dividends and move away from state-subsidised low funding costs.

Neumann points to an environment of "constructive ambiguity" encouraged by Beijing - "the roadmap is not as clear as Western commentators think".

Confidence still has to be built in the current leadership.

He says the Chinese economy is stimulus-driven, but that is not sustainable over time.

China has an excess of savings which Beijing is now happy to see invested in overseas companies - not only the natural resources SOEs have acquired in international shopping tours but also companies bought simply to acquire know-how and managerial skills.

Neumann reckons there is another side to this in that China wants to slow the build-up in foreign reserves and an over-reliance on US treasuries.

Encouraging SOEs and private Chinese companies to go on the acquisition trail by investing overseas is also part of a conscious decision to slow building foreign exchange reserves.

We are starting to see this in New Zealand where some of the latest buying - such as Beijing Capital's acquisition of TransPacific Industries - differ markedly from the resource plays which have predominated in the dairy sector.

One aspect - to which Australia is now subject - is fallout from the competitive tensions between China and Japan.

Japan's Prime Minister, Shinzo Abe, has also encouraged Japanese firms to invest overseas.

He has visited all the Asean economies and made several investment deals on his recent trip Downunder.

Behind the policy is a conscious strategy that Japan must ensure corporate earnings are sustained from overseas in an environment where the domestic economy has contracted.

There is a lesson for Xi in Japan's predicament.

Japan could have modernised its economy earlier and exposed it to competitive reform. It remained inwardly focused. Stagnation resulted.

Xi cannot afford to delay the market reforms for too long - that would give Japan a competitive advantage.

The upshot is that New Zealand will increasingly come on the radar screen for investors from both major Asian powers.

The commodity boom is a fickle beast, as is obvious from the slide in dairy prices as other agricultural nations built supply when prices were high. Timber is in a similar space.

The real prize is learning how to finesse the opportunities to put Asian capital and New Zealand know-how together.

- NZ Herald

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Head of Business for NZME

Fran O'Sullivan has written a weekly column for the Business Herald since its inception in April 1997. In her early journalistic career she was a political journalist in Wellington and subsequently an investigative journalist who broke many major business stories including the first articles that led to the Winebox Inquiry in both NBR and the Sydney Morning Herald. She has specific expertise in relation to China where she has been a frequent visitor since the late 1990s. She is a former Editor of the National Business Review; has twice been awarded Qantas Journalist of the Year and is a multiple winner of the Westpac Financial Journalism Supreme Award.

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