In a speech to the 19th National Congress of the Communist Party of China in October 2017, Xi Jinping spoke of the ambition to turn China into a “mighty force” for realising the “Chinese Dream” in the world. As part of this, the much-publicised Belt and Road Initiative (BRI), announced in March 2015 (and covered in our Review of Financial Markets in May 2017), will enable China to “actively promote international cooperation”, he said. 

As the only country to register positive economic growth in 2020, China’s economy appears well set. Stringent lockdown procedures to contain the Covid-19 virus led to a 6.8% contraction in GDP growth in the first quarter, but the economy rebounded to 2.3% growth for the year, according to the country’s National Bureau of Statistics.

The International Monetary Fund (IMF) is predicting that China will continue to benefit from its early containment of the virus, forecasting in its January 2021 World economic outlook update that China’s 2021 year-on-year GDP growth will be 8.1%, in comparison to 5.5% world output, and the 4.3% average predicted for advanced economies.

“Chinese Dream”

Elizabeth Economy, senior Fellow at the Hoover Institution at Stanford University, and senior Fellow for China Studies at the Council on Foreign Relations, says: “Xi’s Chinese Dream – the great rejuvenation of the Chinese nation – is centred on reclaiming Chinese centrality on the global stage. This means realising Chinese sovereignty claims and pushing forward with the BRI.”

However, despite Xi’s words about promoting international cooperation, Elizabeth points out that China has cocooned itself politically by “sharply limiting the extent to which Western ideas, information, and actors from outside China can engage inside the country”, and has, to an extent, stifled its economy too.

As the only country to register positive economic growth in 2020, China’s economy appears well setShe points to the ‘dual circulation’ strategy, which suggests that the country is developing a closed loop of innovation, manufacturing, and consumption, a type of cocooning of the economy, but one that “allows for targeted engagement with the international economy through the import of needed technology, capital, and know-how, as well as through Chinese exports”.

Tim Harvey, CEO of NTree International, a firm that facilitates European investor access to Chinese markets, with a particular focus on commodities, believes that by 2030, China will have overtaken the US to become the world’s largest economy once again. When you drill down into the numbers, it is not hard to see why.

The country is home to the largest number of the world’s Fortune Global 500 companies, 124, more than the US, which has 121. And in 2017, the Chinese government announced an ambitious Artificial Intelligence Development Plan that is part of the Made in China 2025 initiative, an industrial programme focusing on high-tech industries that aims to reduce China’s reliance on foreign technology imports, and in turn ensure it becomes the undisputed world leader in the tech sector by 2030.

Along with its growing position as a tech hub, China is set to focus on three strategic imperatives. In supporting green technologies, encouraging broader participation of foreign investors, and fostering greater economic cooperation China believes it has the ingredients to continue its growth in the coming decades.

Green technologies powering growth

Although it remains a world leader in commodities - particularly metals – the country has been increasingly trying to diversify away from the energy-intensive heavy industries that drove its growth in the decades following 1978. Having declared ‘war’ on pollution in 2014 in a bid to tackle its huge carbon footprint, China announced a ban on 24 types of solid waste imports in 2017, and followed up with a total ban on solid waste imports that came into effect at the start of 2021.

In September 2020, Xi pledged that China would be carbon-neutral by 2060. It is a vast undertaking – the Chinese premier has acknowledged that the country’s CO2 emissions are not expected to peak until towards the end of the current decade – but one that could be possible, given that China is currently the world’s leading producer of renewable energy, according to figures from the Organisation for Economic Co-operation and Development, and is set to dramatically scale up renewable energy output over the coming years.

A November 2014 report by the International Renewable Energy Agency estimates that, from a base point of 7% in 2010, China’s share of modern renewables in its overall energy consumption could increase to 26% by 2030, which would make it the world’s largest user of renewable energy, consuming 20% of global capacity. Additionally, IEA analysis shows that over the next three years, China will account for 40% of global renewable energy capacity expansion as the country scales up its renewable ambitions.

China also dominates the electric vehicles (EV) market, with over 400 EV companies. According to China Association of Automobile Manufacturers, the country sold over 1.2 million EVs in 2019 alone (despite a slump in sales in H2), accounting for well over half of the world’s annual EV sales for the year.

The Chinese government is aiming for ‘new energy vehicle’ sales to account for 25% of total domestic vehicle sales by 2025. “In many respects, China is setting the standards for the development, roll out and implementation of green technology,” says Tim Harvey. “Chinese investment in technologies that reduce carbon emissions will benefit investors everywhere by helping to mitigate climate change risks.”

A case for foreign investors

Max J Zenglein, chief economist at the Berlin-based Mercator Institute for China Studies, says that China will continue to “expand its role in international finance” as it aims to cement its global position. “Making the Chinese financial system more accessible to international investors includes improving the efficiency of the still-underdeveloped domestic financial system and strengthening the role of the Chinese yuan internationally,” he says.

Over the past decade, China has embarked on significant reforms to provide foreign investors with easier access to its enormous capital markets. One of the most recent – and most important – of these took place in November 2020. The previous regulations that governed access to the country’s onshore futures markets – the Qualified Foreign Institutional Investor (QFII) and the Renminbi Qualified Foreign Institutional Investor (RQFII) programmes – were brought together under one unified scheme: the Qualified Foreign Investor (QFI) regime.

The new rules increase the range of financial instruments that foreign investors can trade. Previously, QFII and RQFII were limited to stocks, bonds, public mutual funds, equity index futures and FX derivatives, but the new regime now also includes private investment funds, bond repurchase agreements, financial futures and options, and commodity futures and options.
Over the past decade, China has embarked on significant reforms to provide foreign investors with easier access to its enormous capital markets

Additionally, the unified regime streamlines the licensing application process that affords international investors access to Chinese markets. Danny Dolan, managing director of China Post Global, an investment management firm with headquarters in Hong Kong, notes that the reform of the QFII and RQFII programmes “was needed as they had been overtaken by the more recent Stock Connect [the equities trading link between China’s mainland markets and Hong Kong’s stock exchange] and Bond Connect [which allows international players to invest into onshore China via Hong Kong programmes], which both offer easier access via Hong Kong without the need to register with the Chinese authorities”.

“The new reformed QFI programme replaces the previous licence application with a registration process, and abolishes the previous quota requirement, giving investors more certainty, and less bureaucracy,” Danny concludes.

Opening up

Meanwhile a number of commodity futures, including crude oil and iron ore futures, are already open to international investors via the China Financial Futures Exchange.  A major new futures contract for copper, which launched on the Shanghai International Energy Exchange in November 2020, is just one example of a drive to accelerate the use of the renminbi for transactions overseas, as China continues to flex its pricing power muscles in international markets.

As Danny points out, “greater international adoption of the renminbi may also further reduce the risk of a default on Chinese government bonds and quasi-sovereign bonds”, although the risk is already very low given China’s robust public finances, strong credit rating (A+ from S&P and Fitch, and A1 from Moody’s), and low interest rates by emerging market standards.

A 2020 China Investor Survey by Funds Europe, a business strategy magazine for European asset management professionals, reveals that easier access to China’s markets is helping to drive foreign investor participation. Some 69% and 63% of the 139 respondents identified ease of access to onshore channels and ease of access through offshore channels (such as Stock Connect and Bond Connect) as key factors driving their investment strategies in the Chinese market. Data from Hong Kong Exchanges and Clearing shows that, despite the pandemic, a record high of HK$1.35bn (around £126m) was generated via Stock Connect in the first nine months of 2020, amounting to a 79% year-on-year rise. One of the key drivers of this growth, alongside China’s economic bounceback in the second half of 2020, was the inclusion of China A shares in FTSE Russell’s global equity benchmarks for the first time in June 2020.

China’s markets are seen as an attractive future proposition, with more than 90% of respondents to the Funds Europe survey noting that the importance of China in their investment strategies continues to rise. “Chinese companies are very well-positioned for the future,” Danny says. “The reduced impact of quotas has helped to increase confidence among overseas investors. Increasingly, having a China strategy is essential for major international investors.”

A case for economic cooperation

You only have to examine the role China played in the recovery from the 2008–2009 global financial crisis to make a case for mutual economic cooperation, even if diplomatic foundations between China and a number of major Western countries remain fragile.

In 2009, with the US and European economies slumped in recession in the wake of the banking crisis, a US$586bn Chinese stimulus package provided a welcome boost to the global economy.

The West and China need each other to address global challengesBut the argument for mutual economic cooperation is not one-sided. Although China’s 2020 growth rebound shows it has weathered the Covid-19 storm well compared to other major economies, sluggish domestic growth, which predated the onset of the pandemic, has been a contributing factor to its declining rate of GDP growth (growth fell gradually year-on-year over the previous decade, from 10.6% in 2010, to 6.1% in 2019, according to World Bank data).

Elizabeth Economy makes a straightforward case for mutual cooperation: “The West and China need each other to address global challenges, such as climate change and pandemics, and to ensure global peace and stability. The West wants China for its market, investment opportunities, and to a lesser extent labour force. China wants the West for its market, investment opportunities, education, and technology.”

How will the conflict between strained diplomatic relations and China’s drive to open up its economy to Western investors play out? Max Zenglein says that although “China’s financial system is in the process of coupling with global markets”, its “party-led form of state capitalism” is set to “increasingly clash with Western views of competition and market mechanisms”. It remains to be seen whether common ground can be found over a mutual need to maintain and strengthen economic ties, particularly in light of a forecast of lethargic global growth in the post-pandemic landscape.