China’s learning curve on financial services

IT is important to reflect on how far China has travelled, where it currently stands and where it plans to go next, says Stuart Gulliver, Group Chief Executive of HSBC, in an address to a China Conference in Sydney. Excerpts:

SO FAR, reform (in China) has been focussed on three broad areas, says Stuart Gulliver.
“By promoting the renminbi as a trade currency, China has used its trade strength to integrate the renminbi into the global financial system. Trade has been used as a mechanism to do this.
“By opening swap lines and growing the offshore market, it created the means for investment exchange to take place.
“And by releasing controls on two-way
investment flows, it started the process of aligning onshore and offshore markets, and opening up the capital account to make the renminbi fully convertible.”
“All of this has been designed to ease the transition of China’s economy to a more sustainable state.
“Because for years, China relied on exports and State-led investment to power GDP growth, but it is now focussed on developing a more services-oriented, higher-tech economy driven by domestic consumption with far less of a polluting impact on the environment.
“It is moving from an economy built on the power of the State to one increasingly supported by the private sector, and it is trying to do this while unwinding and reducing reliance on local government debt and shadow banking, and simultaneously developing its capital markets.
“The move to introduce greater market influence into the value of the currency marked the start of the next stage of the programme to reduce State control of the financial system.
“It is also important to understand not just the outcome of individual reform measures, but also the motivation.
“China is reforming with a clear purpose. In particular, it has aspirations to develop its economy around two major priorities.
“The first is better use of overseas direct
investment. “During the first stage of reform, much of the focus was on reducing restrictions on investment into China. This openness to foreign investment – and the ideas and technology that it brought with it – was one of the main reasons for rapid economic development.
“In this next stage, China has started to
facilitate capital going out as well as in. In 2014, China accounted for more than 13 per cent of global GDP, but China’s overseas direct investment accounts for less than eight per cent of the world’s total ODI. Yet this is beginning to change, and it is pretty significant.
“In 2014, overseas direct investment grew by nearly 16 per cent. And nearly 60 per cent of China’s ODI is now denominated in renminbi, which is up from 15 per cent in 2013. And in 2014, China’s ODI surpassed its non-financial FDI for the very first time.
“This is striking for two reasons.
“First, it indicates that China’s capital flows are moving increasingly naturally in both directions. Second, China’s policymakers are not just content to let it happen, but they are actively encouraging it.
“Beijing realises that greater outflows are necessary to bind China more tightly into the global financial system and to strengthen links with its economic partners.
“Liberalisation of finance rules, private sector guidance and targetted use of foreign exchange reserves for overseas investment are all geared to expand opportunities for Chinese firms wishing to invest abroad. China is also supporting its companies going out, thereby increasing their appetite for joint ventures, technology transfers, brands and resources.
“The pattern of China’s ODI is increasingly diverse. As China’s ODI grows and matures, it is likely to become more diversified both by sector and by geography.
“Finance and energy are still the primary target sectors, but firms are increasingly diversifying into agriculture, consumer goods, professional services, technology and real estate.
The “Belt and Road” initiative launched by President Xi aims to increase infrastructure
capacity in strategic trade markets and
increase connectivity between regions.
“This initiative will be a powerful driver of
export demand in China’s most competitive markets and even greater trade flows between China and its partners. Countries along the land and sea routes that form the “Belt and Road” actually account for 63 per cent of the world’s population and 29 per cent of global GDP…
“…and the China Development Bank
estimates the value of planned cross-border co-operation projects is already US$900
billion.”