The yuan has slipped past the euro to become the second most used currency in trade finance after the U.S. dollar. We are indebted to SWIFT, the financial transaction services company, for this piece of intelligence. Its data is for October. It is a vindication of China’s push to make the currency more reflective of China’s position as a global trading power. However, the dollar still accounts for four out of every five dollars financing global trade, while the yuan accounts for barely one in twelve. In terms of all payments, the yuan ranks twelfth with a less than 1% market share.
Tag Archives: China
There is a long tradition of sailors on aircraft carriers parading on deck in a formation that spells out messages. This Bystander recalls visiting U.S. carriers even doing it in Japanese characters on visits to Japanese ports. The crew of China’s first aircraft carrier, the Liaoning, has now joined this naval tradition, as witnessed by this undated photograph that has appeared on some state media web sites. The message is seems fitting — “Chinese Dream”.
Is this the committee for ‘comprehensively deepening reform’ that came out of the Third Party Plenum? Or at least its vanguard? A group of 28 senior officials, including ministers, vice-ministers, and provincial party bosses has met under the chairmanship of propaganda chief and Politburo Standing Committee member Liu Yunshan. State media say the committee is charged with promoting the reform plan put forward at the plenum, and will start a tour of the country to that end at the end of the week. It comprises a lot of heavyweights just for a PR push.
Liu is a protege of former President Hu Jintao and similarly comes out of the Party’s Youth League, the faction of its career officials. That should aid him in coordinating reforms, if that indeed is his role, across the many agencies of government at national, provincial and local level, all of which have great scope to be obstructionist where they feel their interests are at risk. Liu’s team appears to be reporting to President Xi Jinping. If this is indeed going to be steering committee for reform, putting of it under direct presidential report is another example of how Xi is centralizing power and thus tightening his political control.
Most developed countries have done it, and now so will China — boost GDP growth through an accounting change. The National Statistics Bureau says wants to use market values for assets such as land and property values when calculating gross domestic product. It also says it wants to bring its calculations more in line with international practice. That most likely means that research and development and other intangible assets will no longer be regarded as a mere expense, but will be transmogrified into an investment.
The instant effect will be a one-off jump in the GDP number. It is hard to know by how much without knowing more of the accounting detail but it is likely to be material. R&D spending in China reached 1 trillion yuan ($64 billion) in 2012, equivalent to 2% of its gross domestic product, according to state media.
It is, though, a change to be welcomed, and one a U.N. working group to set an international standard for GDP accounting agreed in 2008. The U.S., Canada, Australia and U.S have already made or are making the change on intangible assets. Europe will, too, next year.
GDP is a creature of the manufacturing economy, a measure of an economy’s hard output of goods and services. It is less good at capturing the intangible economy that is coming to represent more and more of the value created though innovation and creativity in the economies of the 21st century. Intangibles include not just R&D but also patents, copyrights, trademarks, designs, cultural creations, and business processes.
When the U.S. made the change in the middle of this year, which in its case also included counting creative works such as films and books as long-lived assets, it provided a one-off jump in GDP of 2.7% (in raw data terms, the equivalent to adding an economy the size of Belgium). When new definitions are introduced, past estimates of GDP get re-stated so percentage changes in GDP are only slightly affected. But they do capture something of the changing nature of an economy. Restating the U.S.’s historical GDP numbers using the new definitions raised annual economic growth between 1959 and 2007 to 3.39% from 3.32%. In more recent periods the difference has been higher, an 0.17 percentage points difference in 1995-2001 and an 0.12 percentage points difference from 2002 to 2007.
The first steps in the long, hard slog to implement giving markets a “decisive” role in China’s economy have been taken with the publication of a raft of detailed measures that flesh out the communique issued after the Third Party Plenum. While easing the one-child policy and ending labor camps are grabbing the international headlines, the overwhelming majority of the measures directly affect the economy. These include:
- moving ahead with interest rate liberalization, establishing a bond market and further opening capital markets;
- speeding up moves towards full capital-account convertibility;
- allowing privately-owned small- and medium-sized banks to open up the banking system and bring some of the shadow banking system into the mainstream;
- moving towards market-pricing of water, oil, natural gas, electricity, telecoms and transport;
- raising the remittance of profits from state-owned enterprises to central government to 30% from the current zero-15%;
- requiring state-owned enterprises to diversify their ownership and allowing private investment in joint ventures with state-owned enterprises and letting employees of mixed-ownership enterprises hold shares in those companies;
- strengthening protection of intellectual property rights (IPR), including possibly setting up an IPR court;
- property tax reform;
- giving farmers more property rights and hastening the loosening of “hukou” or residency permit system by scrapping it in small cities and townships and then gradually eliminating it middle-sized cities.
These are all areas where the party leadership has forged a broad political consensus, though within each there are still considerable differences between reformers and conservatives to resolve. The dual mandate that came out of the plenum — giving markets a decisive role and strengthening the role of state enterprises — gives both sides a rallying call for their cause. There is plenty of scope for backsliding as those various ideological and political struggles are fought out. Such a transformative economic to-do list carries political risks for President Xi Jinping and Prime Minister Li Keqiang. They will move cautiously, and the various fronts of the reforms will move at different paces.
China’s leaders resorted to the old management technique for dealing with broad and deep differences: kick the issue to a sub-committee. The Party’s Third Plenum agreed to set up a working group to co-ordinate “comprehensively deepening reform” — which had, after all, been the meeting’s main agenda item. The questions now are who will comprise this working group, and how much power it will have within the sprawling network of Party and government organizations to knock heads together to ensure consensus over setting policy and getting it implemented at state and local levels.
As the communique issued after the plenum pointed out, “the core issue is to straighten out the relationship between government and the market”. The task is double complicated by the plenum’s dual mandate of giving markets a “decisive” role in the economy while “unceasingly increasing the energy, control, and influence of the state economy” — that mandate serving as a proxy for the balance of power between the reformers and the conservatives.
Upgrading markets’ role from a “basic” to a “decisive” one is a significant advance by the reformers, but the lack of a more detailed, let alone bold plans for reforming the public sector is a marker of the entrenched power of the big state-owned enterprises including the banks. The areas that were highlighted for reform — fiscal and tax reform, unified land markets, a sustainable social security system, and rural property rights — are all more directly functions of government and thus more directly amenable to Party and central government discipline.
Elsewhere in the economy, President Xi Jinping and Prime Minister Li Keqiang will have to open up cracks for private and foreign firms to let markets be more decisive in the hope that that will chip away at state monopolies. One place to start is financial services. Loosen state-owned enterprises’ grip over domestic financing and give international markets more power though opening up the capital account and the rest — eventually — will follow.
The four-day behind-closed-doors Third Party Plenum has got underway. The agenda is known well-enough: the next phase of China’s economic reform to put growth on a more sustainable path— “unprecedented” changes, according to Yu Zhengsheng. The desired outlines have been sketched in the State Council’s Development Research Center blueprint known as the the 383 plan.
The first three is the actors — market, government and corporations — the eight is eight sectors that will be center stage — finance, taxation, land, state assets, social welfare, innovation, foreign investment and governance — and the final three is three bundles of high-priority policies, notably lowering entry barriers to financial markets, providing basic social security services to citizens, and allowing collective lands to be bought and sold, which implies a big change in ownership rights. (Caixin provides the summary appended below.)
Some of the 383 plan is specific and detailed, such as ending government-set prices for oil products. Other parts are broader brush, such as turning some state-owned enterprises into sovereign investment funds to pay for public services.
The big unknowns are first how much the leadership can get agreement on, and against what timeline; and second what degree of resistance both during the meeting and after will be put up by the vested interests in local government and state-owned corporations and banks that potentially stand to lose the most from moving away from the infrastructure investment-driven state capitalism of the past three decades.
We don’t expect much by way of detail to emerge during the meeting, or necessarily at the end of it. We do expect an end-of-meeting declaration of unity and a rallying cry to deepen reforms comprehensively. The loftier the rhetoric probably the less the agreement of detail.
Eight Key Sectors
The two newly released manufacturing surveys confirm the gradual reversal of the recent slowdown of China’s economy. The official Purchasing Managers’ Index reached an 18-month high of 51.4 in October. The HSBC/Markit final PMI for the month rose to a seven-month high of 50.9. A reading above 50 indicates expansion in the manufacturing sector, while a reading below 50 indicates contraction.
The key difference between the two is that the official PMI, which is weighted more towards bigger and state-owned enterprises, showed continuing weakness in new and export orders. That was less apparent in the HSBC/Markit survey, which is weighted towards smaller and private-sector firms. The question the difference poses is, how strongly will the momentum of the recovery carry through the rest of the fourth quarter. Strongly enough, we would hazard, for GDP growth to at least meet the official target of 7.5% for the full year.
What is a Party plenum?
It is a high-level meeting of the broad leadership of the Chinese Communist Party. In attendance are the Politburo’s Standing Committee, the inner sanctum of Chinese power, currently seven strong, plus the some 200 members of the Central Committee, which is the level of power one rung below the Politburo. Committee members will also be the occupants of the most important state and government positions.
How often are plenums held?
Typically for four days every year in October during a Politburo’s five-year cycle, though they tend to be front loaded, which effects the timing. The current Politburo took over in November 2012, when its first plenum elected the key Party leaders; Xi Jinping was named as Party general secretary and chairman of the Central Military Commission then. He and Li Keqiang were appointed to the lesser state posts of president and prime minister at the second plenum in February this year.
What is significant of third plenums?
These are the big policy setting meetings for a Politburo’s term. Deng Xiaoping announced China’s opening to the world at a third plenum in 1978 and Zhu Rongji introduced the idea of a socialist market economy at a third plenum in 1993 — as state media have been reminding their audiences incessantly. That is setting up this one to be of the same scale of importance. Xi and Li are expected to advance a sweeping proposal for economic reform to rebalance the economy, starting with financial markets reform and boosting the private sector.
Anything to be read into a November rather than October date for this third plenum?
Nothing beyond the complexity of preparing a reform package on the scale being mooted, squaring away vested interests, and the need to consult more widely than usual on how to implement it as the reforms will touch on such widely disparate areas of the economy.
How detailed will be the action plan coming out of the plenum?
The plenum sets Party policy. The government then has to come up with the detailed policies and priorities that puts the broad strategy into practice. That is somewhat similar to the five-year plans. It is also a somewhat deductive process. The plenum is unlikely to produce either a blueprint for reform or a timeline. It more sets the overall direction and indicates what broad reforms have had political sign-off.
What are the key signposts to that direction?
- Get the private sector out from under the shadow of the big state-owned enterprises;
- Accelerate financial reform, particularly interest-rate liberalization, regulation of shadow banking, and greater internationalization of the currency;
- Open up hitherto largely protected sectors such as energy, finance and telecoms to more international investment in order to improve their innovation and international competitiveness.
- Lessen market distorting subsidies for power and other resources;
- Reform local government financing to make it less dependent on land sales, and the corruption-plagued market distorting investment they encourage;
- Relax the hukou system of household registrations to support the policy of urbanization, which is seen as critical to rebalancing the economy towards domestic consumption.
These are all interconnected. For example, reform of local government finance will mean developing a municipal-bond market which will require financial-markets and foreign-exchange reforms to be fully effective.
Any chance of political reforms.
No. The new leadership is making a point of positioning its reforms as a continuation of those of its predecessors. Even though political reform seems to many to be the inevitable consequence of the economic reform path China is taking, the Party is kicking dealing with that day as far down the road as it can. Xi has been talking of the Chinese dream as an echo of the American Dream and creating a moderately prosperous society. All is being kept within an economic frame of creating a better standard of living for Chinese. That is the premise the Party’s claim to a monopoly on political power rests.
Where are the points of resistance to economic reform?
Xi has interwoven his anti-corruption campaign and strictures against official extravagance with his message of the need for deep economic reforms. That has mostly gone down well with the broad public and put local and provincial officials and some in the big state owned enterprises who could be expected to be resistant to change on the defensive. That is not to say there doesn’t remain substantial pockets of resistance to change from those who would potentially lose out. The leadership is hammering a message of both the necessity and inevitably of reform. At the recent World Economic Forum meeting in Dalian Li said, “China is now at such a crucial stage that without structural transformation and upgrading, we will not be able to sustain economic growth.”
How quickly will reform happen?
Some big (and profitable) state owned industries and provinces and municipalities are powerful commercial players now in their own right. They have the potential to be roadblocks to reform. Xi recognizes the risks of reforming them from the top down so seems to be pushing changes from the bottom up and side in that will require them to adapt to a new economic environment, but to be able to prosper by doing so. The internationalization of the yuan is an example of that process at work. But it also an example of how Xi’s approach will take many years of incremental change to take effect. But that might prove more effective in the long-term than hammering through change using political clout.
Who are now the key figures in pushing reform?
Xi and Li, who as prime minister is in charge of the economy, are the political prime movers. There has been a consensus among the very highest levels of the leadership for some years that China’s economy will need to move in the direction being advocated. Xi and Li would not have been able to assume the leadership had that not been the case. Among the key technocrats backing them up are central bank governor Zhou Xiaochuan, long-time proponent of reform, and Liu He, the new deputy director of the National Development and Reform Commission. Liu was a central figure behind the publication of the report the World Bank issued last year calling for the reform of state-owned monopolies and warning of China’s risk of being caught in the ‘middle income’ trap which would leave it unable to make a Japan and South Korea-like transition to being a developed economy. Liu has drafted the economic reform speech Xi give at the Plenum.
As the Party heads towards its November plenum on deepening economic reforms the question that comes to the fore is whether China’s elites can benefit from rebalancing the economy in the way they have done from the three decades that followed the opening up of the economy after 1978.
High levels of Party/state/government controlled investment, access to cheap credit, and soaring asset prices, particularly real estate, created fortunes for the politically powerful. And not just for the political leadership but also, crucially, for the military. The focus of the next wave of reforms, which includes eliminating unproductive investment through the more efficient allocation of capital, providing more opportunity to not especially well connected small and medium sized businesses, and favouring the consumer interest over that of the (typically state-owned) producer is not obviously to the existing elite’s personal advantage — even if the rebalancing collectively enhances their long-term chances of retaining their grip on power.
That trade-off is certainly understood — and accepted as essential—at the very top of the leadership — and has been for some years; remember Wen Jiabao wittering on about it to anyone who would listen in the last half of his prime ministership. How far down the pecking order that understanding now goes is moot.
Yet even assuming that the need for reform is widely accepted, how it is implemented is something else again. Who among the elite gets to bear the costs of change and in what proportion? The reality is that the state-owned pie than can be shared out to buy off opposition to reform is going to shrink because state-owned enterprises are going to have to bear the brunt of the adjustment. Ally that with a natural instinct of elites to be fearful of change, particularly institutional and technological change that threatens the status quo, and the potential brake on reform could be powerful.
That is not to say that either institutional and technological change won’t force political change, or that change won’t be imposed from the top assuming the power is there to do it — vaulting China into the ranks of rich countries is a powerful motivation for the new leadership for so many reasons — or, on the other side of the ledger, that there is even common cause among the ‘vested interests’ that are at risk of losing out when it comes to blocking particular pieces of reform. The process could be ugly, especially when viewed from outside the country, or even from outside the narrow confines that the various overlapping factions of China’s elite inhabit.