In a recent event, our founder and CEO Ting Zhang was joined by three distinguished experts Shirley Ze Yu, James Kynge and Steven Lynch to discuss their perspectives on what is happening on the ground in the region in relation to policy changes and opportunities for foreign investment.
China’s economic shifts and growth strategy
Shirley Ze Yu, a leading voice for China’s political economy, addressed the recent major economic shifts seen in China.
At this year’s congressional session, in addition to the launch of China’s 14th five-year plan, China has established a Long Vision 2035. Within the Long Vision it says that China aims to double its GDP over the next 15 years, between 2020 and 2035. Even though China already had a large economic base in 2010, it was able to double its GDP from 2010 to 2020 and now, if it were to double GDP again from 2020 to 2035, China would effectively be quadrupling its GDP across the 25 years span between 2010-2035,
In 2020 China also adjusted its economic growth theories. Firstly, the Dual Circulation Economy places domestic economic circulation (supply, distribution, and demand in the supply chain cycle) as the main pillar of China’s economic growth going forward. This reduces the role of international economic circulation as a facilitator of China’s future economic growth. Previously China’s economy relied heavily on labour intensive industries which only accounted for a minor contribution to China’s economic growth. Now that China is operating a technology and data led economic model in its strife for self-reliance, its previous capital-led investment model is increasingly inefficient and has a diminishing return on leverage for future economic growth.
The second major economic shift was announced by President Xi Jinping in August, driving for “common prosperity” and wealth redistribution. China’s history shows an evolution from a global proletariat society under the Mao era, to letting ‘some’ people become rich in the Deng Xiaoping Era, to the current day which shows another reform being led by Xi Jinping for prosperity by some to become prosperity by all. There are still around 560 million Chinese people who are living with an income of less than $150 a month and so the goals of achieving common prosperity and long-term sustainable economic growth in China can only become a reality through revitalising the rural regions of China.
The final major growth driver for China is the call for carbon neutrality by 2060. China is the world’s largest renewable energy investor and is monopolising the renewable energy supply chain, owning 70% of global solar modules and Chinese manufacturers being responsible for 65% of the new wind capacity globally. We are therefore looking at a multiple trillion-dollar industry being created in China in the renewable energy space, leading to significant economic opportunities in this sector.
What is behind the blizzard of new regulations
James Kynge, the Global China Editor of the Financial Times, highlighted the ‘veritable blizzard of new regulations’ currently being announced in Beijing, to redraw its social contract. These regulatory changes are leading to the most consequential changes in the way China has been run since 1979. They have arisen as a response to great pressures felt by China, especially in relation to the geo-political tensions between the US and China which began in 2019.
A lot of the changes we are seeing in China right now have arisen due to the Communist Party declaring they were entering a ‘New Era’. China’s Communist party works on a set of principal contradictions which are the template for its developmental phases. The most important one was set in 1981 which emphasised the acceleration of economic growth, however Xi Jinping put through another principal contradiction in 2017 which called for “common prosperity” and the reduction of inequalities. Despite the social inequality that exists in China, with over 600 million people living off less than $150 a month, it is also home to more billionaires than any other country in the world. The second contradiction is dual circulation, for less reliance on foreign markets, money and investors.
Xi Jinping has been promoting family values in part to encourage families to curb the plunging birth rate in China. China’s recent regulation crack downs on things like after-school tuition and video games can be closely linked to this issue as families feel the financial and emotional pressure when it comes to raising their only child, thus acting as a barrier from having further children in the future.
China has also recently made important developments in terms of their laws and regulations about data, with 19 new pieces of legislation on data coming into effect by the end of 2021. It is shoring up its data security, and this is all linked to dual circulation. Any company, whether Chinese or foreign, that generates data in China must keep that data within China. However, Chinese companies that list abroad attract foreign investors by showing them data, and these new laws create a barriers in making this data accessible. The impacts of these regulations will therefore be felt significantly by the 248 Chinese companies that are listed in America, worth approximately US$2 trillion. Foreign companies that operate in China, as well as Chinese companies that list overseas will need to adapt to this new regulatory era in order to operate in their respective regions.
Opportunities and concerns on the ground
Steven Lynch, the Managing Director of the British Chamber of Commerce in China, offered a different perspective from on the ground in China, closely looking at the sentiment survey of British businesses in China to highlight the key opportunities and concerns that remain in this market.
China handled the Covid pandemic in an extreme way, which resulted in an immediate blow for businesses, but also led to a fast economic rebound through 2020. This has meant that Q1 in 2021 has seen increased investment into China, and therefore British businesses in China remain optimistic. The sentiment survey showed that over 44% of companies were still optimistic about the China market, half were neutral and very few were pessimistic, meaning optimism is still relatively robust.
The concerns that were brought to light through the sentiment survey very much reiterated what Shirley and James already mentioned: the geopolitical tensions between China and the world, the difficult and uncertain regulatory environment, and the obstacles to business travel due to China’s ‘no Covid’ policy.
However, the main driver behind the optimism that remains for the Chinese market is the potential that it holds. With 1.4 billion people living in different provinces, China represents a huge opportunity for UK businesses, and with the 14th five-year plan providing more clarity to investors, it is an opportunity that is continuing to outweigh the concerns.
The panel went on to discuss the future regulatory outlook and areas of opportunities in China and the rest of Asia.
The current and future regulations in China
The after-school education sector has been an unregulated sector for a long time, for both academic and vocational education companies. However, when it comes to the double reduction law, which impacts curriculum-based K-12 education sectors more specifically, education companies have sought out new opportunities in the market. If the educational companies are more focused on quality or skill-set training, they can avoid the barriers that the double reduction policy has created. Chinese companies have also found loopholes in the regulations, for example holding curriculum classes for parents, but allowing them to bring their children.
Although the regulations to the education sector came as a surprise for some, Shirley stated it is possible to predict which sector is next by keeping on top of the news in China. China tends to follow the pattern of piloting new regulations in Beijing and/or Shanghai before progressing to nation-wide implementation of these laws. Our experts believe that the next industries to watch for stricter regulations are the plastic surgery industry, the online insurance industry, and the broader healthcare industry.
China’s capital market and other areas of opportunity in China
Despite the increasingly difficult regulations to navigate in the Chinese market, there are still bright spots to consider when investing in China and Chinese companies. The financial service sector in China is worth US$40 trillion, as well as the sustainable energy sector providing significant opportunities for foreign direct investment. China has set up a Beijing stock exchange whilst simultaneously onshoring a lot of their companies. The number of unicorns in China is at the same level with the number in the US which is a good indicator of the vitality of the Chinese economy, also providing little incentive for China to allow these companies to be listed abroad again. China will therefore be keen to attract global capital into China to finance these unicorns.
The rest of Asia
Other Asian markets may also provide better opportunities for the rest of 2021 and 2022. For international companies looking to do business with Asia Pacific, the Belt and Road Initiative remains very relevant. One of the major pushes of the Belt and Road Initiative is digital connectivity across Asia Pacific and the Eurasian continent. ASEAN also became China’s largest trading partner in 2020 and grew by a further 23% in the first half of 2021, deepening the integration of the supply chain between China and ASEAN countries.
South-East Asia is a particular bright spot for foreign investment, producing all kinds of new start-ups and around 25 unicorn companies. When looking at Thailand, Malaysia and Singapore, Chinese companies including tech giants Alibaba and Tencent are investing in their start-ups like Grab (which raised US$40 billion recently), Talk and Lazada. This therefore means that not only is there digital connectivity with these regions, but also Chinese capital flow into these regions.
Whilst countries in South-East Asia pose significant opportunities for foreign companies, evolving regulations in these countries cannot be overlooked. Foreign companies looking to invest in this region must consider the risk profile of each country. Afterall, ASEAN is made up of 10 different countries and 600 million people, so any investment decision into Asia needs to be considered on a country-by-country basis.
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