Investors worldwide are watching the two sessions as the political gathering takes place at a crucial time for China’s geopolitics and economy. The annual meetings come amid a bullish market and the final countdown to the US-China trade talks. However, as presidential tweets, growth targets and stock surges fill the news cycle, those trying to predict the future of China’s economy should also look at the story beneath the headlines.
This year’s growth target, announced by Premier Li Keqiang as 6-6.5 percent, is the figure markets are closely watching. The decision to adopt a target range is evidence of the government’s pragmatism amid uncertainties. It also reveals confidence and commitment to maintaining economic momentum as China shifts from quantity- to quality-oriented growth.
This rebalancing is well underway. While recent years have seen a gradual deceleration of remarkably rapid growth, China’s larger economic base means that absolute gains are more significant than during the earlier double-digit expansion periods. China will remain the leading contributor to global GDP growth, with its share expected to rise to over 28 percent by 2023, according to OECD projections.
By unpacking the GDP components, China’s changing role in the global economy is revealed. Exports as a percentage of Chinese GDP have decreased from 36 percent in 2008 to 18 percent this year. Today Chinese consumers and entrepreneurs underpin global growth with services and consumption accounting for more than 60 percent of the country’s economy. Such fundamentals drive what continues to be the best consumer story in the world, with rising Chinese imports creating opportunities for exporters everywhere.
Before the ongoing two sessions, much ink was spilled over the meaning of the spectacular $1 trillion Chinese stock rally in February.
We should not get too carried away with interpreting sentiment-driven swings in the stock market. At the same time, it is useful to examine the underlying causes of this urge and what it reveals about China’s journey of development.
First, the stock market gains were helped by the positive signals coming out of the US-China trade talks. By postponing tariffs and talking up a possible meeting with Chinese top leader, US President Donald Trump raised hopes that a deal can be reached.
Global markets recognize the importance of sound China-US relations. China is so deeply interwoven into the fabric of the global economy that any attempt to stifle market relations between the world’s two largest economies would have a negative impact, and not only for themselves but also for the world at large. This is a sign of how far China’s globalization has progressed since the launch of reform and opening-up four decades ago improved ties with the US. Investors, workers, and international consumers are hoping for an agreement to end the trade dispute and put China and the US on a course that allows them to manage competition and continued cooperation.
Second, the Chinese stock rally came after President Xi Jinping noted at a group study session of senior Party officials in February that China should deepen supply-side structural reform in the financial sector and strengthen the sector’s ability to serve the real economy. This reflects an important new era of reform and opening-up, one that will see services sectors open wider to promote growth and innovation.
This confidence boost has been reinforced at this year’s two sessions through a variety of new measures aimed at improving the business environment. This includes a major plan to reduce taxes and fees by $300 billion in 2019 to boost manufacturing and the private sectors, which now provides 80 percent of China’s employment. Investors will also watch the anticipated passage of the Foreign Investment Law, which promises to reinforce fair treatment of all foreign firms in China.
The third major reason behind the stock rally was the decision by stock index compiler MSCI to quadruple Chinese shares among its global benchmarks.
This move, which revealed the growing importance of Chinese stocks within global markets, caused significant movement of foreign capital into China’s stock market. As a result, overseas investors will come to play a larger role in the stock markets.
This extra capital and internationalization of China’s stock market may bring an added benefit. International investors will be drawn to the potential of long-term stocks. Such actions will help reward improvements in efficiency and corporate governance, contributing to the development of Chinese businesses. For these reasons, the MSCI adjustment represents a milestone for the development of China’s financial sector and the economy at large.
In the run-up to Mar-a-Lago and beyond, many investors and analysts speculating on China’s future will be swayed by market and the White House. During such periods of fluctuation and as the political weather changes daily, it is necessary to look beyond the headlines and to make sense of the larger development story.
The author is the president of the Center for China and Globalization, a Beijing-based non-governmental think-tank.
(In Association with Global Times)
