China’s new era: how directors should be responding

China’s new era: how directors should be responding

Mon, 11/12/2017 - 14:09
19th National Congress

STRENGTH: China’s new leadership team is deeply committed to maintaining high-quality economic growth. Photo: Xinhua News Agency

Foreign directors and investors face fresh opportunities and challenges as China’s economic and social reform drive gathers momentum under a new leadership team led by President Xi Jinping.

The 19th National Congress marks the start of President Xi’s second term in office.

His unanimous re-election as the Secretary-General of the Central Committee, and leader of the Politburo Standing Committee was never in question.

Premier Li Keqiang was also returned to the committee, where he and President Xi are joined by five new members.

The newly elected party officials’ government positions will be confirmed by the National People’s Congress at its annual meeting in March 2018.

President Xi delivered a report outlining his vision for China as it enters what he calls “a new era of socialism with Chinese characteristics”.

First, China will continue to target a steady rate of economic growth to achieve modernisation by 2035, and to become a “great modern socialist country” by 2050.

Central to this strategy is China’s ability to manage key risks, including financial instability and pollution.

Second, China will develop robust drivers of high-quality economic growth. China will deepen supply-side structural reform in the real economy, by creating a modern manufacturing powerhouse operating at the high end of the global value chain, developing high-end consumption, innovation, and increasing the use of green technologies.

Finally, China will address issues of unbalanced growth and development to provide a “better life” to all individuals.

The Communist Party of China recognised that this would require material and cultural growth, as well as improvements in democracy, the rule of law, justice, security and the quality of the environment.

More important than the deals announced during the meeting between President Xi and US President Donald Trump earlier this month were assurances from President Xi that China would become increasingly open and transparent in dealing with foreign companies and China’s Belt and Road project.

Specifically, the Chinese Foreign Ministry confirmed China would substantially reduce barriers, including in the banking, insurance and finance sectors, and the automobile sector.

This builds on the announcement of a “negative list” approach earlier this year. Under this framework, foreign direct investment into any industry not listed in the negative list only requires an online record filing, as opposed to prior approval on a case-by-case basis.

Directors should expect further announcements about the timetable for reforms, actively consider the opportunities deregulation may bring and identify prospective Chinese partners who they wish to pursue relationships with.

The 19th National Congress recognised the need for reform to address risks prevalent in Chinese financial markets.

Stability has been threatened primarily by weak lending standards, which have resulted in China’s overall level of debt rising to more than 250 per cent of GDP by the end of 2016.

Policymakers created the Financial Stability and Development Committee in July and, more recently, the Chairman of the China Banking Regulatory Commission committed to curb off-balance sheet government debt and over-lending to property developers.

Another contentious issue for investors has been currency restrictions and challenges remitting profits from China businesses offshore.

Following the end of the National Congress the restrictions are likely to be relaxed gradually. Indeed, Zhou Xiaochuan, the governor of the People’s Bank of China, indicated during the congress that market intervention would be reduced.

Investors will rightly ask where they can find the greatest returns on their capital. In the following three areas investors are likely to experience the greatest opportunities:

1. Leveraging Western technology and expertise.

China’s transformation into a “great modern socialist country” will require a modernised economy. While the promotion of domestic innovation will undoubtedly be a focus, increased deregulation will provide a great opportunity for the uptake of Western technologies and expertise, including in industries such as advanced manufacturing, clean energy and other green technologies.

2. Satisfying the demand of Chinese consumers.

Essential to President Xi’s “Chinese dream” of bringing benefits to the people is the availability of high-quality consumer goods and services in the domestic market.

As the Chinese middle class grows and incomes increase, demand for the high-quality products that Australian businesses can offer will remain strong.

E-commerce may be an attractive method of entry for Australian businesses, in light of the 12 new cross-border e-commerce specific Free Trade Zones (FTZs) in 2016.

The FTZs will enable access to more flexible investment and financing structures, but investors also need to be aware the investment environments of the FTZs can change rapidly.

3. Emerging trends and needs.

The rise in the size of the Chinese middle class is continuing to result in significant demand for tourism, education, healthcare and aged care services – industries which are the subject of reform, and where there are significant opportunities for foreign investors.

The conclusion of the 19th National Congress and President Trump’s visit in no way marks an end to China’s economic reform program.

China’s 13th Five-Year Plan outlined the necessary changes to transform China into a high-end manufacturing economy and to encourage investment into service industries.

In the future, China is likely to implement more reform to nurture innovation and entrepreneurship, and to allow market forces to play a greater role in efficiently allocating resources within the economy.

Directors of companies with expertise in relation to technology, digital innovation, services, investments, and in the financial and capital market sectors in particular should assess what opportunities the reform program will mean for them.

With sufficient fact-based preparation, patience and the right relationships, doing business with China is likely to become even more rewarding.

• Martyn Huckerby is an International Partner in the Corporate Group of the Shanghai office of King & Wood Mallesons, where he specialises in corporate, regulatory, competition/antitrust and telecommunications law.

Intan Eow is a senior associate in King & Wood Mallesons' Corporate Group in Sydney.