During the 4th Bertelsmann Foundation on April 19th, in cooperation with China Daily, the Bertelsmann Foundation and Financial Times hosted a conversation between Charlene Barshefsky, Senior International Partner of Wilmer Hale and former U.S. Trade Representative and Ma Weihua, President and CEO of China Merchants Bank. The honored guest, Mr. Ma, has held high-ranking government positions within the Liaoning Province Planning Economy Commission and the Office of Anhui Provincial Government, and previously served as Director of the general office of the People’s Bank of China and the State Foreign Exchange Regulatory Bureau. That said, Mr. Ma’s role in finance sector reform in China cannot be overlooked by any means.
The discussion focused on three topics:
1. Development Reform in China
2. Finance Sector Reform in China
3. Foreign Direct Investment (inbound and outgoing) in China
Recently, there has been a shift in China’s Development Model. In previous years, there was a 10 percent annual growth rate, but will it continue? As the world grapples with an economic recession, there is less demand for China’s exports and it is prudent to shift strategies. In fact, in the first quarter of 2012, China’s Gross Domestic Product (GDP) growth was expected to drop to 6-7%. In addition to a narrowing trade surplus ($183.1 billion in 2010, down to $21.6 billion in December 2011, $5.35 billion in March 2012),
In January 2012, Deutsche Bank projected in a report that China’s economic growth would be 8.3%, and that the Chinese economy would decelerate in the first quarter of 2012. Ma Weihua compared the slowing down of China’s economy to turning a car- you must slow down to turn safely and effectively. The goal now is to slow down growth and shift the focus onto China’s domestic market through internal development, and fostering wealth accumulation and consumption. This will be accomplished through a combination of finance sector reform, development reform and greater foreign direct investment (inbound and outgoing) in China. One way was to increase the terms for Chinese savers and raise interest rates on invested capital in synthesis with the general liberalization and marketization of interest rates and exchange rates.
Moreover, the rapid rate of depletion of natural resources necessitates a slowdown in manufacturing. As Mr. Ma said, “quality over quantity.” In the context of a global economic recession, China’s previous reliance upon exports for growth no longer makes sense, said Mr. Ma, because there was an imbalance- China was producing and exporting goods and the West was consuming and saving very little.
Furthermore, the composition of China’s labor force is shifting. Changing labor markets demand updated skill sets and knowledge, which requires investment in training and education. In October 2011, the Financial Times reported that China’s labor costs soared as wages increased 22 percent. This means that China now has the third highest labor costs in Asia, after Malaysia and Thailand. In the past, inexpensive labor was one of the advantages that made Chinese businesses more competitive, but this is changing.
Foreign Direct Investment:
Beijing has set a goal of $120 billion in FDI inflows for each of the next four years. Outbound FDI rose 94.5 percent in the first quarter compared to outbound FDI in the first quarter of 2011, which amounted to $16.55 billion. For those interested, Bertelsmann Stiftung and the China Center for International Economic Exchanges (CCIEE) have published a report entitled “Cash in Hand: Chinese Foreign Direct Investment in the U.S. and Germany” which is available on the Bertelsmann Foundation’s website. The report, written by Ting Xu, Thieß Peterson and Tianlong Wang, offers a comparative analysis of Chinese foreign direct investment in Germany and the U.S., and finds greater investment in Germany, which offers lower labor costs and tax advantages compared to the U.S.’ restrictive FDI controls.
In summary, China is reforming its policies regarding development, the finance sector and foreign direct investment. As Beijing shifts from an primarily export-based growth model, and focuses inwardly on domestic markets, finance sector reform will be essential to fostering wealth accumulation and consumption. Additionally, as China’s trade surplus shrinks due to slowed manufacturing in response to lowered global demand for imported Chinese goods, the manufacturing industry is expected to focus more heavily on the quality of its consumer goods rather than the quantity. Overall, liberalization and marketization characterize the reforms to the world’s second-largest economy.