Business
China's growth prospects in the coming years will bring more opportunities for foreign investors
By Yu Shujun  ·  2021-02-24  ·   Source: NO.7-8 FEBRUARY 18, 2021

Workers assemble a vehicle in an automobile factory in Changchun, capital city of Jilin Province in northeast China, on February 2 (XINHUA)

The Chinese economy, with its growth reviving to 6.5 percent in the fourth quarter of 2020, is on track to a full recovery from the pandemic this year.

The International Monetary Fund projected that China's economy will grow by 8.1 percent in 2021, according to its latest World Economic Outlook Update released on January 26.

Hu Yifan, chief China economist of UBS Wealth Management, is even more optimistic. China's GDP growth this year could rebound to around 9 percent due to a low base in 2020, Hu said at the Forecast of China's Economy for 2021, a recent online discussion hosted by the National Committee on U.S.-China Relations.

Hu added that since the pandemic has been largely controlled in China, consumer confidence is gradually picking up. The Chinese economy will return to the path of rebalancing toward a more consumption-led growth.

China's GDP growth may then normalize to 5-5.5 percent, entering an era of medium-speed growth, according to Hu.

China aims to become a moderately developed country by 2035, as indicated in the proposals for formulating the 14th Five-Year Plan (2021-25) for National Economic and Social Development and the Long-Range Objectives Through the Year 2035.

For the long-term goals, the major growth drivers will be the dual circulation strategy, urbanization 2.0, technological self-sufficiency and green economy, Hu said.

Yao Yang, Dean of the National School of Development at Peking University, agreed, saying that urbanization 2.0, technological independence and a robust supply chain, as well as mitigating climate change are three major directions that will reshape the Chinese economy in the next five to 15 years.

Huang Yiping, Director of the Institute of Digital Finance at Peking University, noted that a reform of the financial sector can create a positive outlook for the next five or maybe 30 years.

Among the growth drivers, the focus on technological independence is mostly prompted by U.S. sanctions on hi-tech exports to China. Huang pointed out that to support growth over the next five to 15 years, what China needs is a real improvement in the existing level of technology like in the manufacturing of electronic products and automobiles, which China has been doing well so far. "But the big question is if it can continue in light of the external environment which is becoming really hostile. There is a potential risk there."

Despite that, the panelists agreed that China's urbanization and green drive as well as financial reform and opening up will bring more opportunities for foreign investors.

"More sectors will be open, especially [those] highlighted in the Sino-European bilateral investment treaty, and also in the RCEP [Regional Comprehensive Economic Partnership]," Hu noted. They include transportation, telecommunications and auto sectors. China will also open some service sectors, especially healthcare.

Urbanization 2.0

China's urbanization has been progressing for more than 40 years, with an average annual growth rate of about 1 percentage point, Yao said.

According to data from the National Bureau of Statistics, the urbanization ratio had exceeded 60 percent by the end of 2019. But it's still far below the 80-percent level of developed countries.

The pace will probably accelerate in the next 15 years, Yao said, estimating that more than 200 million people are going to move to cities.

Morgan Stanley projected in a 2019 report that China's urbanization ratio could increase from 60 percent to 75 percent by 2030, translating into 220 million new urban dwellers. Half of these inhabitants would settle in five super-city clusters, i.e. Yangtze River Delta, Beijing-Tianjin-Hebei Area, the Guangdong-Hong Kong-Macao Greater Bay Area, Mid-Yangtze River Area and Chengdu-Chongqing Area.

In their latest report published on January 29, Morgan Stanley predicted that China's private consumption is set to reach $12.7 trillion by 2030, about the same as that in the U.S. Further expansion of urban areas is among the major factors spurring this growth.

Green economy

President Xi Jinping announced last September that China would peak carbon dioxide emissions before 2030 and achieve carbon neutrality before 2060.

At the Climate Ambition Summit held last December, Xi further announced that China would lower its carbon dioxide emissions per unit of GDP by over 65 percent from the 2005 level and increase non-fossil fuels' share in primary energy consumption to around 25 percent by 2030.

These would have major investment implications for renewable sectors, according to Hu.

Yao said that the government is going to make policies to reach those goals, such as improving carbon tax, carbon trading and green finance policies. China will also see a boom in the electric vehicle sector.

Since 2016, China has launched a series of green finance instruments, including bonds, loans, shares, development funds and insurance products. Hu thinks that China will likely accelerate the development of the green financing market for better sufficiency and greater participation.

Meanwhile, "dealing with climate change is going to lay a foundation for the improvement of U.S.-China relations," Yao said.

Financial opening up

As China's income level rises, it will lose the low-cost advantage, and "we need to rely more on innovation," Huang said, adding that a bank-dominated financial system is not particularly suited to support innovation.

China's economic growth is already slowing, and the government would not be able to forever tackle the problems of the financial sector, Huang said. "This is why we need a complete revamp of the financial sector in order to sustain economic growth over the next five to 30 years."

Policymakers have already outlined a broad framework of financial reform in three key areas—developing multi-layered capital markets, market-based pricing for the exchange rate and lending rate, and financial regulation reform, according to Huang.

During the reform, financial risks should be managed well to avoid a systemic financial crisis, Huang said.

He also pointed out that foreign players are a critical force in China's financial reform and development.

"The Chinese Government has been much more relaxed and aggressive in opening the financial services sector," Huang said.

In recent years, the Chinese Government has implemented more than 50 opening-up measures such as scrapping foreign ownership caps on various financial institutions and foreign financial institutions' business limits, said Yi Gang, Governor of the People's Bank of China, in a speech via video link at a financial forum in October 2020.

"That is very encouraging. I'm always very proud to see that when we talk about the opening of the Chinese economy, one leading area is the financial sector," Huang said. "Now there are wholly owned foreign financial institutions in China in many areas. I think there are going to be more."

Huang pointed out that capital account liberalization and opening of the capital markets will be the main breakthroughs during the 14th Five-Year Plan period.

The government is already trying to put together plans for opening the capital account alongside restarting internationalization of the yuan, he said.

"So it will be a lot easier for foreign investors to come to China, invest in the Chinese market and hold yuan-denominated financial assets within five years," Huang said. 

(Print Edition Title: Plowing Ahead)

Copyedited by Madhusudan Chaubey

Comments to yushujun@bjreview.com

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