China is embarking on 'the biggest economic experiment in modern history'

Johannes Eisele/AFP/Getty ImagesChinese President Xi Jinping.
  • China is integrating its markets with the global economy, even as President Xi Jinping consolidates power to rule indefinately.
  • The combination poses an interesting challenge for Western economies.
  • ANZ economist Raymond Yeung says a strategic shift is underway to reposition China’s role within the global economy.

China is steadily opening up its markets to global capital flows at the same time as President Xi Jinping consolidates power at the head of the authoritarian Chinese Communist Party.

And according to Raymond Yeung, ANZ’s chief economist for greater China, that makes it a unique case study.

In a research note on the strategic shift being carried out by Chinese policy makers, Yeung said the current paradigm “challenges conventional Western economic thought”.

“On one hand, Xi emphasises the Party’s leadership in all aspects of the economy. On the other hand, he promotes free trade and pledges to use markets as a principal means for resource allocation,” Yeung said.

“Establishing a state-owned market economy is probably the biggest economic experiment in modern history.”

From June this year, stocks traded on mainland China will be included in the MSCI Emerging Markets Index, a benchmark used by huge global investment funds such as Blackrock and Vanguard in the composition of their investment portfolio.

And in November 2017, China said it would relax foreign ownership restrictions on Chinese banks — effective immediately — and lift the ceiling on foreign ownership limits for securities funds and joint ventures over the next three years.

Then last month, Chinese authorities undertook key regulatory reform by merging the China Banking Regulatory Commission and China Insurance Regulatory Commission into one central oversight body.

“This change in the regulatory framework is in line with our view that China will move towards the Australian model — i.e. an activity-based approach which will bring deposit-taking institutions and insurers under one roof,” Yeung said.

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All of the above reflects China’s aim to steadily integrate with the global economy. And at the same time, President Xi’s path is now clear to rule indefinitely over the un-elected Communist Party.

Yeung noted that Chinese policy makers have also been more explicit than ever in efforts crack down on excessive leverage.

Ultimately, Yeung said the integration with global markets forms part of a long-term strategy for China to pivot away from its traditional role as a manufacturer of cheap goods.

“Chinese policymakers know that China is losing its cost competitiveness. The country no longer wants to focus on textile products, toys or mobile phones assembling services,” Yeung said.

Rather, President Xi is positioning China towards a role in the global economy more like the one the US currently occupies — with the offer of “Chinese wisdom and a Chinese approach to solving the problems facing mankind”.

“The US exported brand value, services and culture via Hollywood movies, Silicon Valley technology, Big Macs and the Yankees. Xi is keen to use a similar approach to elevate China’s global status,” Yeung said.

“Many US headquarters enjoy the bulk of the margins from its intellectual inputs, marketing and other services. This seems to be the kind of achievements that China is aiming to attain.”

In that sense, last week’s US tariff announcements in response to alleged Chinese intellectual property theft may be reflective of a more subtle battle between the two super-powers to maintain a leading role in the global economy.

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