It’s a long way from Beijing to Belgravia but London’s upmarket estate agents would be well advised to keep a close eye on developments in China over the next 10 days. The price of a mansion in London’s more fashionable districts is rising fast. Cash buyers from overseas have snapped up houses with little or no regard of the cost, creating a property microclimate divorced from the rest of the market.
The Bank of England is keeping tabs on the boom, concerned that the flood of foreign cash pushing up the price of mansions could — if left unchecked — herald the start of the next bubble.
Well, you ain’t seen nothing yet. The freeing up of China’s economy over the past 35 years has been methodical. First it was agriculture. Then it was industry. Now, the next phase of liberalisation planned by the ruling cadre of the Communist party includes finance.
A host of possible reforms are being considered. These include offering higher interest rates for domestic savers backed up by deposit insurance for savings accounts and making China’s currency, the renminbi, convertible.
Unfettered movement of capital out of China is not going to happen overnight, but it could happen within five to 10 years. That’s why George Osborne was in China last month seeking to make London the global hub for dealings in the renminbi. That is why fund managers, hedge funds, private equity firms and property specialists in Britain are licking their lips.
China’s leaders have encouraged speculation that radical change is afoot by talking about a “masterplan” for the economy. There have been signs that Beijing is prepared to sacrifice quantity for quality: accepting that growth needs to be slower but more sustainable.
Although living standards have risen sharply, China’s economic model is investment-intensive. There has been a rapid expansion of industrial capacity to provide goods for export. Heavy debts have been incurred in the process, particularly by local government. The sluggish recovery in the global economy that followed the financial crisis of 2007-08 means that demand for China’s manufactured products is growing less quickly than it once was. Hence the feeling that the economy needs more of a domestic focus and that capital should be used less wastefully.
The internal debates about the future of the economy will come to a head next weekend when the central committee of the Communist party meets in its third plenary session since it was elected for a five-year term in 2012.
Historically, the so-called third plenum has been the occasion for the party hierarchy to focus on the economy, followed by big shifts in policy. It was at the third plenum in 1978 that Deng Xiaoping announced the opening up of the Chinese economy: the move that triggered 35 years of stupendous growth.
Fifteen years later, Deng said the economy needed more investment and had to become more export-focused. Within a decade, the country’s success in breaking into western markets was crowned by admission into the World Trade Organisation. WTO membership, together with a period in the early 2000s when the global economy was expanding at its fastest rate since the late 1960s and early 1970s, meant there was little pressure to reform China’s economy. It was hard to argue with growth rates of 10% and record rates of poverty reduction. Now, though, expectations are high that President Xi Jinping and Premier Li Keqiang will act.
Analysts at Capital Economics say the third plenum will come up with a direction of travel rather than a detailed policy programme. But they expect the new leadership to address three key issues: the low share of national income going to average households; the dominant role of the state in much of the economy; and the inefficient use of capital.
Xi and Li are likely to proceed with caution. There will be strong opposition to reform from vested interests who like the status quo. What’s more, China’s fragile financial sector needs handling with care. The balance sheets of commercial banks and the shadow banking sector are bloated with loans to state-owned enterprises and real estate companies. Many of these loans are non-performing, and there are enough parallels between China today and the United States half a dozen years ago if Beijing wishes to observe the consequences of over-hasty or badly sequenced reforms.
Even so, the feeling seems to be that ducking the need for change will merely store up even bigger problems for the future. Deregulation, land reform and a strengthening of the social security system are on the agenda.
But it will be financial reform that will be of most interest to the outside world. There has been liberalisation in this sector but Capital Economics says this is set to accelerate by allowing the renminbi to operate in a wider trading band, allowing full private ownership of banks, facilitating the development of the corporate bond market and loosening curbs on cross-border capital flows.
In the US, there has been much agonising over the emergence of China as a rival economic superpower. America’s trade deficit with China has been a particular cause of concern, with Beijing accused of manipulating the renminbi exchange rate to dump goods in the west. Fears have been expressed that America is vulnerable to a financial Pearl Harbor: a sudden decision by Beijing to stop buying US Treasury bills.
In the light of what is going to be discussed later this week, such fears look overblown. That’s not just because such a move would be a pyrrhic victory for China, since it would destroy the value of its assets. It’s also because bit by bit, China’s economy — if not its political structure — is being reshaped along the lines sought by Wall Street and by American-owned transnational corporations.
Back in the late 1990s, US multinationals demanded that China accept more stringent conditions than had been imposed on other developing countries in order to secure WTO membership. Beijing accepted. Now America wants two things: China’s financial sector to be opened up to US banks and the country’s savings to boost western capital markets. More than likely, Washington will get its way, perhaps not immediately but with profound effects.
Why? Well, consider this. America, the world’s biggest economy, has savings of $US2.8tn (£1.7tn); China has more than $US4tn. As a result, the impact of financial liberalisation in China will make the flow of funds into the west from Russian oligarchs look inconsequential.
As Diana Choyleva of Lombard Street Research notes, China’s elite already sends its children to Britain to be educated. The money is about to follow. Which is why the hedge-fund owners of Mayfair and the estate agents of Belgravia have every reason to be cheerful.
This article originally appeared on guardian.co.uk
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