China is investing nine times more into Europe than it is into North America, seeking to diversify its foreign economic policy. In the first six months of 2018, Chinese direct investments in Europe swung dramatically upward to $ 20 billion.[i] At the same time, Beijing is increasingly liberalizing its own restrictions, to attract foreign financial interests to its territory.

The ruling Communist Party of China has redoubled its plans to reform the state sector through a mix of market changes and targeted support in an attempt to reduce inefficiency and dominate some economic spheres. The latest advance in this direction involves a significant shake-up in ownership structures and deployment of private capital in the sector.

State-owned enterprises are in a rush to acquire shares in private companies, including firms that the government regards as strategic sectors. Investments in private companies in sectors such as finance, renewable energy and artificial intelligence are also a means for state-owned enterprises to pursue higher returns and move away from declining industries such as low-end manufacturing.

“The long-term growth of the world economy is coming from China,” insists Jeremy Schwartz, WisdomTree’s director of research.[ii] He expects to see a lot of growth in China’s consumer tech sector in the next five to ten years as the country pivots to a more consumer-focused economy.

China is pouring resources into its tech sector. The government wants 5G deployed on a large commercial scale by 2020, and China’s major carries have all promised to meet that goal. Now may be the best time to invest in companies like Tencent и Alibaba, whose stock price has been driven down by an escalating trade war that shows no signs of slowing down.

China is thus slowly following through on pledges to open up to foreigners, as an impending trade war with the U.S. focuses attention on Beijing’s grip over doing business in the world’s second-largest economy.

It’s an opportunity for companies like Goldman Sachs Group Inc. and BP to expand in an economy with 1.4 billion consumers. Among the changes, many of which have been previously announced by Beijing, caps on foreign ownership of banks will be removed, ownership limits on brokerages and insurance companies will be lifted in 2021, and in 2022 for passenger car manufacturing. The country will also open up parts of its raw materials sector.  In a boon to companies like Bayer AG and KWS Saat Se, China ended the cap on foreign ownership of companies that breed and produce seeds except wheat and corn. Earlier, foreign firms were not allowed to take a controlling stake in joint ventures. Beijing also scrapped limits on domestic purchases and wholesale sales of rice, wheat and corn. Foreigners will still be banned from breeding and producing genetically modified crops, livestock and fish.

 

Energy sector liberalisation is the biggest break through

Beijing also scraped the rule that Chinese partners must hold a majority stake in the construction and operation of power grids, in line with a broader reform of the electricity sector as the government pushes to cut overcapacity and inefficiency.

“Loosening the inflow of all forms of capital into the sector is a natural step for China’s power reform,” Tian Miao, an analyst at Everbright Sun Hung Kai Co. in Beijing, observed. “China’s power reforms in the past few years have pushed for better transparency on the cost structure of grid operators and the market’s role in power distributions”.[iii]

It could be attractive sector for long-term utility investors looking to diversify across markets and benefit from China’s strong economic growth. However, foreign investment in power grids will not be significant in the near- to medium-term. That’s because the sector is dominated by two operators – State Grid Corp. of China, one of the world’s biggest companies, and China Southern Power Grid Co. That said, the outlook for investment returns in the sector is still unclear amid the ongoing reforms. Meanwhile, companies like Exxon Mobil Corp., Royal Dutch Shell Plc and BP will be able to invest more in gas stations after the government scrapped the rule that a Chinese partner must hold majority share in a chain with more than 30 outlets.

Heading for EV with a little help

China has secured € 21.7 billion of investment in the past year to manufacture electric vehicles while Europe secured only € 3.2 billion.[iv] China produces a third more cars than Europe does (23.5 million passenger cars manufactured in 2017 versus 17 million in Europe) and thus the market size cannot explain the huge disparity in investment. China’s ambitious new car policy, requiring carmakers to manufacture electric vehicles in its territory, is a key driver of investment in EVs, one which Europe currently lacks.

German automaker BMW is taking a majority stake in its China joint venture and investing 3 billion euros in factories there as the company prepares to meet increased demand for electric vehicles.

Alongside the deal, BMW will invest in new and existing plant facilities in Shenyang, increasing production capacity to 650,000 vehicles a year from the early 2020s. The plants produced 400,000 vehicles last year.[v]

The Chinese government has issued a new energy vehicle mandate which uses a system of credits to push automakers to increase the share of battery-only and hybrid cars in their sales mix. The policy is expected to increase the number of electrically powered vehicles in the world’s largest car market in coming years. Last year, battery-only and hybrid cars were 2.2 per cent of the Chinese market; the International Council on Cleat Transportation estimates that could rise to around 4 per cent by 2020 under the policy.

The country is BMW’s single largest market, with 560,000 vehicles sold there last year.

Even exotic rare earths are not passed over

The new Beijing list also touches on rare earths, an exotic mix of 17 minerals with an array of niche and often highly strategic use, across multiple industries. China accounts for about 80 per cent of the world’s supply, and triggered fears of a global shortage back in 2010 when it restricted exports. Now it’s giving foreign investors a slightly bigger role in the domestic industry, allowing them to operate in separation and smelting without entering joint ventures.

It’s another step to reform a domestic rare earths sector that has been heavily restructured in recent years to consolidate the industry and tackle heavy pollution. The list also lifts foreign investment restrictions in smelting of tungsten, a material used mostly in steelmaking that is often found together with rare earths. But the moves won’t be too meaningful at the moment as the rare earths industry is currently in oversupply.

The financial sector is the next

In April, the country pledged to open its $42 trillion financial sector by lifting foreign ownership ban in everything from banks and insurers to mutual fund management and futures firms.

Investment banks like Goldman Sachs and UBS Group AG have an opportunity to boost their share fivefold as they take more direct control of joint ventures. Insurers, including Asia’s biggest AIA Group Ltd., are set to cash in on their already healthy presence, while banks like HSBC Holdings Plc and Citigroup Inc. face a steeper road ahead to build market share, but will reap juicy profits as they do so.

You can invest, too

Foreign companies are not the only ones that will be able to profit from a liberalised foreign investment regime. Foreigners working in China can now invest in domestic A-shares, upon authorisation from the Chinese securities regulator. The news is expected to open the floodgates to some 900 000 foreign residents working in Mainland China that could access the country’s $7-trillion stock market in Shanghai and Shenzhen.

For three decades since the Shanghai bourse launched in 1990, stock trading to foreigners was closed and only granted to large funds from 2003 through the Qualified Foreign Institutional Investor scheme, which to date, totalled over $100 billion from 287 foreign firms. Then came the Stock Connect and Bond Connect in 2016 where foreign institutions could trade domestic stocks and bonds through Hong Kong.

Allowing approved foreign residents to invest directly would lead to sharing listed companies’ performance and investment opportunities. Tens of thousands of foreigners in many Chinese cities now have their personal stake in businesses and big-ticket items like real estate. Even universities abroad like Kasetsart University of Thailand introduce subjects on China’s equity and fixed income markets for their degree programmes.[vi]

There are sceptics, of course

Invoking the natural economic cycle in which the economy fluctuates between periods of growth and recession, some believe that the enthusiasm about China’s “opening” is far-fetched and economic growth is losing steam. They claim that the natural resources boom, which accounted for 72 per cent of China’s industrial growth in 2017, has created dangerous and widening cracks in various economic sectors. Overexpansion is inevitably associated with dangerous land mines. Ominous news about recently built, uninhabited ghost towns and factories producing goods that will never be sold are coming from China.[vii]

One thing is for sure – it’s a turning point

The U.S. government and the European Union have repeatedly criticised the lack of openness in China’s economy, including barriers to entering certain sectors as well as the demands made of companies who do invest, such as the transfer of valuable technology. Yet Qatar was the first to see, back in 2014, which way the wind of change was blowing and that China would cardinally break with the old economic way of thinking. Qatar’s sovereign wealth fund, the Qatar Investment Authority (QIA) signed a Memorandum of Understanding with the Chinese state-owned China International Trust and Investment Corporation (CITIC) Group to set up a US$ 10 billion fund to invest in China’s property, infrastructure and healthcare sectors.[viii] That deal was part of QIA’s strategic move to diversify away from its mainly Europe-focused investment towards fast-growing emerging markets, especially in Asia.

Access to the stock market is a major move towards a fully open Chinese economy. The Chinese yuan is to be freely tradable and become a major global currency in a decade or even faster. Following decades of restrictive policy and planned economy, Beijing is accepting market realities and is realising that free competition is the driver of the market and of the joint efforts of local and foreign companies to achieve more than they would if working in isolation. The process is not going to be easy; challenges and problems are prowling everywhere, but the direction being taken is clear and that is recognised by both China and its foreign partners who feel more confident every day about seeking ways to enter those markets, closed until recently, but still fabulously rich.

[i] Turak, Natasha, China is investing 9 times more into Europe than into North America, CNBC, report reveals, available at https://www.cnbc.com/2018/07/17/china-is-investing-9-times-more-into-europe-than-into-north-america.html

[ii] Wiener-Bronner, Danielle, Why now is the best time to invest in China, CNN, available at https://money.cnn.com/2018/08/08/investing/markets-now/index.html

[iii] China Opens Up More of Its Economy to Foreign Investors, Bloomberg News, July 29, 2018, available at https://www.bloomberg.com/news/articles/2018-06-29/china-opens-up-more-of-economy-to-foreign-investors

[iv] European carmakers invest seven times more in EV production in China than at home, Transport & Environment, June 21, 2018, available at https://www.transportenvironment.org/press/european-carmakers-invest-seven-times-more-ev-production-china-home

[v] BMW Ramps Up Investment in China to Meet Electric Demand, Voice of America News, October 18, 2018, available at https://www.voanews.com/a/bmw-ramps-up-investment-in-china-to-meet-electric-demand/4609079.html

[vi] Foreign residents allowed to invest in China’s $7-trillion stock market, Business Mirror, August 22, 2018, available at https://businessmirror.com.ph/foreign-residents-allowed-to-invest-in-chinas-7-trillion-stock-market/

[vii] Berko, Malcolm, Not a good time to invest in China, New York Finance Daily News, August 18, 2018, available at https://www.nwfdailynews.com/news/20180818/malcolm-berko-not-good-time-to-invest-in-china

[viii] Qatar sets up US$10bn fund to invest in China, The Economist Intelligence Unit, November 7, 2014, available at http://country.eiu.com/article.aspx?articleid=182473202&Country=Qatar&topic=Economy&subtopic=Forecast&subsubtopic=Policy+trends&u=1&pid=561808840&oid=561808840