Caixin View: About Those Import Targets...
As head of the world's second-biggest economy, President Xi Jinping's words carry weight. His speech on Monday to kick off the China International Import Expo (CIIE) in Shanghai was closely watched for any sign of concrete measures or offers that could help ease the bitter trade war with the U.S. But while Xi gave some headline-grabbing numbers on import goals, there wasn't much to inspire optimism. Here's our take on the key points:
Xi gave some new import targets: China will buy more than $30 trillion of goods from other countries over the next 15 years. That's an increase of $6 trillion over the existing target of $24 trillion that the Ministry of Commerce had re-stated just hours before. He also said China will import $10 trillion of services over the same period.
While Xi's goods target represents a 25% enlargement, we don't expect it will satisfy U.S. demands that China significantly reduce its trade surplus. China is already on track to hit these targets – it imported $1.84 trillion of goods in 2017, up 16% from 2016. About $500 billion of this came from the U.S. The old target of $24 trillion amounted to roughly $1.6 trillion per year which, in value terms, is actually a decrease from 2017's level. To hit Xi's new target, China needs to import on average $2 trillion of goods per year until 2033. Per year, that works out at an extra $160 billion, or 8.7% more than in 2017. For services, imports would have to increase faster though — they'd have to be on average about $660 billion per year, more than 40% higher than last year's $468 billion. Given the base number, the structural changes in China's economy and its shift toward a more services- and consumption-based model, that's not particularly onerous.
Imports vary significantly year by year, and forecasting a decade into the future is risky given the uncertainties. But the point is, Xi's new figures don't imply any major deviation from current trends. These targets likely leave plenty of room for China to show its commitment to increasing imports by overdelivering on its promises.
2.New board for high-tech companies
Xi announced a new board for high-tech companies will be set up by the Shanghai stock exchange. That's encouraging, especially after plans for a Chinese depositary receipts (CDR) program for overseas-listed tech giants hit the skids. What's more interesting is that he said the board will trial a registration based system, something that's long been talked about but never acted on. China currently has an approval-based IPO system, which is slow, has little market input, and provides opportunities for rent-seeking by officials. Partly for this reason, none of China's tech giants have chosen to list on the mainland, preferring instead to take their IPOs to the U.S. China has for years been saying it will shift to a registration-based system similar to that in the U.S., where the market plays the determining role in the process, but there have been significant delays.
This promise could be significant in the long run. A registration-based board could help offer innovative companies a much easier way to raise funds by issuing equity, as well as increase the quality of listed companies. As yet however, the securities regulator has not given out a timeline or any more details on how the system might work. There's also good reason for caution given the disappointing results of the CDR program, which, though it used a very different strategy, was the last attempt to encourage domestic tech companies to offer shares in China. CDRs allowed domestic investors buy shares in tech giants that had already listed overseas. Despite much hype, this stalled in June when smartphone maker Xiaomi Corp. shelved its listing plan due to a dispute with the regulator over its valuation, while deteriorating market sentiment amid escalating trade friction with the U.S. also led the authorities to drag their feet. The CDR story demonstrates just how far China's regulators have to go before they start relinquishing their strong control over the capital markets.
Xi made other promises, but they offer little or no progress on previously announced plans. As usual with his speeches, they were short on detail:
● Xi vowed to “firmly punish behavior that encroaches on the lawful rights and interests of foreign companies, particularly intellectual property right (IPR) infringements,” adding the government will introduce a “punitive compensation institution” to raise the cost of infringement. Alleged IPR theft by Chinese companies is a major issue Washington has pressured Beijing to address in bilateral trade negotiations. However, this promise, as well as the punishment mechanism, was already mentioned in the government's annual work report to the National People's Congress in March.
● Looser restrictions on foreign ownership in the education and health care sectors, something overseas companies have been seeking for years. Xi offered no details, but currently foreigners
▪ are banned from investing in compulsory education
▪ can take minority holdings in upper-secondary and higher education institutions
▪ can have up to a 70% share in medical institutions
● The expansion of the Shanghai free trade zone to cover a new area — Xi did not specify where
● Reduced tariffs and lower "institutional costs" of imports — this likely refers to the bureaucratic hurdles that plague importers
November 5-10: China International Import Expo in Shanghai
November 7: State Administration of Foreign Exchange releases foreign exchange reserves for October
November 8: General Administration of Customs releases import and export data for October
November 9: The National Bureau of Statistics releases the consumer price index (CPI) and the producer price index (PPI) for October
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