China’s chance to innovate

By Duncan Bartlett for China Plus

A flood of foreign money is pouring into China, including large sums from North America, Europe and other parts of Asia.

Official data shows that foreign direct investment (FDI) into China rose for the seventh straight month in October, jumping 18 percent year-on-year to RMB 81.9 billion ($11.8 billion).

Looking through the figures, I am struck by the large sums of money coming in from the United States, despite the US-China trade war and the hawkish rhetoric from President Trump and Secretary of State, Mike Pompeo.

American financial institutions are deeply involved with businesses in China. For example, JP Morgan Asset Management recently invested $600 million in a joint venture with a Chinese logistics firm called New Ease, through a deal backed by money from Europe, the Middle East and Asia.

International investors regard China as something of a “safe harbour” as it rebounds from the impact of the Covid-19 pandemic, during a time of global uncertainty. The Chinese economy is expected to grow by two percent this year, compared with declines elsewhere. And the increase in foreign investment has helped push the renminbi to its highest level in years. 

Government officials say that overall foreign direct investment in the period 2016 to 2020 is likely to reach the total sum of $690 billion.

I am interested to see how China utilises this foreign money. One clear objective set out by the Ministry of Commerce is to attract more global investment into special economic zones, as well as places such as the Hainan Free Trade Port. The ministry is also encouraging investment in sectors such as information technology and ecommerce.

This raises a question: is there a risk that all this foreign investment will squeeze out Chinese businesses, making life particularly difficult for companies involved in competitive industries? 

I think this is where a delicate balance needs to be struck. While FDI plays an important role in helping China connect to the rest of the world, the Chinese government also needs to nurture domestic industries, without resorting to protectionism.

The phrase “dual circulation” is now being widely used to explain how China’s government intends to maintain the balance. It was one of the major themes of the fifth plenary session of the Central Committee of the Communist Party of China, which was held recently in Beijing.

My understanding is that “dual circulation” encourages Chinese companies to be resilient and not rely upon foreign partners for their survival. It also includes policies which support the domestic economy. 

At the same time, “dual circulation” recognises that as an inevitable result of its continued economic growth, China is becoming ever more integrated with the global economy. The government therefore continues to welcome investment and partnership.

So to my mind, far from implying that China is “turning inward,” as many have claimed, the strategy aims to maintain harmony between domestic economic growth and global opportunities. 

This was included in the message that President Xi recently shared with business leaders from the APEC region. He said during a speech delivered by video link from Beijing that China’s sound economic recovery has proven the resilience and vitality of the Chinese economy and he said that he is confident that “steady unleashing of the China market potential will create vast business possibilities for other countries.” 

The “dual circulation” idea will be developed during the 14th Five-Year Plan, which according to the Commnist Party is taking China “on the beginning of new journey towards a modern socialist country.”

Alongside this, the party has set goals for “reform, opening up and innovation.” Some of its language is familiar, as “reform and opening up” are long established concepts, although there is much debate, both within China and abroad, about the pace by which reform is progressing. Some people say it is too slow, while others maintain that change needs to be managed gently in a huge nation like China, where some regions are significantly more developed than others.

It seems to me significant that “innovation” is now often held up as the catalyst to progress. In his speech to the APEC business leaders, President Xi said that innovation has always been the primary driver of development for China.

He also said that to achieve high-quality growth driven by domestic demand, China should vigorously boost scientific and technological innovations in the country. 

My view is that China has now reached a stage where it is a fertile ground to develop innovative products and services. That will appeal to investors, which are looking to team with the world’s most innovative companies.

The challenge will be to create a business environment which not only generates returns for investors, but also helps to build a society in which all of China’s citizens thrive. 

This is a Dummy post to see how it looks like in the side bar

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