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President Xi shows how to make stalling look like reform

By Paolo Danese
16 Apr 2018

Chinese president Xi Jinping delivered the message everybody wanted to hear: despite the trade spat with the US, China will keep opening up its markets to foreign firms. But the speech was light on substance. The remarks feel like more of China’s vintage ‘stall and delay’ strategy rather than the much-touted ‘new era’. That could backfire, especially since Donald Trump seems hell-bent on making his aggressive trade policy towards China a reality.

Xi’s comments, delivered at the annual Boao Forum for Asia that ended last week, received wide praise from high-ranking officials, from Philippine president Rodrigo Duterte to IMF managing director Christine Lagarde. They heard what he wanted them to hear: the time for reform is now.

The business community, which appeared to listen a little more closely, concluded that perhaps Xi meant not quite now but shortly. For some, he seemed to have been referring to measures China had already unveiled.

“Most of the measures announced in President Xi’s speech are old news,” summarized the European Union Chamber of Commerce in China.

This is not to say China has not impressed with some of its reforms. The opening up of its financial system looked, at face value, like big news – although the collective shrug from offshore bankers made it seem like it may have been nothing masquerading as something. But for those who want more, China does not appear willing to budge.

A foreign ministry spokesman was quoted in state media saying China's new measures on foreign ownership in some domestic sectors are based on the country's own tempo of economic opening-up and that the introduction of new policies is based on "thorough consideration and careful arrangement".

The punchline had an almost sarcastic undertone.

“It is impossible for China to make these decisions within a short period”, the spokesman said.

Not mentioned was the fact that these measures have been on the table for decades. China itself has repeatedly emphasized how 2018 marks the fortieth anniversary of the opening up strategy. In any case, isn’t the speed of decisions exactly the issue many have been complaining about? China’s reforms are broadly sound. Their pace leaves a lot to be desired.

Many of Xi’s promises last week parroted similar lines from more than a year ago. And ‘promises’ is increasingly the key word here. The term “promise fatigue” is starting to catch on among the China pundits, and could possibly rise to challenge the popularity of babble about “China’s New Era”, much to Beijing’s chagrin.

To break this down a little further, two key measures were publicized to show that China means business. One was the quadrupling of the Stock Connect trading quota and the other was confirming that a 51% cap on foreign ownership in the financial sector was to be implemented within a few months.

Starting from the latter, that announcement was actually first made in November last year, just as Trump was leaving China after his first state visit. It is now mid-April, which begs the question – did it really take Chinese officials five months to go from “we will do this” to “yes, we will do this”?

As for the Stock Connect quota, it was more about fixing an outstanding bug rather than delivering the “surprising” reforms that had been flagged by new vice-premier Liu He in Davos in January.

The reality is that global fund managers have been saying for years to anyone that would listen that the MSCI inclusion of A-shares was well and good, but that the daily quota needed to go to ensure no trading issues on index rebalancing dates. MSCI showed much goodwill in its positive decision on A-shares last June and yet it took China another ten months to address the concern (and seemingly only because the index inclusion is behind the corner, kicking off in May).

The bottom line is that, at least for now, the two common refrains — that Xi’s power consolidation would help get things done and that big steps would be taken as soon as the Two Sessions reshuffle was concluded — were wrong.

But GlobalRMB is not a publication that only bemoans problems. We also try to help fix them. Here are some recommendations on how to get things really going.

First, scrap Stock Connect quotas entirely. China’s $3tr-plus in FX reserves absolutely guarantee that no amount of Stock Connect flows could possibly threaten financial stability in China.

Second, drop all foreign ownership limits on domestic financial institutions, effective immediately. There is really no rationale (except defending the status quo, clearly) for foreign banks to have to wait three years before 100% ownership of local institutions becomes allowed, as it is the plan. China could show its reform mettle by opening the door fully.

And finally, with bond and equity index inclusions being implemented between this and next year, China should grant full access for foreign institutional investors to all onshore spot and derivatives markets across asset classes. More liquidity and the best practices of foreign investors can only help China’s ambitions to take its financial market development to the next level.

Are we hopeful any of these will happen soon? Not really. But they at least provide food for thought the next time Chinese officials tout a reform programme that has been long in the making and has still not gone far enough.

By Paolo Danese
16 Apr 2018