China focus: Striking gold

For the last decade, China has been investing prodigiously into both its own and international projects – from cultural districts in Kowloon, to real estate in Dubai, or railways in Africa. At what point should growth tail off to follow through on plans already laid? 

Chinese media call their Premier the country’s ‘top railway salesman’ for a reason. Not only has Li Keqiang driven extensive railroad infrastructure in his own country, in May 2014, he also announced that his government would be funding 90 per cent of the first stage of a railway in sub-Saharan Africa. The East African Railway Line, which started construction over 100 years ago, in 1895, will run from Mombasa to Nairobi, at an estimated cost of US$3.8 billion, and has plans to eventually extend out to Uganda, Rwanda, Burundi and South Sudan. According to the news agency Reuters, it will more than halve the cost of sending a tonne of freight one kilometre; costing just eight US cents compared to the 20 cents it currently stands at.

China surpassed the US as Africa’s closest trading partner in 2009, and is keen to continue nurturing its ties to the continent. Africa is essential to China’s growing requirement for natural resources, and Mr Li said earlier in 2014 that he plans to quadruple Chinese investment in Africa to US$100 billion by 2020.

The way to ease off on investing while still maintaining economic growth is to reform industry, making it easier to operate in key sectors such as telecoms and financial services

Haibin Zhu, Chief Economist in China at JP Morgan

The above is just one example of China’s commitment to investing in its economic growth, which has been flourishing for three decades. China is set to become the world’s largest economy by 2024, and it has been ploughing more than half its GDP into foreign assets. It has more money in international Treasury bonds and other securities, including hard assets, than all the other BRIC countries combined.

Then there are the extensive development programmes China has been pursuing at home. Trillions of yuan have been spent on transport, education, telecommunications and power plants in the country’s less affluent western region. And there has also been a keen interest in artistic investment: West Kowloon’s Cultural District is intended to be Hong Kong’s cultural powerhouse and has been directly financed by the government with an upfront endowment of HK$21.6 billion for construction and operation.

During the spring of 2014, a ‘mini stimulus’ was also announced, with investment being pledged to fund new railways, water-management projects, housing, and tax relief for small businesses. The housing and railway projects alone, Bloomberg reported in May, were expected to boost the country’s GDP by almost a full percentage point. By the summer, GDP rose 7.5 per cent in the April-June period compared with a year earlier, and retail sales grew 12.5 per cent year-on-year from January to May.

This mini stimulus seems to have neatly balanced the desire for growth with concentration on tying up loose ends in the country. The Chinese government has said that it is willing to sustain a period of slower growth in order to rebalance the economy towards domestic consumption. Haibin Zhu, Chief Economist in China at JP Morgan, said: “If you compare China to a few years ago, the export-driven gross model has come to an end. Since the financial crisis, China has relied very little on net exports, it has been mainly domestic-driven. But if you compare between investment and consumption, China relies too much on investment, and consumption has been relatively weak. That’s the main imbalance.”

The way to ease off on investing while still maintaining economic growth, he ventured, was to reform industry, making it easier to operate in key sectors such as telecoms and financial services, without as many restrictions and permissions needed. This has already been demonstrated in plans unveiled at China’s Third Plenum, which included opening the financial sector outwardly, and establishing privately-owned small banks.

In the meantime, China is continuing to invest overseas, and while sub-Saharan Africa is a key partner, the Middle East is also an important part of the plan. In his keynote address to the China-Arab States Cooperation Forum in the summer of 2014, Chinese President Xi Jinping stressed the huge opportunities that the partnership between the two regions offered. “What China pursues is common development. We want to achieve development for ourselves and we want to enable others to grow as well.”