What can we expect in China in 2018?
The nation could be shaped by geopolitics, momentum from robust economic growth, and a host of new leaders eager to implement new policy.
With so many new leaders put in position over the last six months by President Xi, an overall leader secure in his position and clear on his objectives, 2018 is likely to see much more activity to implement policies, economic and social, that move China in the direction that Xi wants. We may need to worry more about overenthusiastic implementation of policy than the inaction we have often seen in 2017.
Again, the year could well be shaped by geopolitical discontinuities. Opportunities for Chinese companies to invest overseas have diminished in a number of markets, but as of yet, opportunities for trade have not been materially restricted by the governments of importing countries. Relations with Japan and the United States remain volatile, with the potential for damaging discontinuities in trade and investment.
Yet China enters 2018 with robust economic-growth momentum. Despite stresses that we highlighted last year, which have only grown—regional disparities, an aging population, declining heavy-industrial sectors, property bubbles, growth in debt levels, and continuing environmental pollution—China remains slightly ahead of track of its goal to double GDP between 2010 and 2020 and to realize its self-declared ambition to become a “moderately prosperous” country.
Given this, how might 2018 unfold?
China’s continued international expansion—with bigger bumps in the road
After a pause and reset to eliminate outbound investment that the government found frivolous, China Inc.’s outbound investment will resume its upward trajectory in 2018, with a focus on Manufacturing 2025 sectors and Internet-enabled businesses, such as artificial intelligence (AI) and the Internet of Things. Many global-scale Chinese companies are still mostly focused in China, and they are impatient to scale elsewhere. The reality is that even in 2017, China’s more mature outbound investors kept moving ahead with strategically relevant investments ranging from computers, aviation, and automotive to wealth management, schools, and healthcare. Many of these more mature investors already have businesses outside China of the scale of a Fortune 500 company, with the ability to raise cash where they need it for investment. Geographically, Brazil, Japan, and the United Kingdom in particular saw increased interest. In 2018, investment in these sectors will continue with a particular emphasis on the service sectors—healthcare, tourism, education, gaming, and similar.
The international reach of China’s tech companies and investors grew and grew with myriad, often minority, investments too small to show up in national statistics but that gave companies access to innovative technology and business models to scale in China. In 2018, a lot more attention will be paid to global Chinese investment in these fin-, med-, and edtech and AI start-ups, with political pushback in the United States, leading them to focus more heavily on Israel, Scandinavia, and the United Kingdom. De facto, many Chinese investors will simply assume that they could not get approval for investment in the United States and so won’t try. If US–China economic relations deteriorate significantly, we even might see real pressure to break up deals consummated in years past.
Belt and Road will remain the flagship international state-to-state collaboration program for building China-sponsored infrastructure around the world. In 2018, there will be more scrutiny of projects, potentially leading to delays (as with the high-speed rail links in Eastern Europe) but also more projects under way. While in part this will be a result of rebranding existing work under Belt Road, clearly the heads of relevant state-owned infrastructure companies are under strong pressure to deliver real projects as central government in Beijing has become frustrated at the slow pace of project realization. In 2018, multinationals should focus more on what business opportunities result from a port in Kenya, railroad in Hungary, or industrial free-trade zone in Kazakhstan than on gaining a major slice of the construction work.
Beyond supporting its businesses to expand internationally, China’s government will grow its soft-power initiatives in 2018, investing more in its Chinese culture centers at universities around the world, in its international media projection online and on traditional TV, and through its official overseas development-aid budget, the largest recipient of which in recent years has been Cuba.
Domestic centralization and control
A strong, powerful leader with a team around him largely selected by the leader are common ingredients for more centralization for economic decision making and control. China is no exception. And economic success over the last five years, relative to the rest of the world, has created confidence that the government can micromanage at the sector level successfully. But there are additional reasons why China will be visibly more centrally controlled in 2018.
In the financial sector in particular, regulators have moved beyond making examples of individuals whose actions they disapproved of, to a much clearer and complete set of regulations of what is permitted for wealth-management companies, insurers, and online financial-service providers, massively restricting opportunities for regulatory arbitrage. Areas of ambiguity that were large enough in the past, for example, allowed Internet players to become highly popular asset managers and key payments providers without a license. By 2019, it may be hard to even launch small incremental services without approval. Specifically in payments, all online payments will now have to pass through a central government-run clearing house, so that the government can now, should it choose, see who is passing money to whom. Clearer regulation is not a bad thing per se, many multinationals have complained for years that they could not invest with certainty due to ambiguity over regulation. We can hope that the data-protection and cybersecurity laws become similarly clearer in 2018. Read more…