China's Greatest Risk is Not Opening the Market to Foreigners

Source: CNBC

Chinas biggest risk lies in keeping the local market closed to foreigners, a government research fellow said Thursday.

Trade tensions with the U.S. have put pressure on China to respond to long-standing complaints that key local industries are off-limits to foreign companies, and that domestic players have an unfair advantage in Chinas state-controlled economy.

Beijing has acted swiftly this year. Authorities rushed to pass a new foreign investment law in March.

About six months later, regulators announced that foreign companies can take full ownership in key parts of the financial industry at least a year earlier than expected. The new measures roll out Jan. 1, which is also the effective date of the foreign investment law.

Regarding the risk of opening up to the outside, I think not opening up is the greatest risk, Zhao Jinping, a fellow at the Development Research Center under the State Council, told a group of foreign reporters Thursday. Thats according to a CNBC translation of his Mandarin-language remarks.

Risks and Uncertainty

Zhao noted a worrisome backdrop of economic uncertainty worldwide and fears of a split in global technological systems between China and the U.S. Increased protectionism against Chinese companies also poses a big risk for their development, Zhao added.

This year, U.S. President Donald Trumps administration put Chinese telecommunications giant Huawei and several other major Chinese technology companies on a blacklist that essentially prevents them from buying from American suppliers.

In this environment, Chinese companies are under pressure to innovate even more than before, said Zhang Yuyan, director and senior fellow at the Institute of World Economics and Politics under the Chinese Academy of Social Sciences, a major government-affiliated think tank.

He noted that the direction of investment in China might change, and speed up the countrys technological development.

Some analysts have previously noted how pressure from U.S. trade tensions could help China accelerate a needed shift away from heavy state control, toward more market-oriented and efficient systems.

Allowing more foreign companies into the local market could help as well. Along with environmental issues and poverty alleviation in rural areas, Zhao named risks from the financial system as a major concern for China.

Greater presence of foreign institutions in the domestic financial market is expected to help the local industry adhere better to international standards. The so-called reform and opening up will also likely draw more capital into China, while its less clear how easily funds can leave the country.

Government policy to hold steady

Official, but highly doubted, GDP figures showed third quarter growth of 6%, missing expectations and at the low end of authorities 6% to 6.5% target for this year.

The four economists at Thursdays event generally agreed that Chinas economy could grow at a pace of about 6% next year.

However, they emphasized how next year would not likely be worse than 2019, especially if the uncertainty of trade tensions is removed. They also did not predict significant changes in government policy.

Supporting employment, especially high-quality jobs, will remain a priority, said Liu Shangxi, president of the Chinese Academy of Fiscal Sciences, a research institution under the Ministry of Finance.

In addition, tax and fee cuts a significant stimulus policy in 2019 will continue in 2020 but not see a major change, he added. Liu estimated that compared with the 2 trillion yuan ($286 billion) in tax and fee cuts that kicked in this past April, next year would likely only see cuts of 500 billion yuan.

The tax and fee reduction policy helped boost Chinas GDP by 0.8 percentage points this year, according to a report by Minister of Finance Liu Kun on Wednesday.