The View

China’s strategy: keep tilting the playing field until someone notices

The government's strategy of firm politics but economic liberalisation is designed to provide stability and a flexible economy to face the future

PUBLISHED : Thursday, 21 August, 2014, 10:38am
UPDATED : Friday, 22 August, 2014, 1:54am

For millions of Chinese, a summer trip to the seaside involves playing in sand, a dip in the sea and bad food. Last week a group of elite leaders went to the coastal resort of Beidaihe and did none of those things.

China's top officials go there annually to secretly review their strategy. Last year's meeting followed the dawning of a new leadership and was pregnant with expectation. The bets were on the new team easing itself into reform of creaking bureaucracy, relaxation of regulation and rebalancing of the economy.

That thinking has been cast aside. This fifth generation of China's leadership is shaping up as the most politically conservative since Mao, but also one of the most economically liberal.

Economic liberalisation is a hot topic, for growth will keep the people happy

Tight politics is reflected in tight public security, and tougher restrictions have been imposed on the internet and social media. China's foreign policy too has been highly assertive, which plays well domestically, and with the armed forces. It touched Hong Kong with June's White Paper that was calculated to reinforce China's hold over the special administrative region.

President Xi Jinping and Premier Li Keqiang appear daily in hospitals, disaster areas, new projects, and on visits to many countries - if they are not welcoming foreign leaders to the Great Hall of the People - almost as if they are running for office. Xi is the most frequently mentioned leader in the Communist Party mouthpiece People's Daily since Mao himself, according to University of Hong Kong research.

There have been trials of foreign individuals unconnected with governments on allegations of spying - as if the government leaves secrets in public places. The Religious Affairs Bureau has even stated that it will be rewriting Christian theology; not a mean undertaking considering the original author.

Economic liberalisation is a hot topic, for growth will keep the people happy. Global use of the yuan has soared and the Shanghai free-trade zone and the through-train scheme for stock trading between the Hong Kong and mainland bourses are cracking open the door.

The campaign on corruption has seen hundreds of party cadres caught and punished, opening up business channels and hopefully pleasing the people, who have tired of paying under the counter. There is more emphasis on environmental protection and reducing poverty.

The authorities have levelled high-profile allegations of price gouging and corruption against foreign companies such as GlaxoSmithKline, Mercedes-Benz and others, perhaps with some merit but mostly as a result of working on the mainland. Microsoft has been targeted, Apple goods are now officially off government procurement lists and Google's problems have been well documented.

The new leadership has drawn its lines in the sand - but are these policies investable?

This strategy of firm politics but economic liberalisation is designed to provide stability at home and a flexible economy to face the future.

China is following Japan's path of copy then improve, using its own protected innovation. Allegations of Chinese state-sponsored computer hacking of foreign firms are not surprising and we should expect innovation companies to thrive in China.

Chinese global brands are gaining acceptance with half of the world's televisions made by brands such as Haier, Hisense, Konka, Skyworth and TCL. It is an obvious policy to make sure foreign companies do not become overdominant on the back of the Chinese consumer, while giving advantages to domestic brands.

ZTE ironically listed more telecommunications patents than any company in 2012. Lenovo is the market leader in personal computers and Huawei spends 25 per cent of its sales revenue on telecommunications research and development.

China's aggressive global economic diplomacy will build trade, especially in the emerging world. It is safe to say that China now has ample access to commodities and, in five years, expect to see oil drilling and production in the East and South China seas.

The yuan will grow as a global currency but its lack of convertibility with foreign currencies means it will never be a reserve currency. This is an acceptable price to pay for the ability to control the currency's value to suit domestic and foreign policy.

The leadership is betting that resistance from the World Trade Organisation about national favouritism, from the US Congress about currency manipulation, and from the UN about maritime disputes and closed airspace will be about as effective as sanctions on Russia.

It is a balancing game as China relies on the United States and Europe to provide the oxygen for its growth. It cannot risk choking sanctions or trade embargoes, especially as a resurgent US, with new technologies such as shale gas, means that it could live without China.

Xi's "China Dream" has become "China First". But for now the strategy is to keep tilting the playing field in your favour until someone notices.

Richard Harris is chief executive of Port Shelter Investment Management