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Looking after number one

22 Dec 2014 By John Foley

The penny is starting to drop for foreign investors in China. Two years into the leadership of President Xi Jinping, there’s little sign of the country opening, relaxing and rebalancing as outsiders expected. It’s likely that 2015 will be another year of missed opportunities.

Xi certainly hasn’t been idle. He has punished bad eggs, including former security chief Zhou Yongkang. Industrial overcapacity and energy intensity are subject to new targets. It even seems normal now to talk about China’s GDP growing below 7 percent – something the ruling Communist Party’s leaders haven’t countenanced for two decades.

But the decisive role for markets that Xi promised has not materialised. Hardly any financial products have defaulted. A feted cross-border stock investment scheme with Hong Kong is capped at a measly 2 percent of the Shanghai bourse’s market capitalisation. Meanwhile, the huge pile of foreign exchange reserves that reflects persistent intervention in the currency markets has swelled by $600 billion since Xi took office.

Foreign politicians, investors and bankers are frustrated. Investment into China from overseas in the nine months to September 2014 was lower than in the same period of 2013. But in Xi’s place, most leaders would do the same. Domestic support for the regime is uncertain. The number of labour strikes logged in September by China Labour Bulletin was more than twice the previous twelve-month average. A gathering correction in the property market or an increase in financial instability threatens middle class confidence.

The political popularity quest will only get more fraught. In 2017, five of the seven members of the ruling Politburo Standing Committee will be of retirement age, and jockeying for who takes their place is doubtless under way. The easy way for Xi to win support is by wrapping himself in the flag. That might include widening graft investigations to foreign financial companies, who have previously escaped scrutiny. Bombastic pursuit of territorial claims in the South China Sea is also likely.

All this will raise tensions among trade partners, who hoped for better treatment. One day they may get it. But for now, expect China’s leaders to remain more focused on hanging on to what they have than opening up to the world.

This view is a Breakingviews prediction for 2015. Click here to see more predictions.


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