What to expect from the Chinese economy in 2022

Internal features of China

As we all know, China has the largest population of any country in the world and is fourth in terms of land size. China had a labour force of 785 million in 2020, with about 463 million employed in urban areas. The urban labour force alone outsizes Germany’s entire population by more than 500% while China’s total labour force is larger than the whole European continental population.

a. What to expect from the Chinese economy

China’s economy had staged an impressive recovery from the impact of the coronavirus, but is now faced with numerous headwinds, including a property slump, energy crisis, weak consumer sentiment and soaring raw material costs. In 2021, China’s GDP (current prices) was recorded to be US$16.8 trillion, Hong Kong’s was US$369.7 billion, the US’ was US$22.9 trillion, and Russia’s was recorded to be approximately US$1.7 trillion.

China’s economy grew by 8.1% in 2021 and a GDP per capita (current prices) of US$11, 700 and Hong Kong’s economic growth was recorded at 6.4% with a GDP per capita of US$48,000. Comparatively in 2021, the United States’ economy grew by 6.0% with per capita GDP at US$66,100 and Russia’s economy grew 4.7% with per capita GDP at US$10,800. IMF’s 2022 estimates predict China’s per GDP capita to increase to US$12,990 with 5.6% economic growth and Hong Kong’s per GDP capita to reach US$51,900 with 3.5% economic growth.

Continued Growth

On continued economic growth, The World Bank assumes that China will continue its policy of suppressing Covid and to see 2022’s expected growth slow to 5.4%, as low base effects dissipate and the economy returns to its pre-Covid trend growth. Real consumption growth is projected to gradually return to its pre-Covid-19 trend, supported by the ongoing labour market recovery, rising household incomes and improved consumer confidence. Investment will also remain an engine of growth, but its structure is expected to shift toward private investment as manufacturing capital expenditure picks up, offsetting cooling infrastructure and property investment. As the global recovery is gaining momentum, export demand is expected to keep industrial capacity utilisation high in the short term. However, the contribution of net exports to growth will moderate in the medium term as import growth picks up and international travel presumably slowly resumes in 2022.

Despite the recent surge in imported raw material prices and increase in domestic demand, consumer price inflation is expected to remain below the expected amount of around 3%. This reflects the limited pass-through of rising producer prices to consumer prices as well as the effect of the decrease in pork prices after 2020’s swine fever.

On central policy making, it’s believed that policymakers are ready to maintain fiscal support should private demand remain sluggish and external imbalances further increase. Focusing additional fiscal efforts on social spending and green investment rather than traditional infrastructure investment would not only help secure the recovery and bolster short-term demand but could also contribute to the intended medium-term rebalancing of China’s economy.

China has also said they will commit to a zero-carbon economy and at the same time achieve growth through this commitment. It is estimated (by Credit Suisse) that decarbonisation will add about 0.6% to China’s GDP by investing in electric vehicles, wind and solar power, and batteries. China would then plan to export these renewable energy technologies globally.

Common Prosperity

President Xi Jinping stated that Common Prosperity refers to “affluence shared by everyone both in material and cultural terms, but is not the equal prosperity of neat and uniform egalitarianism.” Chinese leaders have pledged to use taxation and other income redistribution levers to expand the proportion of middle-income citizens, boost incomes of the poor, rationally “adjust excessive incomes,” and ban illegal incomes. Beijing has explicitly encouraged high-income firms and individuals to contribute more to society via the so-called “third distribution”, which refers to charity and donations.

The push for common prosperity has encompassed policies ranging from controlling tax evasion and limits on the hours that tech sector employees can work to the prohibition of for-profit tutoring in core school subjects and strict limits on the time minors can spend playing video games. There are talks of implementing property and inheritance taxes to tackle the wealth gap. Other measures would include improving public services and having a social safety net.

Chinese officials in August 2021 sought to reassure private sector businesses. Vice Premier Liu He, who led China’s trade talks with the US, said policies supporting the private economy have not changed “and will not change in the future.” A week later, the People’s Daily ran a front-page editorial with the same message stating that the “Opening to the outside world is China’s basic national policy, and it will not waver at any time,” and added that there was “equal emphasis on both hands” in terms of regulating industries and promoting development.

In late 2020 there was a move to rein in Big Tech companies which was followed by restrictions on other industries and in mid-2021 there was a move to prohibit tutoring companies from making a profit. This was followed by measures to tackle healthcare costs, labour conditions for wage earners, and tax evasion among wealthy individuals. President Xi in September “reviewed and approved” more actions to tackle monopolies and pollution and support strategic reserves. Social control has also extended to limiting the number of hours children can play video games to three hours, capping salaries, and discouraging fan culture.

In order to comply, some tech companies have donated money to assist with the campaign of common prosperity. The chief economist at Hang Seng Bank China is of the view that the government is still experimenting and “More clarity will come out over time, but right now the central government does not want to have a clear definition of [Common Prosperity]. The Hang Seng economist continues: “I see elements of resistance and discomfort but no organised opposition.”

In short, it appears that Chinese leaders are balancing control with not derailing a private sector that has been a vital engine of growth and jobs. The common prosperity goal may speed China’s economic rebalancing towards consumption-driven growth to reduce reliance on exports and investment, but policies could have unforeseen consequences for growth driven by the private sector. The effort supports the “dual circulation” strategy for economic development, under which China aims to spur domestic demand, innovation and self-reliance.

Continued controls on major industries

The Common Prosperity policy may be responsible for controls on different parts of different industries but the continued controls on major industries going on in China such as on real estate, tech companies, cryptocurrency, tuition services, and energy all come from a collection of different policies.

For China’s property sector, which has been a major driver of the country’s economic and household wealth growth over the past 20 years, analysts generally agree that the current uncertainties in the property market were a culmination of many property companies’ fast expansion through highly leveraged borrowings over the past decades, triggered by regulators’ stronger deleveraging campaign in mid-2020 aimed at curtailing property speculation. In addition, some local governments’ tightened oversight on property developers’ presale revenues to ensure they were meant strictly for construction, resulting in some developers feeling even higher liquidity pressure and increasing their debt risk.

Being caught in a negative credit loop with limited funding access and therefore reducing liquidity, developers, especially financially weaker ones, reduced spending on land and construction to preserve liquidity for debt servicing. Severely constrained funding access and tightened bank control limited their ability to manage their cash flow and caused them to default. Sales have declined across the sector because of developers’ constrained spending and homebuyers’ concerns over completion risks. Investors’ and lenders’ risk aversion has increased in response, exacerbating refinancing risk, particularly for small and financially weak developers.

With land sales predicted to continue to contract in 2022, provinces with both a high reliance on land sales and high debt burdens will face fiscal pressure with a widening funding gap. The shortfall in local government financing will also constrain funding for infrastructure which will weigh on economic growth, intensifying the policy dilemma between supporting growth and deleveraging. Though regulators have already begun fine-tuning property policies, analysts largely forecast that they will continue easing on things such as mortgage issuance to prevent contagion risks to the economy. But they do not think there will be a sharp reversal of the long-term policy stance to curtail property speculation unless it is to defend the 5% GDP growth bottom-line. The reason why China is doing this could be because China is taking advantage of high levels of global liquidity in order to address real estate’s reliance on high debt levels for growth.

Regarding tech companies, new laws include the Personal Information Protection Law (Effective Nov 2021), Data Security Law (Effective Sept 2021), and Anti-Monopoly Guidelines of the State Council on the Platform Economy (which was revised February 2021). These laws have collectively aimed to control the tech company’s monopolistic behaviour, treatment of employees, and rectify any data misuse issues (both from tech companies themselves and from abroad). Essentially, the laws are trying to reflect on some of the biggest concerns across Chinese society today – online content control, fair use of technology, personal choice and algorithms, and data protection.

These new laws seem to be attempting to balance the approach between individual users and internet platforms, and although this may be a good thing for end-users, this may also slow down the growth of the technology giants. A New York law professor has noted that “the age of exponential growth in the wilderness for Chinese technology companies’ expansion may be over, whether domestic or overseas”.

As I mentioned, since November 2020, the Chinese Government has been implementing changes in the tech industry. In November 2020, guidelines were issued to control monopolistic practices in the internet industry. In February 2021, the final antitrust guidelines for internet platforms were released. In April 2021, Alibaba was fined US$2.8 billion and ordered to transform itself into a financial holdings company that will be supervised more like a bank. 13 other fintech arms of firms including Tencent had regulations imposed on them similar to Alibaba. In July 2021, new rules regarding overseas listing were released, namely that companies with sensitive data with more than 1 million users must seek a security review first before listing overseas, as well as stepping up supervision of Chinese firms listed offshore. In August 2021, Tencent and Alibaba started taking steps to open up their platforms and to unblock links to their rivals. From March 2020, consumers will have the right to switch off algorithmic recommendations on apps and see or delete the keywords algorithms used to target them.

So for now, it appears that a gradual easing for both tech and housing is designed to keep economic growth within a stable range.

Stabilising Growth in 2022

China’s economic planner, the National Development and Reform Commission (NDRC), recently announced on its WeChat account that: “China will focus on the security and stability of energy, food, industry and supply chains in 2022, while effectively expanding consumption and investment as well as accelerating structural adjustment and optimisation of the country’s industrial sectors.”

China’s Central Political Bureau – the 25 member centre of power within the government – met on the 6th December 2021 to discuss the economic situation for 2022, prior to the central economic work conference, and said the country will prioritise stability in its economic decision-making for 2022 showing that top leaders are deeply concerned about the risk of potential instability. At the conference, policymakers warned that China’s economy is facing risks from “contracting demand, supply shock and weakening expectations,” and ordered governments at all levels to unveil policies conducive to economic stability in a proactive manner.

So far, Beijing has been managing the economy cautiously. Throughout the pandemic, the government has been very careful about intervening in China’s economic recovery. It hasn’t cut the country’s benchmark lending rate since early 2020 and has refrained from expanding the economy with stimulus – instead offering more targeted support to smaller businesses that have been hit by the pandemic. The People’s Bank of China (PBOC) recently cut the reserve requirement ratio for most banks by half a percentage point on December 15th 2021, which reduced the amount of money that banks have to keep in reserve and therefore unleashed some 1.2 trillion yuan (US$188 billion) for business and household loans. This essentially signals that Beijing wants stability. The December 2021 Central Political Bureau meeting’s policy-tone adjustment also signalled clearly that the senior leadership has recognised downward pressures on the economy and is looking to stabilise any possible market downturn. The PBOC also lowered the rate of the relending program for the agricultural sector and small businesses by 0.25 percentage points. The last time it cut the rate was July 2020.

Economists suggest that both monetary and fiscal policies will turn from tightening to loosening in the coming quarters. However, the easing will still be gradual, and it looks like it would be too early to loosen the controls on the property and local government debt. The current growth down-cycle might only hit the bottom around mid-2022 when more easing might come. This suggests that while Beijing is expected to focus more on supporting economic growth, it is too soon to say when to expect an end to tightening measures in the property market. A further cut of 50-100 basis points to the reserve requirement ratio could also come later this year.

China will “focus on ensuring the economy grows in a reasonable range, and that society remains orderly ahead of the party’s key 20th congress meeting later next year,” the Central Political Bureau said in December. The Central Political Bureau statement didn’t include the phrase “houses are for living in, not for speculation” – language that the Central Political Bureau had used in July. The general tone of the December 2021 Central Political Bureau meeting seemed to focus more on using a more stable and growth-centred language as compared with the July 2021 meeting.

Further policy easing with boosts to investment and consumption are expected in the coming months to mitigate the property downturn and to avoid a hard landing and measures are anticipated to ease financing for developers. Economists expect credit growth to have bottomed in October 2021, with a “modest rebound in the coming months.” Meanwhile, interest rates are predicted to remain on hold through 2022.

Economists have further said that China could also increase fixed-asset investment in infrastructure, transport and telecommunications to boost growth. The current reserve requirement ratio cut is not aimed at small and medium-sized enterprises, so there are expectations that there will be more low-interest-rate financing schemes for small to medium enterprises, which will be part of the fiscal stimulus. The draft of the economic work report to evaluate how much fiscal stimulus has yet to be released but there are two large items expected in the draft – one for SMEs, another for achieving the zero-carbon-emissions target.

But it should be added that while the Central Political Bureau statement stated that stability and growth was the centre-piece for 2022, it should not be over-interpreted as giving the green light for relaxation on public policy. In fact, it has been reported already that more fintech regulations are already being planned. China’s central bank indicated that strengthening regulation of the country’s growing financial technology (or fintech) sector will be one of its top priorities over the next four years (2022 – 2025) along with promoting data application and green financial services. Regulations will include improving governance of fintech, strengthening data-related capacity building, promoting orderly data sharing and applications, and building a platform to connect business, technology, and data.

Regional Comprehensive Economic Partnership (RCEP)

The Regional Comprehensive Economic Partnership (RCEP), signed on the 15 of November 2020, is a free trade agreement (FTA) between 15 Asia-Pacific countries including all 10 ASEAN members (Brunei, Cambodia, Indonesia, Laos, Malaysia, the Philippines, Thailand, Vietnam, Singapore, and Myanmar) and Australia, New Zealand, China, Japan and South Korea. RCEP was formally conceived during the 2011 ASEAN Summit in Bali and negotiations officially began during the 2012 ASEAN Summit that took place in Cambodia. After approximately 9 years, the RCEP was officially launched on 1 January 2022, ratified by 10 members with South Korea to follow on 1 February 2022; Indonesia, Malaysia, Myanmar and the Philippines have yet to ratify the deal.

This FTA covers 30% of the world’s population and 30% of the global GDP as of now although by 2050 it is predicted to cover 50% of the latter. It is the largest trade bloc in history and also happens to be the first trade agreement signed between China, Japan and South Korea, three of the largest economies in Asia. One of RCEP’s core objectives is the lowering of tariffs although this is to be done over a period of 20 years. Currently, it is expected that 65% of intra-RCEP tariffs will be lowered within a short period of time but the objective is for 90% of total tariffs to become zero over time. The remaining tariffs are limited to strategic sectors that countries have not agreed upon any liberalisation policy as of yet. The tariff reductions will result in a 2% increase in exports for the region due to the diverging of trade away from non-member countries, compared to 2019-levels.

Upon further analysis, it was noted that China is predicted to be the second-largest beneficiary of the RCEP with an expected increase in exports amounting to an estimated US$11.2 billion, after Japan which is expected to be the largest beneficiary with an increase in exports amounts US$20.2 billion. China is currently also seeking further regional trading agreements. In September of 2021, it applied to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), a higher-standard mega trade deal that took effect in late 2018 among 11 economies. China has also applied for the Digital Economy Partnership Agreement (DEPA) launched by Singapore, New Zealand and Chile.

Hong Kong has also expressed interest in joining the RCEP, which will allow further membership applications after 18 months. Chief Executive Carrie Lam in September 2021 said at the Belt and Road Summit that the city was keen to begin formal discussions on accession as soon as RCEP is ready to take on new partners. The Association of Southeast Asian Nations also “welcomed” Hong Kong’s interest at an ASEAN-Hong Kong meeting the same month, saying the Chinese special administrative region is “well-placed to add value to RCEP.”

The Greater Bay Area

The Greater Bay Area initiative was first proposed in China’s 13th five-year plan. A “Framework Agreement on Deepening Guangdong-Hong Kong-Macao Cooperation in the Development of the Greater Bay Area” was signed in 2017 and in 2019, an Outline Development Plan was released, setting out more detailed steps on how to put the framework into practice. The Greater Bay Area encompasses two special administrative regions (Hong Kong and Macau) and nine Mainland cities (Guangzhou, Shenzhen, Foshan, Zhuhai, Huizhou, Dongguan, Zhongshan, Jiangmen, and Zhaoqing). Hong Kong, Shenzhen, Guangzhou Macao are core cities, while the rest are node cities. Policies will be implemented to increase the connection between the network of cities, each of which has its own unique talent that China intends to synergise to maximise the productivity and competitiveness of these markets. As stated in the Framework Agreement, key cooperation areas of these cities include infrastructure connectivity, market integration, technology and innovation, industries, quality of living, and international cooperation.

As such, the Greater Bay Area has a sizable and untapped potential. The region encompasses an area of around 56,000 square kilometres and has a total population of 86m. The GDP of the region should not be overlooked – the combined GDP of the region is US$1.67 trillion, accounting for 12% of China’s total GDP generated by just 5% of China’s population. The demand for financing, asset management, banking, and insurance will further increase GDP growth in the region with an extended flow of capital and cross-border transactions. The Outline Development Plan has set out a range of initiatives to increase the scope for the cross-border use of Renminbi (RMB) in the Greater Bay Area, including cross-border RMB interbank lending, RMB foreign-exchange spot, forward business, and the creation of RMB derivative products.

Post-2022

China’s growth rate is expected to continue at a downward trend due to an ageing and labour force which is no longer expanding at earlier growth rates, and the slowdown in labour productivity. However, human capital investment and innovative technological upgrades could counteract this decline such as raising the retirement age and allocating resources more efficiently. Geopolitics has also become an increasingly important consideration, especially with the current uneasy relationship with the United States. China’s medium-term prospects may be pushed lower the more both economies separate with regards to both trade and investment. There are still currently restrictions on Chinese companies and laws that make it difficult for investors to invest in China especially in areas such as technology, communications, and biotech. For trade and technology, dual circulation seems to be China’s main strategy. For finance and the extraterritorial role of the dollar as the reserve currency, a renewed effort to internationalise the RMB, possibly with the help of China’s Central Bank Digital Currency (CBDC), seems to be what China is aiming for.

The dual circulation strategy is China’s policy aim to insulate the domestic market from the rest of the world by eliminating bottlenecks, whether natural resources or technology, for China to vertically integrate its production and achieve self-reliance served by China’s sizable domestic market. A relevant consequence for the world is that China may no longer need to import high-end inputs, with obvious negative consequences for major exporters of technology like Germany, Japan, South Korea, or the United States. Furthermore, the second aspect of dual circulation is boosting external demand and increasing the importance of the Belt and Road Initiative (BRI) to ensure open markets in the emerging world. In essence, the dual circulation is part of China’s master plan to become self-reliant in resources, technology, and also demand, through its large market as well as that in third markets through the Belt and Road Initiative.

Against this backdrop, it is important to note that China’s growth will not only decelerate further in the future but will also be increasingly less shared with the rest of the world, due to the dual circulation strategy.

Another important threat is financial decoupling. Beyond trade and technology, restrictions also extend into financial and capital markets with a list of alleged military-related Chinese companies prohibited from receiving US-based investment, as well as the continuing threat to delist large Chinese companies from the New York Stock Exchange.

China’s other strategy of making the RMB an international currency may take time as it currently only accounts for 2% of global payments or reserve currency. The first attempt by China to internationalise the RMB was centred on facilitating Hong Kong as the global hub for offshore RMB business; efforts then extended to other offshore centres. Now China is enforcing this policy by fostering cross-border acceptance of its digital currency, profiting from a first-mover advantage. This is important not only in the long run but also immediately, as it may help China bypass the use of the dollar when and if needed. But the internationalisation of a currency would need more than just technical preparations. It also requires certain conditions to be fulfilled for its global acceptance, namely, preserving its value through price stability, offering a large pool of highly liquid assets, and allowing full capital account convertibility for money to instantly flow in and out of RMB. The Chinese government will need to take additional steps toward the liberalisation of the capital account so as to enhance the full convertibility of the RMB.

As such, a key question is whether the digital Renminbi may help Chinese authorities to allow for more capital account openness while still being able to trace capital flows and act accordingly. This explains why the digital RMB’s traceability under the design of “controlled anonymity” is key, as it allows China to control seemingly free financial flows. In other words, the digital currency could offer a way to promote RMB as an international currency, while still keeping control of cross-border flows. Another important challenge is for China to strengthen its own currency for trade and investment exchanges, particularly in Belt and Road areas.

The impact of current policies is bound to affect China’s potential growth further post-2022. This will make the redistribution of income, anticipated under the new “common prosperity” policy difficult to predict. Regardless, Bloomberg Economics is of the view that China could achieve first place in terms of nominal GDP – held by the U.S. for well over a century – as soon as 2031, depending on the productivity of China’s workers and the efficiency of China balancing labour and capital. This outcome is not certain. China’s reform agenda has affected markets, tariffs and other trade curbs are disrupting access to global markets and advanced technologies, and countering-Covid measures have lifted debt to record levels.

With the labour force no longer growing at previous levels and capital spending gradually rising; productivity may be crucial to China’s future growth. If domestic reforms, international relations initiatives and labour productivity goals are successfully implemented, then China may succeed in its overall economic growth goals.

b. What is the current regulatory framework and measures taken in the field of state regulation of domestic economic and investment activities in the PRC?

China’s legal system is based primarily on the civil law system; mixing elements of the old Qing dynasty law code, Russian civil law, and continental civil law.

The main law regarding businesses establishing a presence from abroad is governed by the relatively new Foreign Investment Law (FIL), which officially took effect on 1 January 2020. The FIL replaces the previous laws and regulations governing the three traditional types of foreign-invested enterprises (which were the equity joint ventures law, the cooperative joint ventures law, and wholly-foreign owned enterprises law) or together, the “Old FIE Laws”. In doing so, the new Foreign Investment Law provides for greater promotion and protection of foreign investment as well as enhanced regulatory transparency. In particular, the Foreign Investment Law provides that the foreign-invested enterprises (or, FIE’s) should follow the PRC Company law (which previously only applied to domestic companies), the PRC Partnership Enterprise Law, and other applicable laws in terms of form, organs, and operating procedures.

Prior to the Foreign Investment Law taking effect on 1 January, 2020, foreign investors, who have been operating in China for decades, have faced certain hurdles on business establishment and investment treatment compared with their Chinese counterparts, and have been restricted from investing in certain sectors unless in a joint venture with a Chinese party. Further, foreign investors have needed to navigate through the Old FIE Laws, which imposed specific requirements on corporate formation, foreign ownership ratios, corporate governance and operational management. In addition, insufficient laws protecting IP rights and trade secrets, mandatory technology transfer, and lack of participation in the legislative consultation process have been significant concerns for many foreign investors.

The new law was designed to take steps to address such concerns. The Foreign Investment Law, comprised of 42 articles in six chapters, focuses on foreign investment promotion, protection and administration, and imposes legal liabilities on both foreign investors and Chinese regulators if in violation of PRC laws. The Implementing Regulations, which are key to understanding the impact of the Foreign Investment Law, have also been in effect since 1 January 2020.

I will now talk about some of the main highlights of the Foreign Investment Law and its Implementing Regulations.

In relation to Legal Liabilities: If foreign investors invest in prohibited industries or fail to comply with investment access restrictions, they are required to divest and/or rectify their non-compliance, and may face other sanctions under the Foreign Investment Law and other PRC laws. The Foreign Investment Law also imposes more stringent requirements on government authorities, mandating fair, transparent, effective treatment and facilitation for foreign investors; government authorities and personnel may face legal liability for breaching certain provisions of the FIL and Implementing Regulations.

Regarding Investment Promotion: The Foreign Investment Law and Implementing Regulations provide that foreign investors are to be treated equally with domestic companies regarding access to government funds, land supply, tax exemptions, licensing, project applications and so on. Foreign Invested Enterprises may comment on new legislation and administrative rules concerning foreign investment, and only published documents may form the basis for the exercise of administrative authority. Under the FIL, foreign investors may enjoy preferential policies in certain sectors and regions as designated by the Chinese authorities. Foreign Invested Enterprises can participate in government procurement through fair competition, and must not be discriminated against in such procurement processes with respect to their products manufactured (and services provided) in China. The Foreign Investment Law specifically allows Foreign Invested Enterprises to raise funds through public offerings of equity and debt securities. These provisions aim to encourage more foreign investment into China.

In the area of Investment Protection: The Foreign Investment Law provides that foreign investors’ capital contributions, profit, capital gains, income from asset disposals, royalties from IP rights, compensation or indemnity amounts, and proceeds from liquidation, may be freely remitted in or out of China in RMB or foreign currency; the Implementing Regulations disallow any restrictions on the currency, amount, and frequency of such remittances. The Implementing Regulations provide for a collaborative protection mechanism aimed at facilitating the settlement of IP disputes, and for the protection of the IP rights of foreign investors and FIEs. More specifically, both the FIL and the Implementing Regulations prohibit government officials from forcing foreign investors or FIEs to transfer their technology and require authorities to take effective measures to protect the trade secrets of foreign investors that they have learned while performing their duties. Finally, local governments must comply with policy commitments made to, and investment agreements entered into, with foreign investors, and shall reasonably compensate those foreign investors if it is necessary to adjust those commitments or agreements due to national or social public interest reasons.

Regarding Investment Administration: (1) The Foreign Investment Law works together with the two Negative Lists (which I’ll talk about later) in setting out the areas where foreign investment is prohibited or restricted; thus, foreign investors proposing to invest in China should comply with the restrictive requirements regarding equity ratios and top executives. (2) As the Old Foreign Invested Enterprise Laws have been repealed at the same time that the Foreign Investment Law became effective, Foreign Invested Enterprises are now subject to the PRC Company Law and Partnership Law, which stipulate different rules on corporate governance, voting, share transfers, profit sharing and so forth. So any Foreign Invested Enterprise should, within the stipulated five-year transition period, convert to the appropriate corporate form and update its articles of association and shareholders agreement to comply with such rules which now apply to foreign and domestic investors alike. Given the complexity of the conversion process, it’s expected that specific implementing rules and detailed guidelines will be delivered from the commerce, market supervision and other regulatory authorities on these topics. (3) The FIL also refers to the requirement for national security review of certain foreign investments in sensitive industries and sectors, a mechanism that has been in place since 2006, though not frequently invoked.

The two Negative Lists I mentioned previously refer to the National Negative List, which applies throughout the country, and the Free Trade Zones Negative List (FTZ Negative List), which applies to Free Trade Zones inside China. The two lists are jointly released by the National Development and Reform Commission (the NDRC) and the Ministry of Commerce (MOFCOM) and set out the industries where foreign investment will either be prohibited or restricted. The items on the two lists have been gradually decreasing from year to year. The new updated Negative Lists, which just took effect on 1 January 2022, both further liberalise restrictions on foreign ownership in the field of automobile manufacturing, removing the requirement that foreign investors hold no more than 50% of the shares in automobile manufacturing. The restrictions on manufacturing satellite television ground receiving facilities and key components have also been removed.

The updated rules further say that Chinese companies on the negative list may receive foreign investment to go public overseas, after getting reviewed from relevant regulators to ensure that the businesses are not barred from such listings. Companies still need to undergo separate reviews of their listing plans by the securities regulator and other authorities afterwards.

Foreign investors however in such companies are prohibited from taking part in the management, and their shareholding must follow the same requirements as for foreign investors in China’s stock market. That means that total foreign ownership in a company would be capped at 30%, with no single investor holding more than 10%. Overseas-traded Chinese enterprises that already exceed the limits would not have to reduce foreign investors’ holdings. It is expected that more amendments will be made and the negative lists to be shortened further over the next 2 years. Investors planning to engage in relevant areas are advised to keep a close eye on future developments.

This is in comparison to the new draft rules towards VIE structures (or, variable interest entity structures) released by the Chinese Securities Regulatory Commission (CSRC) which is open for public comment until 23 January 2022. VIEs had mostly been used by China’s tech firms to seek listing on overseas stock markets in order to avoid Chinese restrictions on certain areas from foreign investment. By using VIE structures to list abroad, foreign investors could not invest directly in the domestic assets and hence met the requirements of Chinese law.

The CSRC’s new draft rules now require all Chinese companies subject to security and data reviews for overseas listing plans to file for related reviews and obtain approval with other agencies for overseas stock sales first before registering with the CSRC. Companies need to comply with provisions in the areas of foreign investment, cybersecurity and data security; and a deal could be stopped if authorities deem it a threat to national security.

In essence, companies previously used VIE structures to structure around restrictions on foreign investment but now there is no need to do so. The new rules aim to provide a regulatory framework to guide Chinese companies to raise funds overseas if they choose, rather than tightening controls on overseas share sales as long as they comply with related requirements and file with regulators. VIE structures therefore could face tougher scrutiny under the new rules. It’s predicted that Hong Kong IPOs are likely to be more favoured by domestic firms.

The key points from the draft rules are:

• Foreign ownership in a company is capped at 30%, with no single investor holding more than 10%;

• Companies will be barred from overseas share sales in five circumstances:

  1. if they are violating national laws and rules,

  2. if overseas listings could threaten national security,

  3. if involved in major disputes over assets or core technology,

  4. if major shareholders are investigated for corruption or convicted in the last three years,

  5. if senior management are investigated or punished for major violations;

• Companies may be ordered to divest domestic assets to prevent their overseas IPO from harming national security;

• Companies seeking overseas share sales should file with the CSRC within three days after they submit listing documents to overseas market regulators, including approval from related industry regulators;

• Companies seeking overseas share sales should file with the CSRC within three days after they submit listing documents to overseas market regulators, including approval from related industry regulators;

• Companies are defined as domestic and should follow the new rules if they have over 50% of revenue, profit, and assets coming from the China market over the past financial year, if their main management team consists of Chinese nationals, or their main business operating venue is based in China; and

• Chinese securities firms sponsoring domestic companies’ overseas share sales should file with the CSRC.

Policymakers did not specify which areas involving national and data security would trigger reviews, but analysts said that new technology start-ups, ranging from e-commerce and fintech to smart vehicles and biotechnology, or any other area that has the potential to drastically change people’s lives through digital technologies, will have their IPO documents be more closely monitored and reviewed. It should also be noted that there is no current definition for what an “overseas listing” is but it has been reported that Hong Kong should be put under the offshore listing regime, and that the CSRC has made reference to Hong Kong being an overseas market.

From the developments, it would seem that the provision under the negative list by the planning agency (NDRC) and the Commerce Ministry will play a bigger role than the CSRC’s registration system in deciding the companies’ listing prospects as IPO applicants will need clearance first before going through the registration process at the securities regulator before being able to list successfully.

2. The relationship between government and business within the country

a. What are the features of the relationship between government and private companies in the PRC?

Like many countries, Mainland China has state-owned enterprises and private companies. State-owned enterprises are controlled by the Chinese government directly whereas private companies are not; although they can also be under the Chinese government’s influence, especially large companies.

Laws such as China’s National Security Law of 2015, requires all parties including citizens, state authorities, public institutions, social organisations, and enterprises, “to maintain national security.” Meanwhile, Article 28 of the Cybersecurity Law of 2016 states that network operators, which include telecommunications companies, have to provide “technical support and assistance” to government offices involved in protecting national security.

The National Intelligence Law of 2017 requires every organisation and citizen to support, assist, and cooperate with national intelligence work, building upon the legal framework set forth by both the national security and cybersecurity laws. China’s Company Law in Article 19 also calls for companies to provide necessary conditions to facilitate the activities of the Party.

In September of 2020, new guidelines were issued for private companies by the government, emphasising the obligation to serve the State and to use education and other tools to “continuously enhance the political consensus of private business people under the leadership of the government.”

However, the Chinese government does not habitually micromanage private companies’ day-to-day operations and private companies are largely still in charge of their basic business decisions. The government’s overall aim has remained consistent: The government wants economic growth first and foremost for the country.

Foreign CEOs have sometimes come under pressure to give the Chinese government a larger role in their firms. Again, this is a trend that began pre-2012. The US company, Walmart, which would not allow unions in its US stores, has had government representatives in its companies in China since at least 2006, and government-controlled unions even earlier.

To the question “what’s the relationship between the government and private companies in the PRC?” In many cases, it is impossible to tell precisely how close they are but it is clear that the government holds a strong influence amongst Chinese companies, and that companies see it as being in their own interests to follow government policy decisions.

b. What are the main directions of GR strategies in the PRC now?

When dealing with the Chinese government, communication is important. Many companies, especially large Multinational companies may have departments that deal specifically with government affairs. The implementation of government policies integrated into business goals is seen as facilitating the appropriateness of business decisions in China. This means that a business operating plan which complements public policy objectives is likely to be far more effective than one which doesn’t.

Western Multinational companies must be seen to abide by the letter and the spirit of the law: in relation to labour issues, taxation, or in terms of competition and monopoly laws. The Chinese government appears to currently see the role of the market as a fundamental catalyst for change and is shifting its role towards being the facilitator rather than the deliverer. Businesses are expected to cooperate with China’s policies as China develops horizontal business-government relationships which, at the same time, are geared towards private-sector-led economic and social development.

When it comes to assembling a government affairs team in China, personnel who has deep knowledge and experience of how the system works are essential. It is, therefore, crucial to select a Government Relations Head that fits the company’s needs who can act as a trusted ambassador and communicate well with a company’s executive-level managers. An experienced Chinese Government Relations professional who has a deep understanding of government, a global perspective, has connections across many agencies or departments and who has experience in both large and small companies would be extremely helpful. A good government affairs team will also influence the overall strategy and culture of the Multinational companies in the right direction as well.

Government decisions can be unclear and in the past few years, the Chinese government has also issued a number of new regulations with many laws that are still left with uncertainties. All-new rules and regulations are published by the Ministry of Commerce in the MofCom Gazette. There may be grey areas in the regulatory regime and if there’s a grey area or new area, various governmental departments may have overlapping responsibilities.

The Ministry of Commerce (MOFCOM) has over the years increased its communication with companies, especially Multinational companies, and has been providing updated information to companies via various distribution materials. A working committee has also been formed for foreign-invested companies and MOFCOM has been inviting certain foreign companies to serve on the committee. This committee holds a meeting every two to three times a year and allows a direct line of communication between top-level officials and foreign-invested companies where the latest information is shared with the companies, agendas of the Ministry are introduced, and new policies or regulations are explained.

The Chinese government actively shares information or its draft policies and regulations with selected multinational companies for feedback because the Multinational companies are leading companies in the industry, or because they have established credibility with the Chinese government. For example, Government consultation may include seeking feedback on proposed changes to the law.

To be successful in China, foreign companies must have strong communication lines with not only the central government but with local governments as well. Local government offices exert a significant amount of influence on foreign companies’ operations in China. The influence covers areas such as product and investment approvals, customs clearance, and taxation and many include matters such as land use, human resources, and marketing. Given the influence of government and quasi-government entities in China, many foreign companies seek best practices to manage the wide range of government relationships. Continued expansion of foreign companies into China has brought a heightened recognition of the importance of communication at all levels. Many companies have a dedicated, centralised, corporate-level Government Affairs staff based in one location in China, frequently in Beijing.

In addition to Government Affairs working at the national level, companies often manage government relations at the sub-national level, which includes Provincial, Municipal, District, and County levels, to support business operations in that specific jurisdiction. Sub-national Government Affairs work tends to focus on compliance and implementation to ensure smooth daily operations at the company’s local facility rather than on policy development. Companies that have good communication levels with the local government may find that they can more effectively communicate when specific problems arise.

A company may need to work with multiple local government administrative levels depending on the issue. In general, provincial-level government agencies set the goals and develop strategies for the whole province. Government Affairs work at the provincial level tends to focus on promoting awareness of the company’s products and services to influence top provincial decision-makers and on gathering information about the province’s plans for implementing industrial and other policies. In addition, certain provincial regulators, such as provincial development and reform commissions and provincial bureaus of commerce, have approval authority for foreign investments above a certain threshold or in certain industries. District and zone government agencies are generally micro-regulators responsible for implementing the policies that touch on daily business operations, such as business licences, tax registrations, import and export clearance, work safety inspections, and utility supply.

Businesses may also have to take a careful and deliberate approach when interfacing with authorities in relation to the scope and nature of a particular issue. Careful consideration should be taken as to the current stage of discussion or negotiation with a government department before each engagement. If the query is exploratory in nature, an informal conversation by a local staff member with a civil servant will often suffice for obtaining the necessary advice or information. Where there are more serious matters to discuss, a more formal meeting should be arranged with the authorities. For example, a special investment or cash injection requirement may warrant a meeting with the Ministry of Commerce.

To summarise what would be a best practice guide for a government-relationship strategy:

• Understand a vertically integrated and complex power structure and all stakeholders.

• Develop a government relations strategy or direction.

• Create government relations messaging that demonstrates commercial goals that are aligned with the objectives of the Chinese government and society.

• Understand the role of individuals in power relations, hierarchies, networks, and status positions

• Engage proactively and build communication channels before any critical needs emerge.

• Track and evaluate government relations performance and adjust strategies accordingly.

c. Does the government regulate and legislate for businesses and what are the policies?

As with all governments to varying degrees, the Chinese government has legislative, regulatory and policy power over businesses operating in China and has increased regulations and legislations affecting businesses in recent years. The Common Prosperity policy and the tightening of restrictions based on national security and data protection have led to recent actions against tax evasion, banning private tutoring companies, and the ongoing actions over large Chinese tech companies particularly in relation to data.

In 2016, the government expanded the role of government in enterprises and in 2017, the measures were further extended, with the body overseeing large state companies issuing a directive to SOEs requiring them to write government building principles into their articles of association. In 2018, the Chinese securities regulator, the CSRC, issued a new corporate governance code requiring listed companies in China and overseas to include in their internal guidelines a new inclusive role for the government. Many Chinese companies listed in Hong Kong wrote the government’s role into their constitutional documents. China’s Company law now states in Article 19 (which applies domestically and to foreign-invested companies) that companies need to provide the “necessary conditions” for the activities of party organisations to operate. Chapter 5 of the Chinese Communist Party (CCP) Constitution itself states it requires the formation of a party organisation in both SOEs and private companies with three or more party members.

For foreign-invested enterprises, the Company Law requires party organisations to be established, whether as a Joint Venture (JV) company or 100% foreign-owned, by employing 3 or more party members. However, no management or governance role is required. Party organisations may serve as a channel or platform to coordinate local employee non-work activities or management-employee communications.

In March 2012, then Vice-president Xi Jinping delivered a speech in which he stressed the need to increase the number of governmental bodies inside private business. The government’s efforts to have a more direct line of communication with private companies have been quite successful. One recent survey by the Central Organisation Department, the government’s personnel body, in 2016 found that 68% of China’s private companies had governmental representation, out of a total of 1.86 million companies; and 70% of foreign enterprises. In the province of Zhèjiāng, for example, officials had set a target in August 2018 to have government representatives inside 95% of private businesses.

The Government encourages companies to make their own business decisions and wants to sit alongside local and foreign entrepreneurs and understand more about the decisions.

Part of the reason why China may be concerned about businesses may be because of its focus on high-quality development, which is the route that the Chinese economy is planned to take during the 14th Five-Year Plan for the current 5 years up to 2025. The high-quality development of the equipment manufacturing industry is a ‘top priority,’ President Xi had said.

The Chinese government has been calling for a transition from a focus on high-speed growth to a high-quality development model for a number of years. Beijing last year introduced its dual-circulation economic strategy, which puts a greater focus on the domestic market to drive future growth while adapting to challenges posed by an increasingly volatile and difficult to predict outside world. With outside pressures tending to restrict Chinese firms’ access to certain overseas technology, as well as disagreements over various issues, China is focussing on efforts to build greater self-reliance in core technologies, including semiconductors and artificial intelligence.

d. How often are the goodwill checks of Chinese companies?

4. Business Climate

a. How does China stimulate the country’s economy, including entrepreneurial activity?

Lifting up SMEs

In recent years, China has increased support for small businesses and pledged better use of local government bonds as the economy showed further signs of a slowdown because of tight property controls and from fresh virus outbreaks. The People’s Bank of China will provide 300 billion yuan (US$46.4 billion) of low-cost funding to banks so they can lend to small and medium-sized companies. Other measures include interest subsidies to firms hit hard by the pandemic and a bigger role for local special bonds in driving investment.

The increase in support suggests Beijing is becoming more concerned about the growth outlook, with economists expecting the central bank to provide more targeted support in coming months, with measures such as cutting the reserve requirement ratio for banks again in the coming quarters. Purchasing managers’ surveys released this week showed a bigger-than-expected drop in economic activity last quarter as the government imposed stringent measures to bring virus cases under control.

Ministry officials are supporting this measure in various ways. An official from the Ministry of Industry and Information Technology said during a press conference that the Ministry is formulating ‘one task list, one action plan, and one development plan’ for the 14th Five-Year Plan period (2021-25) for the development of SMEs. The chairman of the CSRC (China Securities Regulatory Commission) Yi Huiman also noted that supporting and facilitating the development of SMEs was a key issue in the global economic recovery. He said that the CSRC will “strive for a complete chain of the institutional system that allows the capital market to serve SMEs’ innovative growth in a faster fashion.”

But perhaps the most interesting piece of news to come out of China regarding SMEs was the launch of a new stock exchange in Beijing late last year as part of an attempt to support the growth of SMEs and the nation’s capital markets. President Xi made explicit that the beneficiaries of the new stock exchange are to be firms cut from a different cloth from the tech giants whose fortunes have cooled recently and that “Service-oriented, innovative SMEs” are to be supported. Traditionally SMEs have struggled in comparison with larger companies to acquire loans from banks. The new stock exchange appears designed in part to make redress for that by connecting SMEs with retail investors.

Real estate

China has also sought to support sectors which it considers to be more vulnerable than others. The central government was, for example, concerned about overheating in the property sector and had moved to cool the market. Policymakers imposed a series of measures to limit borrowing by developers and tighten standards for mortgage lending. At a key economic policymaking conference in 2021, government representatives spoke on promoting the “healthy development” of the property market and better meet homebuyers’ reasonable demands, a signal seen by analysts that further easing of strict property policies could be in place in 2022. Economists at Macquarie say that with the government’s property policy focused on reducing wealth-inequality and curtailing financial risks, there is only likely to be “fine-tuning” rather than a change in direction and their stimulating the sector to support growth would be a “last resort,”.

Capital investment/market-oriented reforms / incentives to increase productivity

Looking at the market historically, in 1978, China embarked on a major programme to open up its economy. It encouraged the formation of rural enterprises and private businesses, liberalised foreign trade and investment, relaxed state control over some prices, and invested in industrial production and the education of its workforce. Much previous research had suggested that China’s economic development was largely due to capital investment, such as investment in infrastructure, technology, and so on. The capital stock grew by nearly 7% a year over 1979-94, but the capital-output ratio has hardly moved. So, despite a large expenditure of capital, the production of goods and services per unit of capital remained about the same. This statistic suggests that capital plays only a constrained role.

Productivity however increased at an annual rate of 3.9% during 1979-94, compared with 1.1% during 1953-78. By the early 1990s, productivity’s share of output growth exceeded 50%, while the share contributed by capital formation fell below 33%. Such explosive growth in productivity is extraordinary – the US’ productivity growth rate only averaged 0.4% during 1960-89, while the Asian Tigers hovered at around 2%, sometimes slightly more, for the 1966-91 period. Analysis of the pre- and post-1978 periods indicates that the market-oriented reforms undertaken by China were critical in creating this productivity boom. The reforms raised economic efficiency by introducing profit incentives to rural collective enterprises (which are owned by local governments but are guided by market principles), family farms, small private businesses, and foreign investors and traders. They also freed many enterprises from constant intervention by state authorities.

The profit incentives appear to have had a further positive effect in the private capital market, as factory owners and small producers eager to increase profits (as they could keep more of them) devoted more and more of their firms’ own revenues to improving business performance.

The reforms also expanded property rights in the countryside, which resulted in the creation of small non-agricultural businesses in rural areas, and granted greater autonomy to enterprise managers, giving them the power to set their own production goals, sell products at competitive prices, and retain portions of the firm’s earnings for future investment. And by welcoming foreign investment, China’s open-door policy added more power to the economic transformation. Cumulative foreign direct investment, negligible before 1978, reached nearly US$100 billion in 1994; annual inflows increased from less than 1% of total fixed investment in 1979 to 18% in 1994. This foreign money has built factories, created jobs, linked China to international markets, and led to important transfers of technology.

While capital investment is crucial to growth, it becomes even more potent when accompanied by market-oriented reforms that introduce profit incentives to rural enterprises and small private businesses. That combination managed to unleash a productivity boom that propelled aggregate growth. China’s open-door policy managed to spur foreign direct investment in the country, creating still more jobs and linking the Chinese economy with international markets.

Strong exports and effective control of the pandemic

Recently, the Chinese economy managed to navigate the trade war and Covid-19 without any large economic stimulus. In fact, it managed a strong economic recovery in 2021. How did it manage that?

The Chinese government has been slowing the expansion of its spending in comparison to GDP growth. In the first half of 2021, the government earned 9.6 trillion yuan ($1.48 trillion) and spent 9.4 trillion yuan. In the same five-month period in both 2021 and 2020, revenue was up 3.6% year-on-year on average and spending rose 0.3% year-on-year. This indicated that the government had adopted a contractionary fiscal policy, in which it expanded its revenue more than its spending in the face of prevailing economic challenges. On the other hand, the growth of government spending was far outpaced by GDP growth, which jumped 5% year-on-year on average in the first quarter of both 2021 and 2020 in real terms, or 7.1% in nominal terms. This contrasted starkly with China’s fiscal policies between 2009 and 2010 in the aftermath of the global financial crisis and those of other major economies in the past two years.

Secondly, exports, which eclipsed domestic consumption and investment, became the most significant of the three main drivers of the Chinese economy. In the first five months of both 2021 and 2020, exports expanded 11.3% year-on-year on average in yuan terms, nearly double the speed of this year’s first-quarter GDP growth. The China-U.S. trade war in 2019 might have rendered Chinese exports bleak. However, China’s prompt containment of the pandemic allowed it to quickly resume production and transport, and utilise the comprehensive strength of its supply chains to outcompete its foreign rivals under pressure from the pandemic, increasing the global market share of its exports. It is, nonetheless, largely uncertain whether this trend can sustain in a long-term post-Covid era.

Thirdly, domestic consumption recovered despite the adverse impact of the pandemic. Retail sales in the first five months of 2021 climbed at an annual average of 4.3% year-on-year from the same period in 2019, lower than the annual average of 8% before the pandemic and GDP growth in the first quarter. This was due chiefly to the impact of anti-epidemic measures on restaurants. In addition, retail sales of major consumer goods, including automobiles, petroleum and related products, household appliances, and garments, fell from the same period in 2019, while retail sales of food, beverages, household commodities, and communication appliances increased considerably year-on-year.

All in all, the increase in retail sales of communication appliances may be the result of 5G smartphone replacements, while there were other increases in the sales of necessities. High-priced non-necessities, such as automobiles, may still be experiencing a rebound from economic recovery. It is expected that restaurants and travel will continue to recover if the pandemic stays under control with easing anti-epidemic measures, while high-priced goods will pick up momentum if the economy sees stable growth in the future. The pandemic and anti-epidemic measures will therefore influence domestic consumption in one to two years.

Lastly, infrastructure investment through government spending had not become the primary source of economic growth as expected. A consensus in the market was reached a year or so ago that the Chinese economy should be relieved from the pandemic through infrastructure investment. This was contradicted by an annual average growth rate of 5% in the first five months of the year from the same period in 2019. The figure, lower than the first-quarter GDP growth, was due to minimal growth in larger projects, such as transport, public facilities, and communication, while noticeable increases were concentrated in smaller social welfare projects, such as education and healthcare.

The question of whether China can sustain this economic growth depends on a number of factors. These include, first, how much global trade will be left for China when its competitors fully recover from the pandemic? Secondly, the strength of Chinese exports may not be sustained if the country’s industrial capacity is not enlarged with future investment, in which there has been little growth in the past half-year. Lastly, domestic consumption is the long-term driver of the Chinese economy, and it depends on the conditions of the pandemic. If the pandemic ends, there should be a continued recovery in consumption. If it persists, striking a balance between pandemic control and boosting consumption will be more challenging.

Greater Bay Area

The Greater Bay Area provides a wide range of business support programs and financial incentives to foster the region’s growth. In the Outline Development Plan released in 2019 by the Chinese government, Hong Kong, Macao, Guangzhou and Shenzhen were prioritised as core engine cities. Hong Kong plays a unique role in this regional complex, distinguishing the Greater Bay Area from other “Bay Areas” in China. The four cities will facilitate the openness to foreign direct investment.

One of the key advantages of the Greater Bay Area for both local and foreign investment are the low tax rates, encouraging higher mobility and easier connectivity of talents from all over the world. Usually, the income tax rate for an individual taxpayer can be up to 45%, but eligible individuals working in the Greater Bay Area can enjoy a preferential tax rate of 15. Living allowances are also available for eligible high-level professionals and technical personnel, adding further value to the relocation of strong talents.

Business owners can enjoy notable benefits when selling across borders via Free Trade Zones (FTZ). Incorporating within one of these zones comes with faster customs clearance, which means that goods can be moved between FTZs and overseas countries without paying taxes and duties in China. It will also be easier to manage cross-border currency exchanges with banks.

Many of the areas which China seems to have increased regulations recently are also areas that foreign policymakers are concerned about, but changes may be slower. In China’s system, things may seem to happen faster. Regulatory tightening is, however, only one side of the equation. There are also sectors that are being supported by the government — such as semiconductors, green technologies, and consumer brands. So, the government is attempting to restructure the economy and to benefit the long-term development of the country.

So, there is plenty of entrepreneurship in China driving growth outside the areas being targeted for reform by the government. In fact, China’s economy is now almost entirely driven by private businesses. Almost 87% of employment in China is in private companies and private firms also account for 88% of China’s exports.

1. Features of China as a country for investment

a. Why Buy Chinese Stocks?

China’s main stock exchanges are in Shanghai, Shenzhen, and Hong Kong, while a new board was recently launched in Beijing; and I’ll talk more about these later. China is an interesting market to invest in, and many believe, provides much in the way of opportunities.

Many Western and Asian investors are of the view that any long-term portfolio should include China, and now is a good time to enter the market given its recent drops. The MSCI China Index was down nearly 20% in 2021 while at the same time the US S&P 500 Index was up nearly 16%. A large investment firm in the US recently increased its investment focus on China and urged investors to increase exposure to China by three times. It is an appropriate time to invest, not just in the Chinese market generally, but also in the specialised companies and sectors. The view is that China has a middle class of hundreds of millions which creates enormous investment opportunities. It is expected by some that offshore Chinese shares could rise by as much as 32% from current levels by the end of 2022.

China also has many rising industries. China is a large percentage of the emerging markets indices – roughly 37% of the MSCI EM Index.

China’s e-commerce market is now the largest globally and is projected to grow even larger still having held an estimated 37% of the global e-commerce market share in 2019. Cafés, bars, and other drinking establishments generated US$ 7 billion in 2021, which was up almost 25% from 2020, and is also projected to continue its growth trajectory. China is also no. 1 in exports globally, and is allocating, from 2020 to 2025, US$2.1 trillion to infrastructure investment. It has the largest number of tech unicorns globally (2019, tech startups valued at $1Bn or more), and its equities are estimated to deliver close to double-digit annual investment returns over the next 10 to 15 years, as the economy approaches becoming the world’s largest, in absolute terms.

China is still predicted to produce long term gains. Analysts have tied this conclusion to three reasons: The current bear market is tied to near-term policy uncertainty rather than a broader economic downturn, and other emerging markets have not been as depressed in 2021. And though there may be further regulatory reform in China, the market’s reaction may be overdone.

Since the COVID-19 pandemic began in early 2020, China’s policy has used quarantines and travel restrictions — whether within a city or with other countries — to control outbreaks. With only a contraction in the first quarter of 2020, the country became the only major economy to grow in 2020. Although hotels and restaurants were impacted, the manufacturing and agriculture sectors were the least affected and have contributed the most to growth. Industrial production grew by 2.8% in 2020 and rose by 10.1% in the first 11 months of 2021 from the same period in 2020. China’s factory activity unexpectedly increased in December, according to an official measure called the Purchasing Manager’s Index.

According to international surveys in 2020, countries applying a Zero Covid strategy had almost returned to normal economic activity. Their GDP was down only slightly (-1.6%) compared to 2019. Meanwhile, the decline in GDP was greater (-5%) in G10 countries that had not eradicated the virus. Elimination in the short term at least appears to be a cost-effective economic investment with lasting positive effects. In the second quarter of 2021, the GDP of the Zero Covid strategy countries grew in 2020 compared to the fourth quarter of 2019 (+1.7%). In the countries that did not eradicate the virus, GDP decline in 2020 remained significant compared to the fourth quarter of 2019 (-1%).

The Winter Olympics, which are to start on the 4th of Feb, may make Beijing the first city to have held both Summer and Winter Olympics and the Chinese government is placing commendable emphasis on COVID-19 control in relation to the Olympics.

b. What are the risks of investing in China?

China’s recent policy which is much in the news is: ‘Common Prosperity’ and this is clearly significant to the market. It appears this means that more regulations will be imposed upon the market. The Chinese government certainly seems to have put a renewed focus on the country’s deep inequalities through national, economical, and financial security policies. There are reasons to be cautious as these sudden changes in the landscape might lead to unintended investing consequences. However, that is not to say that “the short term bumps, the zigs and zags” aren’t signs of opportunity for investors. There is reason to believe that as the government is focusing on stability in 2022, the government may increasingly be able to assert its influence with more predictability in the market going forward. It could also be argued that with China addressing the issues of cybersecurity, antitrust, and other social issues sooner in its development trajectory than is often the case, China’s economy will also stabilise at an earlier stage than other countries.

Another issue is the lower levels of China’s GDP which could potentially signal that investment in China would not yield as positive returns as presumed. And there are investors who believe that China must be seen now as having undue investment risk in the light of the continuing uncertainties. Deriving from tensions between profits and national goals, and extensive regulatory actions, the level of risk remains uncertain even though there is strong growth potential in China. The uncertainties arising from the pivot in Chinese policy may have caused some foreign investors to look at the situation differently, though it is certainly possible that the current situation is part of a regulatory cycle that the market will over time absorb.

In addition to the uncertainty I have just talked about, there is a risk of inflation. There is also currently an amount of volatility in China with listing restrictions, law changes and rule adjustments on foreign investment, as well as changes as to how money can be brought out of China. Coupled with the recent regulatory actions in various industries, it is difficult to predict what happens next in any investment sector. It will be necessary to monitor policies such as national security, supply chains, and inflation all of which will have ramifications for the market. And as investors slowly come to grips with that, opportunities for investment may become clearer.

Debt, both national and foreign, is also an important factor for risk in investments in any country. Increasing national debt leads to higher interest rates, lower stock returns and thus hinders investment. At the end of 2020, China’s foreign debt, including U.S. dollar debt, stood at roughly US$2.4 trillion. Corporate debt was US$27 trillion, while the country’s total public debt exceeded 300% of the GDP. China’s public debt is already 60% higher than the average across other countries, and the debt-to-GDP ratio is growing at a rate of about 11% per year. As China’s GDP growth has been lower than 11% annually for the past 11 years, its debt is outpacing its GDP growth.

At the same time, according to a report by the Institute of International Finance in January 2021, China’s outstanding debt claims on the rest of the world increased from about US$1.6 trillion in 2006 to more than US$5.6 trillion as of mid-2020, making China one of the biggest creditors to low-income countries. Therefore, while debt levels may create reasonable concerns around investment risk, the debt level is not yet at an unsustainable level that would negate interesting investment opportunities.

In comparison, the US public debt stood at US$28.9 trillion in November 2021, an estimated 120% of GDP. 53% of federal debt was owned by investors from the United States, including the Federal Reserve. Foreign investors owned 25% of federal debt and China is the 2nd largest non-US holder of US debt with a recorded value of approximately US$1.1 trillion as last recorded in October 2021. Unlike China and the US, Russia’s national debt is below 100% of its GDP at approximately 18% of GDP (US$211 billion). Russia’s debt stands at US$490 billion as of October 2021.

China also is also facing pressures from overseas and, as we are all aware, current patterns show that there may be a shift towards deglobalisation and decoupling with the US economy. A few Chinese companies have been delisted from the New York Stock Exchange while further measures have been taken to make it more difficult for Chinese firms to list on US exchanges. Another source of external discontent towards China has been the disruption of global supply chains caused by China’s manufacturing industries and ports shutting down during the peak of the COVID-19 pandemic in mid-2020. This resulted in an international economic slowdown as cargo and ship schedules were disrupted with the most major bottlenecks occurring in the ports of China, the source of one-third of the world’s manufacturing. In August 2021, the Port of Níngbō —the world’s third busiest—was closed over a single COVID-19 case, after the Port of Yántián—the world’s fourth busiest—shut down in May and June due to 150 cases. With container shipping capacity down, and some Chinese ports disrupted by COVID-19 outbreaks, shipping prices increased and waiting times lengthened. The end effect is it has become a far more costly and uncertain enterprise just to bring goods into the country to sell to customers. As China acts to rein in the Omicron variant, the international community has concerns there may be further supply chain disruptions due to lockdowns in China, resulting in countries’ attempts to diversify or reshore their supply chains to lessen dependency on Chinese exports and services.

Supply chain disruptions coupled with China’s renewed drive for “Common Prosperity” may further affect investor sentiment in relation to China especially with the increasing regulation on big tech companies and the property market. China’s residential real estate market has deteriorated, nearly 30% of the sector’s high-yield bonds – which account for the bulk of Asia’s sub-investment grade corporate debt market – were trading at distressed levels in early December 2021. Chinese homebuyers are postponing their purchases. Risk aversion among creditors and investors is intensifying, increasing the probability of further defaults and leading the property market into what is being called a “negative credit loop”.

However, Beijing has been resolute in reining in the excesses in the property sector in the face of a sharper slowdown than markets anticipated. It was stressed upon (during the online Davos Agenda meeting) that the “Common Prosperity” policy is “not egalitarianism” but a means to make the “pie bigger” for a more “equitable share” for all. The Chinese government also offered further assurance that “All types of capital are welcome to operate in China, in compliance with laws and regulations and play a positive role for the development of a country.”

Homecoming for listed companies

Another risk that investors may face would be the possibility of Chinese companies facing delisting in the US stock exchanges. If investments have been made into a Chinese company and it wishes to list in the US, the US’ Holding Foreign Companies Accountable Act (HFCAA) recently enacted and signed into law in December 2020 would require Chinese companies to delist from US stock exchanges if they do not submit their financial audit papers to the Public Company Accounting Oversight Board (PCAOB) for three years in a row. The SEC’s earliest enforcement of the HFCAA would begin in 2022, making 2025 the earliest time for companies facing possible delisting (unless the accelerated law goes through which shortens the time to two years).

It looks increasingly likely that there will be further de-listings of companies if the US and China do not agree to another memorandum of understanding that exempts Chinese companies from releasing their financial statements as they did in 2013. The law seems to be motivated by American concerns about Chinese businesses having an unfair advantage over local enterprises as well as anti-PRC sentiment fuelling calls for the US government to enact laws to make it harder for Chinese companies to do business in America and to delist them from American stock exchanges. Measures have thus been taken to make it harder for Chinese companies to list on US exchanges, prohibiting investment in certain Chinese companies, and requiring Chinese companies to disclose their financial statements or face delisting. If companies are forced to delist from the US, companies may lose out on increased media attention, better analyst coverage, better liquidity and increased enterprise value, all of which translates to lower cost of capital, for both debt and equity, and higher financing costs. An investor investing in a company facing delisting may therefore be looking at a company that could be facing a reduction on real value.

Companies may also lose out on the chance of raising high amounts of capital. Since 1999, more than 400 Chinese companies have raised over US$100 billion on the US stock exchanges.

China however appears to be encouraging Chinese companies to delist from US exchanges. China has enacted its own laws encouraging overseas-listed Chinese companies to list shares in China while remaining listed overseas and enacted laws to discourage listing in the US. It has streamlined the listing process in China and announced plans to increase supervision of Chinese firms listing offshore. It will tighten the procedural rules for listing overseas, and require any company wanting to list overseas to comply with China’s laws and regulations on safeguarding Chinese data. In fact, it was recently reported that China is currently deliberating on prohibiting internet companies outright from listing overseas.

Although the US may have exempted Alibaba, Baidu, and JD.com from delisting right now, it is likely that many other Chinese listed companies, especially some that involve national security or national data, may not be able to comply with US disclosure requirements because they would risk violating Chinese law. It’s also likely that all Chinese companies listed in the US will face enhanced scrutiny by the U.S. authorities and inevitably consider all available options, which would include listing in Hong Kong or in Mainland China.

c. Is there a difference between investing in China through funds and buying common stock in Chinese companies? If so, which option is more profitable?

Whether investing from outside China in stocks or funds, the structure of how this works is important. For stocks, some Chinese stocks are listed offshore such as in New York, Hong Kong, or London, while most are traded on Chinese exchanges. Most Chinese stocks available in the U.S. are traded as American depositary receipts (ADRs). In most cases, ADRs entitle investors to foreign shares being held on their behalf at a bank. But that is not the case for some Chinese ADRs, which represent an interest in a company that is part of a contractual structure with a Mainland Chinese Group – often called a Variable Interest Entity, or VIE – designed to get around China’s restrictions on foreign ownership in certain industries and assets. Today, there are around 250 Chinese companies listed in the U.S. capitalised at more than US$ 2 trillion with technology companies accounting for just over half of that at US$1.2 tn. Alibaba alone has a US$0.6 trillion in market cap.

Because of ongoing political uncertainty overseas, some Chinese companies have secondary listings in Hong Kong, although companies can sometimes find it difficult to meet Hong Kong’s stricter listing standards. Institutional investors have moved some of their Chinese holdings out of ADRs and into stocks listed in Hong Kong – which includes H-shares – or those listed in the Shanghai and Shenzhen exchanges, known as A-shares.

To trade stocks listed in Hong Kong, the broker Interactive Brokers Group, for example, charges a commission ranging from 0.015% to 0.05% per trade value — the higher the monthly volume, the cheaper the commission rate — plus other fees and clearing costs. There is no minimum investment threshold, but there is a floor charge of HK$4 to $12 (US$0.51 to $1.54) per order.

To buy shares listed on the HKEx, investors usually settle in Hong Kong dollars and this can be done in two ways: investors can convert their own currency in their accounts to Hong Kong dollars or buy Hong Kong stocks on margin, borrowing Hong Kong dollars from a brokerage firm with investments as collateral.

Investors can also invest in certain Chinese A-shares directly through brokerage firms using the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect. Both are cross-boundary channels that allow investors in the Hong Kong market and in the Mainland market to trade shares on the other market using local brokers and clearing houses and offers international investors a broader range of Chinese companies to invest in through Hong Kong. Northbound investment means Hong Kong or other international investors investing through Hong Kong into Mainland China while Southbound investing means Mainland investors investing into Hong Kong. In the Shanghai-Hong Kong stock connect, there are approximately 2400 stocks in the northbound link and 400 in the southbound link. For the Shenzhen-Hong Kong stock connect, there are approximately 3000 stocks in the northbound link and 500 in the southbound link. Major stocks such as CITIC Securities, Ping An of China, and BYD are available to Hong Kong and international investors through the northbound stock connect while stocks such as HSBC, Tencent, and AIA are available to Mainland Chinese investors through the southbound stock connect.

Access, however, to the mainland Chinese market is only available through some brokerage firms and not others. The stock-connect regime allows qualified mainland investors to trade in HKEx-listed shares and enables international investors to trade selected A-shares, listed on the Shenzhen or Shanghai Stock Exchange, via the Hong Kong Stock Exchange.

Just over 50% of the companies listed on the HKEx are from Mainland China and they account for over 80% of HKEx’s market capitalisation. The trend is that more and more Mainland stocks are being listed on the HKEx, including so-called homecoming companies, which were previously listed in New York, boosting HKEx’s total market capitalisation. In 2020, Hong Kong ranked 2nd globally in total proceeds of IPOs with a total of 154 new IPOs completed, raising a total of HK$ 397.5 billion (US$ 50.1 bln); representing an increase of 26.5% in terms of funds raised compared to 2019. Hong Kong’s current market capitalisation as of December 2021 is HK$ 47.7 trillion (US$ 6.1 trillion).

The Shanghai stock exchange’s market capitalisation was also US$ 6.1 trillion, ranking 3rd globally, and raised US$49.9 billion at the end of 2020 which was the 3rd highest in that year after Hong Kong. Shenzhen’s market capitalisation was US$ 4.5 trillion ranking 6th globally, and raised US$ 18.5 billion which was the 5th most that year. Together, these three Chinese stock exchanges hold over US$ 16.7 trillion in market capitalisation, just under the New York Stock Exchange at US$ 26 trillion and the NASDAQ at US$ 23 trillion.

Hong Kong’s legal system is a common law system while the Mainland legal system is a civil law system. Hong Kong’s courts are independent from the government and the legal system has been consistently ranked high in Asia, scoring above 90 (out of 100) since 2003 in respect of the rule of law and ranking 2nd for judicial independence in 2019 from the World Economic Forum. The two separate systems coexist under the ‘one country two systems’ principle, a principle which also allows Hong Kong to maintain its own currency, the HKD. The HKD, which is a freely convertible currency, is pegged to the USD while the Chinese currency, the RMB, has exchange controls and is only allowed to trade within a narrow band of 2% above or below the day’s midpoint rate. This makes Hong Kong an easier option for investment by overseas investors.

The Shanghai and Shenzhen stock markets have restrictions on what categories or investors can buy stocks and what is available to them for purchase. Companies incorporated in mainland China and listed in either Mainland China or Hong Kong can issue different classes of shares depending on where they are listed and which investors are allowed to own them.

• A-shares represent publicly listed Chinese companies that trade on Chinese stock exchanges such as the Shenzhen and Shanghai Stock Exchanges. These stocks trade in yuan renminbi (CNY).

• B-shares are Domestically Listed Foreign Investment Shares. They list on the Shenzhen and Shanghai exchanges, and are denominated in RMB but settle in USD in Shanghai and HKD in Shenzhen.

• H-shares, traded on the Hong Kong Stock Exchange, are shares issued by Mainland Chinese companies and are subject not only to relevant Chinese laws and regulations but also to Hong Kong applicable laws and non-statutory codes. They are freely tradable and usually trade using the Hong Kong dollar (HKD).

• Chinese businesses with hold companies incorporated and listed outside mainland China are generally referred to as ‘Red Chips’, ‘P Chips’, or ‘S Chips’ depending on their ownership structure, revenue source, and listing location. Many of these companies are incorporated in the Cayman Islands and hold Chinese businesses and are listed on the Hong Kong Stock Exchange.

A-Shares are generally only available for trading to mainland Chinese citizens. However, foreign investment in these companies is allowed through a regulated structure. Some institutional investors may qualify as Qualified Foreign Institutional Investors (QFIIs) or other strict trading programs. Only a group of institutional investors on the Shenzhen or Shanghai Stock Exchange have qualified for QFII status and can directly buy and sell Chinese A-shares on the Shenzhen or Shanghai stock exchange.

A-shares are issued in Mainland China under Chinese law and are quoted in RMB. For investors who are not QFII qualified, the main way to buy these shares may be through an emerging market fund or buying certain shares through the Hong Kong Stock Connect.

In 2021, investors seemed to switch from interpreting regulators’ actions as only focused on a few big tech firms to concern that no industry was going to be isolated from the impact of regulatory reforms. Concerns that changes aimed at reining in the excess leverage of property developers, such as Evergrande, could lead to the risk of financial contagion. However, the targeted regulatory changes impacting China’s stock market are not unprecedented and are often followed by sharp rebounds in share prices driven by broadly favourable policy actions. Funds that have a portfolio of stocks may produce less volatile returns.

It’s interesting that there has been a bear market at some point nearly every year in Chinese stocks (17 of the past 20 years), usually driven by some policy issue. Historically, investors have tended to be compensated for this heightened volatility with strong annualised total returns. From August 2001 to August 2021, the MSCI China Index produced an annualised total return of 12.3%, outperforming the 9.3% produced by the S&P 500.

Funds

There is also the option of not holding Chinese stocks directly, but instead investing in investment funds. A single fund, usually a portfolio of stocks, offers a viable route to investing in the China market because of the restrictions on investing directly into the Mainland Chinese market. However, most mainland China funds are not available to overseas investors.

In 2015, the China Securities Regulatory Commission (CSRC) and the Hong Kong Securities and Futures Commission (SFC) introduced the Mainland-Hong Kong Mutual Recognition of Funds, or the (MRF). The MRF allows Mainland China and Hong Kong funds that meet the eligibility requirements to follow streamlined procedures to obtain authorisation or approval for offering to retail investors in each other’s market. In other words, once a fund has been authorised by or registered with the relevant authority in one jurisdiction (home jurisdiction), it is generally deemed to have complied in substance with the relevant requirements of the other jurisdiction (host jurisdiction) and may enjoy an easier process of being offered to the public in the host jurisdiction. The initial investment quota for the MRF was RMB300 billion for in and out fund flows each way.

As of late 2020, Hong Kong’s SFC has approved around 50 China-domiciled funds to be sold in Hong Kong for Hong Kong and international investors but only around 24 funds have been made available to investors. Meanwhile, there are around 30 Hong Kong-domiciled funds available to be sold in Mainland China.

The Mutual Recognition Funds essentially provides a channel for Hong Kong and other international investors investing through Hong Kong to access the Mainland China market by investing in funds managed in Mainland China.

With funds in China, there can be a large discrepancy when it comes to growth. That’s why active management is particularly useful when it comes to China with active managers choosing and building a portfolio based on their research.

Because of the restrictions on direct investment by overseas investment directly into the A-share market, some overseas funds either have their own QFII quotas and invest on behalf of their funds in the A-share markets.

Private equity funds & Venture capital funds

Both the VC market and PE market in China have enjoyed a large surge in the past several years, with total assets managed at around RMB 9.7 trillion (USD 1.5 trillion) in late 2019. VC and PE funds usually obtain their funding from domestic investors, though foreign investors also invest in both, with more foreign investors investing into PE funds than VC funds.

China is the world’s second largest private equity (PE) market and accounted for approximately one-third of global private equity fund raising in 2019, with almost USD 200 billion in PE fundraising. From 2004 to 2014, China’s private equity funds outperformed the rest of the world’s, both on an absolute as well as a risk-adjusted basis.

However, China’s private market appears to be still significantly under-represented in investors’ portfolios. As China opens up its financial sector, it looks like that’s set to change. In 2015, 17% of the country’s industries were either restricted or prohibited for foreign investors. In 2020, that figure has shrunk to 6%. In addition to the opening up of certain industries, there have also been initiatives such as the Qualified Foreign Limited Partnership (QFLP) that was introduced to attract cross-border capital flows. The QFLP allows foreign asset management institutions to establish foreign-invested equity investment management enterprises onshore. These enterprises can establish equity investment funds or other closed-end private funds in the form of private placement, with such funds being able to accept domestic and overseas investors. Moreover, the funds can be converted from the foreign investors’ foreign exchange capital into Renminbi to participate in private equity investment in China.

China’s PE market is also one of the fastest growing markets in the region. Total private-equity investment value in China rose to US$ 94 billion in 2018, up 64% over the previous five-year average. The market’s growth has been driven by China’s evolving economy, whereby more and more businesses are entering the advanced or mature stages of their growth life cycle, thereby giving rise to buyout and special situation opportunities. These opportunities will still be ongoing in the upcoming years.

The venture capital market in China is also growing steadily. Together, VC and PE funds raised nearly USD 200 billion in the first nine months last year, a 50% increase from the same period from 2020. The number of venture deals in China rose 56% in 2021’s first quarter from a year earlier, the fourth consecutive quarter of rising activity, as start-ups pulled in RMB 354 billion (US$ 55 bn) in investment.

Bond Connect

Another mode of investment is the Bond Connect. The Bond Connect is an investment channel which establishes a mutual bond market access between Mainland China and Hong Kong. The Bond Connect allows Hong Kong, Mainland and overseas investors to trade, settle and hold bonds tradable in the Mainland and Hong Kong bond markets through a connection between the Mainland and Hong Kong Financial Infrastructure Institutions.

The Bond Connect consists of the Northbound link, which allows Hong Kong and international investors to invest to buy and sell bonds on markets in Mainland China; and the Southbound link, which allows Mainland investors to buy and sell bonds on markets in Hong Kong. The Bond Connect’s average daily turnover in 2021 exceeded RMB 26 billion (USD 4.1 billion) and its trading volume last year was RMB 6.5 trillion (USD 1 trillion).

The Northbound connect has attracted over 2400 global institutional investors and has facilitated Chinese sovereign bonds to be included into various major global bond indices such as Bloomberg-Barclays Global Aggregate Index and J.P. Morgan Government Bond Index – Emerging Markets.

Bond Investors

Investors looking to invest into Asian bonds recently interviewed by S&P Global Ratings said that China was by far the most attractive investment destination despite concerns about economic growth and the country’s relationship with the US; and a growing number of investors were looking to buy Chinese onshore bonds. Out of 178 institutional investors interviewed, over 95% said they were looking to increase their exposure into Asia, with the Bond Connect being the most favoured route into China. Their top choice of investment was infrastructure, transport and logistics, and technology and telecoms as they were the main areas of growth.

5. How do you think Russia-Chinese trade and economic relations are being built today?

Sino-Russian ties have been close before but in recent years, especially after 2012, there has been an increase in political, military, and economic cooperation. From 2012 to 2017, ties between China and Russia strengthened to a relationship of collaboration, with both countries investing in each other’s large projects. In 2014 Russia reassessed its relationship with China and pursued much closer ties. China invested in Russian energy projects, and Russia made some arms sales to China. Although trade and investment expanded, Beijing’s economic cooperation with Moscow remained low compared to China’s trade and investment involved with the rest of the world even during this period of great cooperation.

Today, China and Russia appear to be working to put economics at the centre of their strategic partnership; under China’s Belt and Road Initiative (BRI), Chinese companies are building roads, railways, fibre-optic cables, and other hard infrastructure across Eurasia. Russia’s Eurasian Economic Union (EAEU) harmonises customs processes to create a single market among Russia, Armenia, Belarus, Kazakhstan, and Kyrgyzstan. The world, and especially where these efforts most directly overlap in Central Asia, needs both “hard” and “soft” infrastructure upgrades. To this effect, the two countries have repeatedly talked of linking the Belt and Road Initiative and EAEU. But so far they have provided few practical details.

Chinese-Russian trade is currently highly concentrated in natural resources, where Chinese and Russian interests most strongly overlap. Even as China and Russia cooperate in building digital infrastructure, each side appears to impose restrictions that limit data flows.

Sino-Russian Oil and Gas Trade

Recently, Russia and China crossed the US$110 billion mark in the history of their trading partnership with the intention of doubling this number by 2024. Their energy and strategic cooperation are at the highest point it has ever been showcasing the deepening partnership between the two states. Russia’s “Energy Strategy 2030” (increasing market penetration in Asia) and the 2014 Trade deal between Gazprom and CNPC, which will export 38 billion cubic metres (bcm) of gas annually to China by 2024 is clearly coming to fruition as exports to China continue to increase. In 2020, Russia was China’s top oil and gas provider making up 13% of China’s total energy imports and 20% of Russian oil and gas exports. The exports totalled US$29 billion by 2020 and are expected to continue rising; the success of the energy cooperation may indicate the untapped potential in relation to Sino-Russian cooperation in more areas of trade.

The Power of Siberia, which is a project instated under the umbrella of the Belt and Road Initiative, has been operating smoothly, transporting 10 bcm just in the past few months and with the new expansion project, Power of Siberia 2, this energy cooperation is only going to continue growing further. This project spans the width of Russia in pipelines. Aside from the construction of pipelines, infrastructural projects such as the Amur Gas Chemical Complex (Amur GCC) are evidence of greater geoeconomic integration. Analysts predict that China’s energy imports from Russia will soon equal one-third of the entire EU’s energy imports from Russia. As Russia continues to look east and penetrate the Asian energy market, China will remain a key export destination as well as a facilitator of the Russian energy trade.

Russia in the Belt and Road Initiative (BRI):

The BRI is a transcontinental long-term policy and investment program launched by China in 2013 and aims at infrastructure development and acceleration of the economic integration of countries along the route of the historic Silk Road aiming to “promote the connectivity of Asian, European and African continents and their adjacent seas, establish and strengthen partnerships among the countries along the Belt and Road, set up all-dimensional, multi-tiered and composite connectivity networks, and realise diversified, independent, balanced and sustainable development in these countries.”

Russia and China signed a declaration of cooperation under the Belt and Road Initiative on May 8, 2015. This further led to the 2018 signing of the non-preferential FTA between China and the EAEU with predictions of it eventually evolving to include tariffs and significantly boost trade in the coming decade.

The connectivity dimension of the Belt and Road Initiative, which seeks to improve land-based transportation links between the EU and China, is considered naturally aligned with Moscow’s desire to unlock its transit potential in Eurasia. Of all the possible overland pathways between China and Europe, the one through Russia is the shortest. Moreover, the Eurasian Economic Union (EEU) of Armenia, Belarus, Kazakhstan, Kyrgyzstan, and Russia allows cargo to pass through just two customs posts en route from China to the EU’s doorstep in Poland, Finland, or the Baltic states. Thanks to policy incentives provided by China, this route is now booming, with the volume of cargo transit growing by double digits every year since 2015. In the first ten months of 2018 alone, the volume of goods transported between China and Europe via Russia grew by 23% to 323,000 TEU (twenty-foot equivalent unit, a measure of ship cargo). Moscow and Beijing are discussing projects for upgrading and expanding existing transportation links, including a high-speed rail connection between Moscow and Kazan with possible expansion to Europe and China, a highway from the Kazakhstan-Russia border to Europe, and several smaller projects to address existing bottlenecks.

In the 1st half of 2020, the trade turnover between Russia and Hong Kong amounted to USD 1,124,286,437, an increase of 69.23% (USD 459,916,079) compared to the same period in 2019. Russian exports to Hong Kong in the 1st half of 2020 amounted to $909,065,127, an increase of 97.65% ($449,132,997) compared to the same period in 2019. Russian imports from Hong Kong in H1 2020 amounted to $215,221,310, an increase of 5.27% ($10,783,082) compared to the same period in 2019.

The balance of trade between Russia and Hong Kong in the 1st half of 2020 was positive in the amount of USD 693,843,817. Compared to the same period in 2019, the surplus increased by 171.57% (USD 438,349,915)

Chinese economy 2022

Stabilising growth

Common prosperity

Supporting SMEs

Continued economic growth

Curbing real estate

Curbing tech companies

National security law 2015

Cybersecurity law 2016

National Intelligence Law 2017

Homecoming for listed companies