China Fears Western Financial Risks

China has made huge progress in recent years, and according to several top officials in the country, it has recently lifted 100 million people out of poverty by increasing incomes and creating jobs in poorer regions. This has been achieved through developing logistics and the frenzied construction of bridges, roads and high-speed railways. That said, life remains quite hard for many Chinese people, but there have been significant improvements over the past 30 years. These have been felt, without exaggeration, by everyone in the country. The yuan/dollar exchange rate, which has held strong in the range of about 6-8.3 yuan/dollar for a quarter of a century, is a striking illustration of this. The Chinese currency has strengthened significantly since May 2020, making life difficult for exporters but benefitting most Chinese, who continue to keep their savings in yuan.

Unlike many advanced economies, China has a clear strategy for reform, along with plans for attracting capital and developing technology. China updates its main economic development plans every five years. What are the key takeaways from the latest Five-Year Plan?

China intends to more than double its investment in next-generation infrastructure over the next five years to $1.6 trillion. Significantly, this boost in funding will be focused on developing telecommunications and 5G networks, building charging stations for electric vehicles, and improving data processing technologies and high-voltage power transmission. Financial support for innovation is of critical importance to China’s densely populated regions. The east and south of China are priorities for the country's leadership, especially in terms of attracting and supporting high-tech firms and technology parks. The role of sheer political will should not go without mention here. It has a significant impact and shapes the reality on the ground: one only needs to look at the metropolis of Shenzhen, which was built entirely from scratch.

At the same time, huge financial flows for infrastructure development always reach their intended destination. China is often criticized for inefficient investment practices and for “laying asphalt everywhere” rather than focusing on demand. But ultimately, the Chinese government’s approach has proved astute. While "asphalt" or "concrete" China is emerging from the crisis, the "demand-oriented" and "pinpoint” investments of the US and EU have yet to materialize. That said, China has announced a reorientation towards domestic demand in 2020, among other initiatives. This brings us to what is perhaps the key point.

China has closed its borders for about a year, making entry for foreigners extremely difficult. Moreover, the country is in no hurry to open up again, despite its success. So why remain closed?

In my opinion, China’s leadership is not so much afraid of the virus as of foreign financial risks. Beijing is convinced that Western financial markets today do not reflect the real state of the economy. To some extent, China is trying to isolate itself from the risk of bubbles, and is therefore strengthening the "great economic wall of China" by shifting its attention to the domestic and Asia markets with the help of its new "dual circulation" strategy. This two-pronged strategy combines efforts to develop China's domestic economy with international economic cooperation, creating a synergistic effect.

China’s immediate international economic goal, according to this strategy, is to transfer its financial and economic center from unstable Hong Kong to mainland China, and partially to the island of Hainan. In global terms, China’s leadership sees the south of China supplanting not only Hong Kong, but even Singapore—Asia’s current financial, economic and logistical hub.

The government has launched an initiative in Hainan that gives priority registration to tech firms and highly profitable financial organizations, including participants in the financial leasing market and pharmaceutical companies. Other measures are being taken to encourage local corporate centers and international holdings (headquarters of companies operating across Asia) to move to the southern region of China, as well as high-tech companies specializing in industries such as agricultural technology and hybrids.

Whether China can make Hainan a real alternative to Singapore remains to be seen. Nonetheless, the goal itself is very ambitious.