CDI，Chicago Council on Global Affairs, Bay Area Council Economic Institute and Asia Pacific Foundation of Canada Jointly Host Seminars in North America
CDI, Chicago Council on Global Affairs, Bay Area Council Economic Institute and Asia Pacific Foundation of Canada jointly hosted seminars themed on “Belt and Road” Initiative, the development of bay area and financial innovation. With the purpose of introducing the circumstance of CDI delegation paid visits to three cities including Chicago, San Francisco and Vancouver from December 10 to 17
On December 11, CDI and Chicago Council on Global Affair jointly hosted a seminar themed on “China is changing the future of the world” in Chicago. In the seminar, CDI delegates deemed that the international cooperation model should encourage overseas companies' entry to China and Chinese companies' expansion abroad with the main focus on the “Belt and Road” Initiative. On one hand, the cooperation seeks the mutual benefits with countries along the “Belt and Road” through promoting the cooperation on infrastructure construction, public education, policy making and etc. On the other hand, the “Belt and Road” Initiative encourages to integrate national strategies and plans with developed countries. The other participants had profounder understanding on the “Belt and Road” Initiative through the seminar.
With the idea of exchanging the experience of bay area development, CDI also hosted World Bay Area’s Development Seminar with Bay Area Council Economic Institute on December 13 in San Francisco. Dr. Sean Randolph, senior director of Bay Area Council Economic Institute, shared the experience of the San Francisco Bay Area in building a global innovation center while Dr. Guo Wanda from CDI analyzed the significance of the establishment of Guangdong-Hong Kong-Macao Great Bay Area and Shenzhen. CDI delegation visited Asia Pacific Foundation of Canada and discussed the development of the “Belt and Road” initiative on December 15 in Vancouver. CDI delegates talked about the prospect of RMB Internationalization under “Belt and Road” initiative. What is more, two institute exchanged the views of the policy mechanism of Hong Kong under the “One Country, Two System” policy.
The tour expanded the business connection with international financial institutes and enhanced the business integration. Moreover, through seminars, participants from different countries showed their own perspectives on the ‘Belt and Road’ Initiative.
Index ranking green financial centres due to launch in Q1 2018
An attempt to rank financial centres according to their contribution to green finance is being launched by Brussels-based NGO Finance Watch and the London-based Long Finance initiative.
The Global Green Finance Index (GGFI) will draw on the methodology already in place for the Global Financial Centres Index (GFCI), backed by the Z/Yen think tank and the China Development Institute, which is now in its 11th year. Z/Yen manages Long Finance with support from the City of London Corporation and Gresham College.
“Green finance is no longer seen as a fringe activity, but a profitable and desirable activity, which drives financial markets, serves society and enhances the status of financial centres which demonstrate expertise,” said the GGFI backers.
Several cities have already made explicit commitments to position themselves as leaders in this fast-growing market.
The new index, which is sponsored by the MAVA Foundation – a Swiss conservation organisation – is intended to encourage cities to become greener, compare their performance with their peers, improve policy makers’ understanding of the drivers of green growth, and assist them in shaping the financial system to support sustainability goals.
The term ‘green finance’ is intended to include “any financial instrument or financial services activity – including insurance, equity, bonds, commodity and derivatives trading, analytical or risk management tools – which results in positive change for the environment and society over the long term”.
To compile the index, questionnaire responses from financial services professionals, NGOs, regulators, and policy makers will be combined with some 130 ‘instrumental factors’ that provide objective evidence of cities’ environmental credentials and contributions to green finance.
These two inputs are combined using ‘support vector analysis’ which predicts how respondents would rate cities with which they are unfamiliar.
“The problem with perception data is that individuals have knowledge of only a limited number of centres,” explained Z/Yen associate Simon Mills.
The ‘support vector analysis’ answers questions such as: “If a pension fund manager gives Paris and Sydney a certain assessment then, based on the instrumental factors for Paris, Sydney and Singapore, how would that person assess Singapore?
To avoid home centre bias, the centre that a respondent is based in will be excluded from the assessment.
Michael Mainelli, chairman of Z/Yen, said the questionnaire is due to be launched this month with data collection in January and publication of the index in March. It is then intended to repeat the exercise twice a year, as is done with the GCFI.
Examples of ‘instrumental factors’ to be used in the GGFI include:
- Banks’ ratio of green energy to high carbon energy lending
- Climate-aligned bond issuance or listings as a fraction of total
- Green equity indices
- Sustainable Stock Exchange
- Air quality data
- CO2 emissions per capita
- Metro network length
- Climate Impact Vulnerability Index
- Energy intensity of GDP
- Sustainable Cities Index
- Quality of Living City Rankings
- Corruption Perception Index
- Global Innovation Index
High-tech giants move to Guangdong
Province seen boosting industrial upgrading
A growing number of top global companies in the high-tech, advanced manufacturing and new-energy sectors have unveiled investment projects in South China's Guangdong Province this year, a move that experts attribute to the local government's stimulus policies and an improving business environment.
This trend will help create a complete advanced industrial chain and further promote the region's industrial upgrading, experts said. But they also said that a lack of international talent and the potential influence of the U.S. tax cut may slow down the region's structural adjustment.
In 2017, a total of 47 Fortune Global 500 companies have launched projects in Guangzhou, capital of Guangdong, with total registered capital of 38.2 billion yuan ($5.78 billion), according to the calculations of the Global Times.
In March, construction of the world's largest 8k-resolution panel factory, with an investment of 61 billion yuan, was begun in Guangzhou by Taiwan-based electronic contractor Foxconn Technology, according to a statement the company sent to the Global Times on Tuesday.
The project is the largest overseas investment in Guangzhou since China's reform and opening-up began in 1978, the statement said.
Also, a 350,000-square-meter biopharmaceutical project, funded by multinational conglomerate General Electric, is now under construction in Guangzhou, the 21st Century Business Herald reported on Tuesday.
In the first three quarters, foreign direct investment (FDI) into Guangdong surged 13.6 percent year-on-year to $16.96 billion, the highest in the country, according to data from the Guangdong Bureau of Statistics.
Song Ding, an expert at the Shenzhen-based China Development Institute, hailed the trend as a sign that Guangdong Province has gradually shaken off its previous reputation as being a center of cheap manufacturing for low-end industries.
"In contrast to the scenario several years ago when foreign enterprises set up factories in Guangdong merely to take advantage of the province's cheap production factors, the newly launched projects mostly feature middle- to high-end industries such as the Internet, new energy and aviation," Song told the Global Times on Tuesday.
Bai Ming, a research fellow at the Chinese Academy of International Trade and Economic Cooperation, agreed. He attributed the change to the "more efficient business environment in the province and stimulus policies rolled out by the local government to attract FDI."
A spokesperson for Foxconn told the Global Times on Tuesday that it only took about 50 days for the company to negotiate with relevant parties and sign the 61 billion yuan project with the local government.
On Monday, the Guangdong provincial government released 10 measures for attracting FDI, specifically aiming to entice Global Fortune 500 and high-tech companies, said the 21st Century Business Herald report.
Industrial upgrade
Bai said that the inflow of the FDI in high-end sectors is in line with the Guangdong government's plan to make emerging industries such as artificial intelligence and new energy strategic pillars of its economy.
"Guangdong's economy is transforming from being export-driven to being innovation-based, and the arrival of foreign high-tech companies will accelerate this process and boost Guangdong's global competitiveness," Bai said.
Terry Gou, CEO and chairman of Foxconn, was quoted as saying in the statement that the panel factory in Guangzhou is not "merely a panel processing factory."
The factory will also help encourage hundreds of upstream and downstream electronic suppliers to move their businesses to Guangzhou, creating a new industrial group valued at about 1 trillion yuan, Gou noted.
"Following the flock of enterprises in related industrial chains and value chains into Guangdong, a complete industrial chain in high-end industries will be formed," Song said.
But experts warned that the lack of international talent may hinder the cultivation of new economic growth engines.
"Most of the talent in Guangdong is from China… there is apparently a lack of diversity in talent compared with Silicon Valley in the U.S.," Song said.
Besides, the upcoming U.S. tax cut, which will reduce the U.S. corporate tax rate to about 20 percent from the current 35 percent, may also hinder U.S. firms' willingness to move their plants to Guangdong, and might prefer to operate in the U.S. instead, Bai noted.
Shenzhen overtakes Guangzhou as biggest economy in southern China’s Guangdong province
New calculation methods see the city’s GDP figure for 2016 rising to more than US$302 billion
Shenzhen had the largest economy in southern China’s Guangdong province last year after a new method of calculating gross domestic product saw it overtake local rival and provincial capital Guangzhou.
The provincial statistics bureau said on Tuesday that it had revised up Shenzhen’s GDP figure for 2016 to more than 2 trillion yuan (US$302 billion) from 1.95 trillion yuan in its initial report. The revision meant that the city’s economy grew 9.1 per cent year on year.
Guangzhou’s GDP figure was also revised up, to 1.98 trillion yuan from 1.95 trillion yuan, but the increase was not enough for it to hold on to the top spot.
The changes meant that the province’s total economic output also rose – to 8 trillion yuan from 7.4 trillion yuan – but no figure was given for the rate of growth.
The bureau said the changes reflected the province’s decision to categorise research and development spending as fixed investment rather than an operating expense.
Guo Wanda, vice-president of the Shenzhen-based think tank China Development Institute, said: “It’s positive news for Shenzhen but not a surprise because Shenzhen has been leading Chinese cities in R&D spending.”
Last year, the city invested more than 80 billion yuan in research and development, accounting for about 4.1 per cent of its GDP, the highest ratio among mainland cities, according to official data.
Since 2013, Shenzhen has allocated more than 4 per cent of its annual GDP to R&D, putting it on a par with South Korea and Israel. By contrast, Hong Kong spends about 1 per cent of its GDP on R&D each year.
“It’s very possible to see Shenzhen’s economic size surpassing [that of] Hong Kong and Guangzhou as the Greater Bay Area shifts from a manufacturing economy to a knowledge economy more dependent on the often abstract products of innovation,” Guo said.
Ahead of Guangzhou’s Fortune forum that is expected to bring a host of global business leaders to the city from Wednesday, security checks at subway stations have been stepped up, walls repainted and even paving stones dug up and replaced.
The guests will include Ford Motor’s executive chairman Bill Ford, HSBC CEO Stuart Gulliver and leading tech entrepreneurs, including Tencent chairman Pony Ma and Alibaba founder Jack Ma. E-commerce giant Alibaba Group owns the South China Morning Post.
Local authorities hope the line-up of big-name executives will help put Guangzhou on the radar of global investors, especially Fortune 500 companies, at a time when China is struggling to attract foreign direct investment.
Lin Jiang, a professor at Lingnan College, part of Sun Yat-sen University, said local authorities were keen to make Guangzhou a base for emerging industries and were exploring ways to encourage giant global enterprises to invest. The aim, he said, was to make the city a hub for international shipping, aviation, and scientific and technological innovation.
Fixed direct investment in Guangdong in the first half of 2017 rose 6.6 per cent year on year to US$12.31 billion, according to official figures. The number of foreign-invested enterprises granted approval to set up operations in the province in the same period rose 46.4 per cent from the first half of last year to 5,239.
In Guangzhou alone, foreign investment in the first nine months of this year rose by about 13 per cent from the equivalent period of 2016 to US$5.63 billion.
“Guangzhou hopes to encourage FDI in modern manufacturing and emerging industries, but it’s facing fierce competition from nearby cities,” Lin said.
China wants to build an innovation capital by fiat. Can it?
Inclusion of R&D spending in GDP calculations means mainland city may soon overtake its illustrious neighbour
Once a small fishing village on the outskirts of Hong Kong and not so long ago a haven for manufacturing sweatshops, Shenzhen, in southern China’s Guangdong province, might very soon overtake its illustrious neighbour in economic terms.
In the first three quarters of 2017, the boomtown’s economic output rose 8.8 per cent year on year to 1.54 trillion yuan (US$232.66 billion). While the figure fell short of Hong Kong’s HK$1.94 trillion (US$248.27 billion) for the period – up about 7 per cent in nominal terms from the first nine months of 2016 – the gap between the pair is narrowing.
What’s more, an official from the Shenzhen statistics bureau, who declined to be named, told the South China Morning Post that the city’s economy was set to receive a significant boost as a result of a revision to accounting methods.
“In the fourth quarter, we will follow the provincial statistics department’s lead in using a new method of calculating gross domestic product to revise up Shenzhen’s economic figures for the year,” the person said.
On Tuesday, the Guangdong statistics bureau released revised economic figures for 2016 for its major cities and the province as a whole. The changes followed a ruling from Beijing that when calculating GDP, officials should regard spending on research and development as a fixed investment rather than an operating expense.
As a result, Shenzhen, which is home to numerous technology firms, including giants Tencent, Huawei and DJI, all of which are known for their massive spending on R&D, saw its 2016 GDP figure rise by about 60 billion yuan to 2.01 trillion yuan. Such was the increase that it overtook Guangzhou as the largest city economy in the province.
Assuming it maintains the growth rate it achieved over the first three quarters, Shenzhen’s nominal GDP for the whole of 2017 would be 2.19 trillion yuan, or US$330.86 billion.
Hong Kong’s GDP for 2016 was HK$2.49 trillion. Assuming it, too, maintains its nine-month growth rate of about 7 per cent, the total for 2017, again in nominal terms, would be HK$2.66 trillion, or US$340.41 billion, or less than US$10 billion more than Shenzhen’s.
“Based on the current situation, it’s only a matter of time – maybe next year or the year after – before Shenzhen’s economy overtakes Hong Kong’s,” Simon Zhao, founding director of the International Centre for China Development Studies at Hong Kong University, said.
Despite the gains in the headline figures, it could be some time before Shenzhen overtakes Hong Kong in terms of GDP per capita, however. In 2016, the figure for Hong Kong was HK$339,000, or nearly twice that of Shenzhen.
One of the main reasons for Shenzhen’s stellar economic growth is that most companies based there are either privately owned or foreign-funded, according to Qu Jian, deputy director of the think tank, China Development Institute, which is also located in the city.
Such firms tend to be more innovative and willing to take risks, which has helped to drive technological innovation and industrial restructuring in the city faster than anywhere else in China, he said.
The combined value of Shenzhen’s six strategic industries – biotechnology, information technology, new energy, telecommunications, cultural and creative, and new materials – rose 10.5 per cent in 2016 to 780 billion yuan, or close to 40 per cent of gross domestic product.
Last year, Shenzhen invested more than 80 billion yuan in research and development, or about 4 per cent of its GDP, the highest proportion of any Chinese city.
Since 2013, Shenzhen has allocated more than 4 per cent of its annual GDP to R&D, putting it on a par with South Korea and Israel.
Despite the perceived rivalry between the two cities, ties between Hong Kong and Shenzhen are strengthening.
Tencent is now regarded as the most important stock on the Hong Kong market, while DJI, the world’s largest drone maker, was founded by Wang Tao, who studied at a Hong Kong university.
“Integration is the best way for both Shenzhen and Hong Kong to grow their tech and finance industries,” Zhao said.
“But they also face their own individual risks. Shenzhen, for instance, must be alert to issues of overcapacity in the manufacturing of drones, robots, smartphones and other electronic products, while Hong Kong is prone to changes in foreign markets, like US’ interest rate hikes and capital outflows.” he said.
Zhao said that due to fears of economic bubbles within China there were likely to be huge capital flows moving southwards from the mainland into Hong Kong next year.
Long-term Mechanism for Supply and Demand to Stabilize the Property Market
Author: Fan Gang, President, CDI
Editor’s Note: The 15th "China Reform Forum" was hosted by the China Society of Economic Reform in Beijing on December 2, 2017. The theme of the forum was "to learn from and implement the spirit of the 19th CPC Congress, study and make breakthroughs in the reform of key areas". Professor Fan systematically analyzed the necessity of the property long-term mechanism at the conference.
Despite that short-term policy may work under certain conditions, ultimately long-term mechanism must be established to stabilize the market. As seen in the current huge demand for properties, housing demand is far from exhaustion. The high rate of property ownership in China only reflects the underdeveloped rental market, not the exhausted demand. In addition to residential needs, there are also non-residential needs. Problem arises when people invest in property with small intent for letting, which is resulted from the bubble in the property market and the pursuit of value appreciation in properties. In the absence of a mechanism to increase the cost of property ownership, such demand has not been curbed. Therefore, the most important long-term mechanism on the demand side is property tax.
Property tax has three functions. First, it will increase the cost of ownership, and reduce investment demand. Second, it is the internal stabilizer of price fluctuations. Given the same tax rate, the tax on the property will vary based on the current value of the house. When housing price skyrockets, some people will choose to withdraw from the market or switch to smaller ones due to higher tax. This is fully reflected in other countries’ mechanisms. Third, currently, taxes paid upon purchasing the property included future public services such as environmental conservation and transportation maintenance. With the increase in land price and labor cost, the costs of these public services will also increase along with the economic development. Therefore, the current lump-sum tax upon purchase is unreasonable.
Property tax policy must be implemented rationally with a transitional period. For example, for the properties that have paid lump-sum tax upon purchase, property tax should be collected after a ten to twenty-year transitional period when the lump-sum is discounted to present value. Meanwhile low-income property tax deduction can be integrated into construction tax, or grants for suitable personnel which is similar to the minimum living security.
On the supply side, in terms of inhabitable area, China faces severe scarcity of land and its habitable area per person is one third of the world average, combined with other human factors such as regime, strategies, and policies, causing short supply of land and houses. Such circumstance is mainly reflected in the following four aspects. First, the current plot ratio in China is too low. More buildings should be constructed on the limited land to improve efficiency. Second, some local governments should be held responsible for failure to supply land when housing prices rise and its aftermath. Third, property developers acquire land at high prices while housing price is the derivatives of land premium. Four, the rental market is underdeveloped as the result of insufficient supply of affordable rental properties and inadequate legal system that protects the interest of both landlord and tenant.
Last but not least, land allocation system, specifically allocation between major and small cities, is a problem of divergence of urbanization strategy. In the past, the development of small cities was given priority. Small cities were granted large quantity of land while the supply of land to major cities was restricted. However, the majority of people migrated to major cities while middle-sized and small cities, especially third and fourth tier cities, are where the population outflows. Recently, China Development Institute conducted a study on industrial transfer. The central government had policies in place to encourage industrial transfer and identified over 60 cities to be the industrial transfer destinations. For over ten years, 87% of the transfer was to provincial capitals but barely to small cities. Since better services, infrastructure, human resources and logistics services are only available in major cities due to the agglomeration effect and cluster effect, various industries are brought into major cities along with numerous employment opportunities. Therefore, to pursue a better life, people have to migrate to major cities.
To improve the property system, market-oriented strategy is necessary. First, market based resource allocation should take effect, instead of government undertaking. Second, stabilized market does not entail fixed price. Growth of income and predetermined land supply indicates that the relative price of land is basically GDP. If GDP increases constantly, the land price will increase and then the housing price. As such, what truly needs to be stabilized is the proportion of income to housing price. Measures should be taken on both sides of supply and demand while long-term mechanism should be established to gradually achieve long-term market stability of supply and demand.
CDI Delegates Conduct the Feasibility Study on the Establishment of Special Economic Zone in Sindh
From December 9 to 14, CDI delegation led by Dr. Qu Jian, Vice President of CDI, went on a field trip to Pakistan for a feasibility study on China Special Economic Zone Dhabeji, which is part of China-Pakistan Economic Corridor (CPEC). In the meetings with the government of Sindh, Pakistani consultancies, Chinese investors and Chinese Consulate-General in Karachi, CDI delegates conducted the feasibility study on establishing a special economic zone in Sindh, Pakistan.
CPEC is high on the agenda of the Belt and Road Initiative. Having improved road, rail and air transportation, CPEC now shifts to boost the project of special economic zones which will bring industry and investment to Pakistan. Motivated by the success story of Shenzhen, Pakistan will establish nine special economic zones.
Belt and Road: The Economic Rationale
Author: Fan Gang, President, CDI
Editor’s Note: At the Belt and Road: Seize the Next Wave of Growth in Eurasia forum on November 23 in Venice jointly held by China Development Institute and The European House – Ambrosetti, Professor Fan talked on the economic rationale of Belt and Road. Here are excerpts from his speech:
There are lots of questions about how China will benefit from the Belt and Road Initiative (BRI). The usual analysis is from international diplomacy and geopolitics point of view, which states that by improving infrastructures and connectivity, China gains a bigger market, resulting in more investment in neighboring countries and the world. This is undeniable.
But as an economist, I would like to stress the importance of the economic rationale of BRI. People may wonder why China has the money to finance BRI since China is still poor – GDP per capita is quite low comparing with developed countries. But after 20 years of high savings, China accumulated wealth. The question lays in how to use this saving. If invested in domestic economy, over capacity is inevitable. Currently the surplus goes to foreign exchange reserves, which goes to US treasury bonds. But why not invest in concrete projects that can facilitate other countries’ development, strengthen connectivity with China, and also build our community for future prosperity? Therefore, economically speaking, BRI is a better way for China to utilize its national saving.
However, BRI can only be fulfilled by a joint effort by China and other countries. Although the main focus is infrastructure investment, we should not only calculate cost and benefit in terms of direct return or short-term returns, but also the future, the return to public good, and the economic prosperity of the region.
Nonetheless, it is still investment which requires us to consider carefully about financing and selecting the projects, compatibility with local country’s economic development strategy, effectiveness and efficiency of the projects, which essentially amounts to how to succeed and benefit the people in the future. These are the questions we bear for the Belt and Road: Seize the Next Wave of Growth in Eurasia which is also why I think holding this forum is important.
Narrowing the External Imbalance
Growth remained stable in November, with industrial output up 6.1% y/y. Fixed asset investment excluding agriculture was up 6.3% y/y, up 0.5 pps from October, and up 2.4 pps from its August nadir. However, the current investment growth rate is still lower than investment goods’ price growth rate, indicating that real investment growth is still negative, by -0.2% y/y.
National fiscal revenue fell -1.4% y/y, turning negative for the first time this year. Since current investment strength is mainly government driven, the fall of fiscal revenue will constrain a possible investment rebound. Retail sales of consumer goods were up 10.2% y/y in nominal terms in November, the same rate as in Q3. The consumption indicator is always very stable. The ex-factory price index of industrial output was up 5.8% y/y in November, and PPI was up 7.1% y/y, down 1.1 and 1.3 pps respectively from October, indicating that price appreciation since August represents only a temporary rebound.
M1 was up 12.7% y/y by the end of November, down 0.3 pps from the end of October, showing a consecutive downward trend. Deposits from non-financial enterprises rose 11.9% y/y, down 0.5 pps from the end of October. M2 rose 9.1% y/y, slightly higher than the lowest level, up 0.3 pps from the end of October, mainly affected by large increases from fiscal deposits and non-bank financial institution deposits.
Exports were up 12.3% y/y in November in dollar terms, and up 5.4 pps from October, outstripping the fastest growth rate of Q2. But we believe the fast export growth rate is likely an outlier.
Imports maintained their strong growth, up 17.7% y/y, and up 3.1 pps from Q3. Even conservatively speaking, we expect China to surpass the United States as the world’s largest importer in 2022. Consumption demand as a rising share of import increase will be a key opportunity for investors. This is part of the effort made by current Chinese leaders to further integrate with the rest of the world, and to curb China’s external imbalance, with such initiatives as the Road and Belt, and AIIB. China will also hold its first annual national “import expo” in 2018. By contrast, U.S. President Donald Trump seems to be moving in the opposite direction, most recently seen as threatening to withdraw foreign aid, simply because countries do not support his decision to recognize Jerusalem as Israel’s capital. Any withdrawal by the United States will give China room to expand its role in world trade.
The 10th Shenzhen-Hong Kong Forum
Information
The forum gathered over 100 experts and scholars from Shenzhen and Hong Kong to discuss joint development of the Lok Ma Chau Loop and innovation of cooperation mechanism under the backdrop of the Guangdong-Hong Kong-Macao Greater Bay Area. This forum mainly focuses on how Shenzhen and Hong Kong will improve and develop innovation in the cooperation mechanism, so as to be well prepared to participate in global competition and cooperation, and boost the development of the Guangdong-Hong Kong-Macao Greater Bay Area into an international technology and innovation center and a world-class city cluster.
Date: December 7, 2017
Venue: Pengcheng Hall, Qilin Villa, Shenzhen
Host: CDI, Central Policy Unit of HKSAR
Theme: Shenzhen-Hong Kong Cooperation to Drive the Guangdong-Hong Kong-Macao Greater Bay Area
