Sitting in the plush new UBS offices at 5 Broadgate Circle with the smell of polished leather, fresh coffee and paint, I realised that it was 10th June 2015 since I was last there.
Back then, the China Investors Club hosted a site visit of 5 Broadgate Circle with Make Architects just before handing the building to UBS. As the building shell had been converted to sleek offices, this got me thinking of the changes we have seen relating to China. So here are out Top 5 although whether you think these took China forward to back is debatable.
Top 5 China changes since June 2015
QDII2 - Qualified Domestic Individual Investors Programme
June 2015: Zheng Yang of Shanghai Municipal Government stated that relaxing quotas on individual and corporate foreign exchange purchases would further promote yuan convertibility, boost foreign ownership in JV securities firms and set up more privately owned banks. It would also help with the yuan becoming accepted into the basket of international currencies. We reviewed the decision back in June 2015.
February 2017: China imposed yet more stringent foreign exchange controls after $309bn left China in 2016. As can be seen from this Bloomberg data, the period October 2014 to September 2015 saw a net positive balance which predicated the QDII2 policy statement. It was a one-way downward trend since then leading to the most recent policy by SAFE where purchase of overseas insurance policies were banned. That said, on 30th November 2015 China did achieve Special Drawing Rights status for the RMB so maybe this policy was successful after all?
China UK business relations
June 2015: David Cameron and George Osborne were gearing up for President Xi's state visit in October of the same year. The UK's open door policy to investment in major infrastructure such as HS2, Hinkley Point and the Northern Powerhouse met with no media or political resistance. Other notable developments were that the first international RMB clearing house was opened and China's first RMB denominated bond was issued.
Feb 2017: on the downside and whether through accident of design there has been a distinct cooling of political relationships following the appointment of Theresa May as Prime Minister. This has left both political leaders working on finding a new baseline in their relationship although the intent is to remain positive. Hinkley Point struggled over the finishing line back in Autumn 2016 while HS2 remains a vision statement. We have seen no further RMB bond issuance while the Eurozone saw its own RMB clearing house established in the last quarter of 2016.
On the plus side, the Northern Powerhouse has seen considerable success with Chinese airlines (Hainan) opening direct routes to Manchester alongside investment into infrastructure and real estate. We also have another UK state visit to China planned for May 2017 where Theresa May will pursue the business agenda to attract Chinese investors although how they will pay for the investment is unclear.
Stock market performance
June 2015 - February 2017: the Chinese stock market was approaching a peak but it was not until August 2015 when the bubble burst. Since hitting a low in January 2016, the market had recovered although it remains 23% below its peak in 2015 as shown by the FT on-line analytics tool.
By comparison, the FTSE100 made steady improvement, ending the same period up 11%.
What has not been analysed has been the returns possible from the Chinese property market which is the other main source of wealth creation. I imagine that the graph would reflect a very different picture.
TPP (Trans Pacific Partnership)
October 2015: after 8 years of negotiation by 12 members led by the USA, the TPP was signed. This historic agreement cut China out from the 'Club' and was seen as a play by America to project economic influence to the region, specifically by signing Vietnam to the agreement.
February 2017: following election of President Trump, one of his first Executive Orders was to scrap the TPP. Principally a rejection of trade with Mexico and Canada, this left a political and economic void that China has been only too willing to fill. The biggest losers have been Vietnam that had invested heavily to ride the TPP wave. While some infrastructure contracts get renegotiated, many office and residential developments will remain unfunded unless they happen to sit on key trading routes for China's One Belt One Road.
AIIB - a new economic force
January 2016: AIIB saw its official launch over a 3-day weekend. While the UK announced its support for AIIB back in March 2015 which signalled the tipping point for its future success and cemented the UK as a long standing friend of China, it was unclear how the bank was to operate. This meeting helped put some of the strategic objectives to the main members and clarify its operation position in regional financing.
February 2017: the first 12 months saw $1.7bn invested in nine projects in Europe, Asia and the Middle East. Contrary to the beliefs of some, the AIIB has been politically neutral with regards to awarding infrastructure contracts to Chinese firms and using Chinese labor. However the one over-riding principle has been that the projects support President Xi's One Belt One Road policy.
Summary
We did not focus on the recent Brexit and Trump issues as these are covered in other blog posts. However there are certain to be other areas that are of equal if not greater importance than the ones we raised here. Visa policies, funding for UK education, strengthening of Chinese IP law, South China Seas and investment into football may all strike you as worthy of your Top 5 and we would welcome feedback.