In the News: China's Faltering Economy; Mengniu Proposes Australian Purchase; and Chinese Policymakers Want Business Input
September 23, 2019 | BY
Vincent ChowChina's economy continues to slow as August data paint worrying picture; Chinese dairy giant Mengniu proposes to buy Australian infant formula maker; and the NDRC outlines plans to incorporate more business input in policy-making
China's economy continues to falter
China's economic slowdown is showing little sign of abating with Premier Li Keqiang saying that maintaining 6% growth will be "very difficult". In March, the government set a goal of achieving between 6% and 6.5% economic growth in 2019, but the trade war with the U.S. and structural issues in the economy are increasing the likelihood of China missing that target.
The premier's remarks came a day before economic data for August were released by the National Bureau of Statistics. Value-added industrial output increased 4.4% in August year-on-year, falling short of analyst predictions and the lowest gain for a single month in 17 years. On the consumer side, retail sales increased 7.5% year-on-year, also below expectations for a 7.9% rise. Infrastructure investment meanwhile increased 6.7% from a year earlier, a large jump from July's 2.3%. However investment in other areas failed to buck the slowing trend with headline fixed asset investment (FAI) increasing 4.2% year-on-year, the slowest growth in 2019, while manufacturing FAI fell 1.6% year-on-year, its second contraction this year.
These figures come on the back of July's similarly weak numbers when jobless rates hit record highs while key economic readings including factory production and property investment fell short of expectations. But China's economic woes stretch back several years. It has struggled to rein in high levels of debt in its economy since a massive stimulus package was launched during the 2008 financial crisis. GDP growth reached a record 14.2% in 2007 but that number has steadily decreased as China has embarked on a deleveraging campaign and more recently been locked into a trade war with the U.S. – both exerting downward pressure on the economy. China has not seen above 7% growth since 2014, with its economy slowing to its weakest rate of growth in almost three decades in Q2 of this year at 6.2%. There have been calls for large-scale stimulus but the government has resisted doing so so far. It has however introduced several policy easing measures, including a 5 basis points cut to its new one-year benchmark lending rate for the second consecutive month on Sept. 20. Earlier in September, China's central bank cut the reserve requirement ratio – the amount of cash banks must hold as reserves – for the third time in 2019, releasing $126.35 billion in liquidity to the struggling economy.
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China Mengniu plans to buy major Australian infant formula maker
China Mengniu Dairy Co is planning to buy the infant formula maker Bellamy's Australia for $983 million. The Chinese company, the world's second largest dairy company, said that Bellamy's reputation for quality and established supply chain in Australia were the reasons for the planned acquisition. The Australian company which began as a family business has long tried to sell its products in China, its target market, but has been beset by regulatory hurdles.
Bellamy's has had a torrid 2019, with profits halving in the first half of the year. It has been hampered by a Chinese rule requiring the clearing of online purchases through state-approved warehouses which has limited its informal "daigou" market where shoppers buy products overseas for customers in China. In August, the Australian company said it was still waiting for China's State Administration for Market Regulation to approve the export of its formula to the country from an Australian facility it purchased in 2017. There is still huge demand for imported infant formula in China following a massive contamination scandal a decade ago in which Mengniu was implicated. Bellamy's shares increased as much as 56% after news broke of the planned acquisition.
The deal is subject to Australian regulatory approval, something which might be hard to come by in the current political climate. Australia has been stepping up its scrutiny of Chinese takeovers in recent years through its Foreign Investment Review Board which screens foreign investment proposals on a case-by-case basis and blocks those which are contrary to the national interest. The government body typically considers a proposed takeover's impact on national security, competition, the economy and the community. National security concerns have dominated however when it comes to government rejections of Chinese takeover proposals in recent years. In 2016, the government vetoed the attempted $7.7 billion sale of AusGrid, the country's largest energy grid, to bidders from China and Hong Kong. Two years later, it blocked another proposed purchase by the Hong Kong-based CK Hutchison Group of a major Australian pipeline operator, again for national security reasons.
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China wants more business input in policy-making processes
The Chinese government wants more feedback from businesses in order to improve policy-making. The country's macro planner, the National Development and Reform Commission, released a document last week outlining plans to further incorporate business sentiment and feedback into various policy-making processes across a variety of areas, including industry development and reform, market access and environmental protection.
The document also said that the government will encourage input on some macro policies, including long-term economic plans and major opening-up and reform policies. It will facilitate communication between businesses and the relevant government agencies by taking advantage of various communication channels including government websites, television and in-person seminars. The government cannot simply ignore suggestions from businesses according to the document which requires that the government provides an explanation for every rejection of business advice it makes. However the government can choose which businesses get to participate in the process, thereby leaving room for it to ignore some less favored industry voices.
In May, the State Council published its policy-making agenda for the year which called for improving policy-making by consulting the opinions of relevant businesses, chambers of commerce, and industry associations. The new Foreign Investment Law set to come into effect in 2020 similarly emphasizes foreign-invested enterprise (FIE) participation in the regulatory process, encouraging FIEs give their opinions and suggestions as the regulatory regime is established. However there was considerable criticism of the drafting process for the new Law adopted in March. Although an unusually long comment period of 61 days was provided for the draft law, this was later accelerated and eventually failed to satisfy some foreign businesses who were left dissatisfied with the feedback process and the final text. However there is still the matter of the implementing regulations of the new Law which will largely decide the extent to which the government will deliver on its promises to open up and liberalize foreign investment into the country. Therefore the opportunity still remains for the government to include foreign businesses' input in China's new foreign investment regime.
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