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Dull read that can lead to bucket of gold

By Luo Jiexin (China Daily)
Updated: 2010-12-15 11:05

Reading government documents is always a boring job, which consumes plenty of time and demands a lot of patience. But all the hard work is worthwhile because these documents often offer crucial clues to the mindset of top policymakers.

As the world's financial analysts are keen to look into the minutes of US Federal Reserve Board's open market meetings to decipher the mentality of US policymakers, foreign investors who have huge investments or plan to make big inroads into China should examine Chinese documents with great passion and scrutiny.

The most recent and informative document is the report on the Central Economic Work Conference, a yearly gathering of China's top leaders that sets the tone of the country's monetary and economic policies for the coming year.

By reading the report, policy changes can be detected and they provide instructive clues for foreign investors.

A large part of the report is dedicated to fighting inflation, a major concern haunting top policymakers. Apparently, to keep a lid on consumer prices is the No 1 priority of China, as the anxiety is well spelt out in words such as "holding all provincial governors accountable on matters related to people's rice bags and holding mayors accountable on those related to people's vegetable baskets".

Although China so far still basically resorts to quantitative tools - such as rises in the required reserve ratios for lenders and the central bank's sales of bills - to quench excessive liquidity that is believed to drive consumer prices, the possibility of another interest rate increase is high.

Moreover, since the central government's determination is so strong, tougher measures such as a faster appreciation of the yuan may also be used, if the inflation continues to run away in the coming months.

Keeping the yuan stable and at a reasonable and balanced level, as the reports says, means the currency won't see a big, one-time gain. But that also implies the pace of appreciation may be accelerated.

All this should be music to the ears of foreign investors, in particular those from the United States.

Anti-inflation measures adopted by China will inevitably result in higher financing costs for local businesses. Chinese companies will face some lending difficulties next year as China is expected to raise lending rates and slash loan growth targets.

By comparison, foreign corporations operating in China, especially those from the US, do not face the same financing challenges because most of them can get capital injection from their parent companies in the US, where borrowing costs are extremely low, thanks to loose monetary policies adopted by the Fed.

To be precise, there is more than 5 percentage point gap between the one-year benchmark lending rates of China and the US.

It is the right time for foreign businesses to increase investments in China, because the investment will ensure they will benefit from interest rate differences in the short term and from the growth of China in a long term.

Indeed, foreign businesses should take the advantage of easy financing to beat local players, who pose growing challenges to foreign businesses in the low- to medium-end market.

While investing more, foreign investors should also consider changing their strategies in China, as the report delivered after the Central Economic Work Conference coveys a strong message that China does not want exports to play the decisive role in promoting its economy.

In an unusual appeal, the report asks to "put equal emphasis on both imports and exports". This compared to the much milder wording - "increasing the imports" - in last year's report.

Apparently, China is keen to transform from a major exporter to a great consumer. With that goal in mind, many policies will be designed to encourage imports of consumer products and to phase out low-cost manufacturing businesses - a trend that will continue to be consolidated in the coming decade.

To ride on the crest of that trend, foreign businesses must stop treating China as the world's factory. Instead, they should move some of their production bases to inland China or even out of the country, and invest more on branding, research and development, market and distribution networks.

After all, the days of making quick and fat profits by taking advantage of China's cheap labor and natural resources have gone. Now, the Chinese are emerging as big consumers who favor foreign brands, products and services - and that is where foreign investors can make their next bucket of gold.

The author is an independent financial analyst and business consultant in Shanghai.