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China to fuel growth momentum through new policies

By Albert Li
Published: Friday, 27 January 2017

China has announced a series of policies to encourage foreign investment together with additional plans for supply reform and capacity cuts to continue driving the GDP growth seen in 2016.

Despite concerns for China’s growth in 2016, GDP in the country increased 6.7% year-on-year (y-o-y) between Q1 and Q3, the China State Council Information Office said during a press conference on 10 January.

Shaoshi Xu, director of the National Development and Reform Commission, compared the growth to the previous year, when GDP in 2015 grew between 6.8% and 7% per quarter.

The State Council expects figures to indicate similar growth for the fourth quarter of 2016, with full GDP exceeding Chinese renminbi (Rmb) 70 trillion, an increase of Rmb 5 trillion on the previous year.

A recent report from the IMF outlined that China contributed 1.2% to global economic growth, while the US and EU pushed growth up by 0.3% and 0.2% respectively.

Supplier side reform

Xu discussed supplier side reform at the press conference, which had started in 2016, describing China's strategy as "three part deletion, one reduction and one remedy" as the country looked to cut capacity, inventory and leverage, in addition to cutting costs and remedying defects.

Capacity cut targets for steel were 45m tonnes affecting 180,000 employees, while capacity cuts for the coal sector in China were targeting at 250m tonnes, affecting 620,000 employees. Both targets were completed ahead of scheduled and helped to push the price of both steel and coal upwards.

Capacity cuts were also carried out in industrial mineral production such as soda ash, titanium dioxide (TiO2), graphite and rare earths.

In terms of cost reduction, large companies saw a drop of Rmb 0.14 in production costs per Rmb 100 turnover, with profit increases of 0.26 percentage points. Total cost reduction for all above scale companies in 2016 reached around Rmb 1 trillion.

Prices in both soda ash and TiO2 in China saw increases as a result of capacity reductions throughout 2015, while other minerals like graphite and magnesia did not see price improvements owing to a lack of capacity cuts.

The China State Council noted however that recent price increases were generally the result of short-term factors rather than fundamental changes in supply and demand.

The council outlined the cyclical nature of commodities like steel, coal and other industrial minerals, driven more by a slowdown in economic growth and lower prices, followed by capacity cuts and a subsequent strengthening of prices.

According to Xu, targets for capacity reductions will be higher in 2017 and will be more stringently enforced.

A detailed target for steel and coal was expected in late January while plans for other minerals are likely to be announced later by their respective associations.

Foreign investment

Previously, the China State Council Information Office held a press conference on 6 January announcing new measure for foreign investment in 2017.

Although detailed plans were not disclosed, three main areas will be targeted: measures to expand foreign investment; measures to promote fair competition between domestic and foreign investment; and efforts to draw new foreign investment.

According to the newly revised guidelines, entry requirements for foreign investors will be expanded drastically for the mining, manufacturing and service industries. China also plans to additionally encourage high-end investment in intelligent and green manufacturing, modification and upgrade of traditional industries, and in the construction of infrastructure.

The State Council also outlined plans to treat domestic and foreign company products equally as long as products are made in China to the country’s standards. This follows previous complaints by foreign companies that their products were not treated equally and that foreign firms struggled to win government purchasing bids.

Under existing Chinese regulations, foreign investment is not permitted in the mining and exploration of fluorspar, and into the mining, processing and separation of rare earths. However, the updated guidelines may loosen limitations on these two minerals.

Despite the encouraging policies, foreign companies are hesitant to invest in Chinese industrial minerals such as graphite, fluorspar and magnesite.

"Even though we can buy a graphite mining right, the government still might take it back without any reason," one graphite company – which has a Chinese office but owns graphite mines outside of China – told IM, particularly in light of graphite recently being added onto China’s list of strategically important minerals. 



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