China is opening its economy to imports and foreign ownership - but why?

On April 10, President Xi Jinping delivered a keynote speech on the opening ceremony of the 2018 annual meeting of the Boao Forum for Asia. The event, which is known as the "Asian Davos", hosts leaders from government, business and academia in Asia and other continents, who share their vision for the world. In his speech, Xi affirmed that China would open up to the world, even more than at present. Specific initiatives in four areas were announced, including greatly relaxing market access, creating a more attractive investment environment, strengthening the protection of intellectual property rights, and actively expanding imports.

But why? Why is China so determined to further open up to the world? In a recent TV program presented by China Central Television's financial channel, a panel of government officials and commentators have offered some insights into this question.

Since initiating its trade reforms, China's imports have grown at an annual rate of 14%, rising from US$10.9 billion in 1978 to US$1.87 trillion in 2017. Along with the rapid expansion of imports, a remarkable scenario that has developed in recent years has been a surge in consumption by Chinese tourists overseas. This reached more than US$260 billion in 2016. A MasterCard research paper has predicted that China's outbound tourist numbers will increase by 51% in the period from 2016 to 2021; By 2021 China will account for 40% of the total travel volume in the Asia-Pacific region.

The Chinese government is actually anxious, and unhappy, about the huge amounts of money Chinese tourists spend abroad. How to convert such consumption back to China has become one of the government's most important tasks, because it is endeavoring to make consumption a key driver of the economy. That's why the Chinese government is determined to reduce tariffs on imported products, in the anticipation that this will redirect money Chinese tourists spent overseas back to China, according to Liang Ming, director of the Institute of Foreign Trade, Ministry of Commerce.

China has drastically reduced tariffs for a variety of imported products in recent years. According to the Ministry of Commerce, tariffs have been reduced to zero on more than 8,000 imported products as of January 11, 2018. An example is the red wine imported from Georgia and Chile, which previously attracted tariffs ranging from 14% to 30%. Tariffs on certain types of Swiss watches have been reduced by 50%. Tariffs on Korean refrigerators, rice cookers and other products have been reduced by 40% and will be further cut, to zero, within a few years.

Gao Feng, spokesperson for the Ministry of Commerce, commented that nearly one-third of China's imported products by value, most of which are finished products for consumption, can enjoy preferential tariffs under the free trade agreements between China and its trading partners. Huang Songping, spokesman of the General Administration of Customs of China, said that China will also considerably reduce the tariffs on imported automobiles, as well as a variety of other products.

Tariff reduction is always linked to the expectation of price reductions on imported products. Exciting news of this nature recently was the elimination of tariffs on imported anti-cancer drugs. A Chinese think tank has estimated that the prices of these drugs will drop by at least 20%. Every year 3.5 million new cancer patients are diagnosed in China: this is good news for them and their loved ones.

Zhao Ping, director of the China Council for the Promotion of International Trade, a research centre, believes that price reductions will not be abrupt but will happen gradually over time. However, he says, and more importantly, intensified competition as a result of tariff reductions will stimulate domestic innovation. Foreign companies will bring in advanced products and technology in order to expand their market share and Chinese companies will be forced to invest more resources in innovation. The improved protection of intellectual property promised by the government will be a catalyst to such activities. Ultimately, it is the Chinese consumer and China's economy that will be the beneficiary.

The panel shared a common view that it is time for China to formulate a sound strategy on imports for the benefit of domestic consumption, innovation and to deal with trade imbalances.

The rationale behind China's willingness to expanding imports can also be applied to the liberalization of the restrictions on foreign ownership in the Chinese financial sector, which was another major commitment China made at the Boao Forum. According to Yi Gang, governor of the People's Bank of China, foreign banks and financial asset management institutions can now seek dominant control of their joint entities with local enterprises in China and they can set up branches and sub-banks. In addition to banking, foreign institutions are now allowed to invest in trusts, currency brokerage, and various types of credit services.

The national saving rate in China has traditionally been high. However, due to a lack of competition and institutional failures, the Chinese financial sector has performed poorly in its support of the development of private and small to medium businesses. As a result, an excessive amount of national savings has been channeled to the real estate sector or flows to foreign countries.

The Chinese government is not satisfied with China's financial sector in its current form. It believes that by opening up the sector to foreign investment, it would then become capable of providing more channels to direct capital to the real economy and offer ordinary people better options for wealth management within China.

There are suggestions that China's commitment to a more open economy is due to the pressure applied by President Trump. This is a false statement. In fact, it is now in China's interest to further integrate with the world. To a degree, this further opening up of the Chinese market to the world, and its advocating for globalisation has become a powerful weapon deployed by the Chinese government against the Trump administration in the current trade dispute. American companies and products will risk being locked out of the Chinese market if President Trump persists with his radical trade policies against China.