Today’s decision by China to open its markets to U.S. goods lit a fire under the stock market. While a surprise in the short-term, it actually makes a lot of sense when you look at the steps Beijing’s been taking to transform its economy. Today we wanted to review some of those measures:
- May 17: China implements a long-awaited link between its credit markets with those of Hong Kong.
- May 23: A big day, with Beijing allowing more foreign investment in its economy and cracking down corruption in the financial sector.
- August 7: The Shanghai Stock Exchange increases scrutiny of M&A to guard against systemic risk.
- August-September 2017: China forces cracks down on pollution from steel mills.
- September 28: China Securities Regulatory Commission says foreigners will be able to trade in its up-and-coming futures market.
- October 29: Xinhua reports that new anti-corruption measures will target various levels of government. Even the ruling Communist Party will be affected.
- January 3: New bond trading rules are designed to reduce leverage and systemic risk.
- January 13: The China Banking Regulatory Commission heightens oversight of the country’s “shadow banking” system.
- March 26: China launches yuan-denominated crude oil futures.
- During this same time frame, China allowed its currency to appreciate steadily against the U.S. dollar. (The yuan is up about 9 percent against the greenback in the last year.)
All of these developments are reminiscent of what happened in the U.S. or Great Britain when they emerged as major financial hubs in previous years. The change requires a stronger currency that foreigners can use for reserves, and lower trade barriers. Factory jobs are inevitably lost and imports increase. We’ve seen this story before, and everything’s proceeding as it must for China to modernize. So while today’s news might have shocked some, in the big picture it’s hardly a surprise.
