China has released more detail of its proposed reform agenda and it’s heady stuff. The “one child” policy goes (it’s already largely gone anyway):
China will loosen its decades-long one-child population policy, allowing couples to have two children if one of them is an only child, according to a key decision issued on Friday by the Communist Party of China (CPC).
…The birth policy will be adjusted and improved step by step to promote “long-term balanced development of the population in China,” it said. China’s family planning policy was first introduced in the late 1970s to rein in the surging population by limiting most urban couples to one child and most rural couples to two children, if the first child born was a girl. The policy was later relaxed, with its current form stipulating that both parents must be only children if they are to have a second child.
Reeducation through labor goes:
China will abolish the “reeducation through labor” system as part of a major effort to protect human rights, said a key policy document of the Communist Party of China (CPC) published Friday. China will also reduce the number of crimes subject to the death penalty “step by step,” according to the CPC Central Committee’s decision on issues concerning comprehensively deepening reforms…
Laws relating to correction and punishment will be improved. Community-based correction which helps convicts return to society will also be improved.
The country will work to ban extorting confessions through torture and physical abuse, the document said. Courts will be told to tighten the practice of ruling out illegally obtained evidence, while law enforcement agencies will regulate procedures of sealing up, seizing, freezing and handling properties involved in judicial investigations. Wrong judgements will be prevented and corrected in a better way and those responsible will be investigated and could face punishment. The country will also work to improve legal aid for citizens.
Private banking is boosted:
China will open up the banking sector wider, on condition of strengthened regulation, by allowing qualified private capital to set up small- and medium-sized banks
SOE’s must give big dividends back to Government:
…Thirty percent of the gains of China’s state-owned capital will have to be handed back to the government by 2020, according to a decision issued on Friday by the Central Committee of the Communist Party of China (CPC).
At present, the proportion ranges from zero to 15 percent. The money will be used to improve people’s livelihood, said the decision.
There is more from UBS via FTAlphaville:
Land reform: Farmers will be given more protection of their property rights and enjoy bigger freedom to sell their land. Good for develop modern and scaled agriculture, and also possibly increase land supply for urban construction. This may lead to more property construction in the short term.
Hukou reform: Fully open hukou for small cities, orderly relaxing for medium-sized cities, strictly control Hukou for mega cities (tier 1 cities). Could lead to more property construction, and through better social benefits for migrants, improvement in consumption.
Reduce flow of future local debt by: making local balance sheet and consolidating budget; linking local official performance with debt increase; moving some administrative authority to the central government; reduce local involvement in production, including by divesting some state-share to private sector (mixed ownership); increase local revenue by requiring a higher SOE dividend and marginal increase in tax revenue; address cash flow issue by issuing more bonds.
Property tax: Accelerate legislation of property tax and proceed at appropriate time (more definite than before, but still hint a slow pace)
From Reuters more reaction via Kristina Sadklef, China Economist at East Capital Asset:
“The most important thing for me is that they are changing the hukou system of registration and residence in smaller cities and townships, which is good news for the Chinese rural population. Removing the hukou system means you will speed up urbanization, which is the growth engine for China. It means that people can move to the urban areas easier, they can bring their families, and together with the migrants already residing in these cities they will get the same rights as urban citizens, and so you won’t have the kind of dual system that’s in place now. It’s a big step in liberalizing the labor market and allowing free movement of labor.
“For investors, it means there will be more focus on real estate, more need for social housing, better urban infrastructure, and also all these people will be able to start consuming more.
“When it comes to easing single child policy, that may be good for the ageing China but I don’t see it making a huge difference. At present only 40 percent of couples are affected by the single child policy, in the countryside most people can already have two children.
“We don’t know when they will do all these things. That’s the problem. But it’s still good news because it shows they want to do these things.”
In sum, financial liberalisation will encourage rebalancing towards consumption because capital allocation will be determined by return on investment not local government fiat, there’ll be higher interest rates and higher household income growth. Local government debt restrictions will also reduce uneconomic infrastructure build, though they are still allowed to issue bonds to the purpose.
These shifts are significantly offset by Hukou and land reform which will boost housing construction. Mind you, as I’ve noted before, with Chinese urbansaition at or past its peak point there will be no need to increase the rate of growth in associated industrial capacity, if increases will be needed at all.
Thus the net balance of these changed settings in the private economy is an increasing consumption share of GDP as households get a greater cut of national income and more support to spend it. Fixed asset investment growth will still be firm but not as intense as the previous period.
The likelihood is that that will mean lower growth and certainly a mix of growth less favourable to commodities over time.
But Beijing has a 7% growth target. So, it again comes back to the same question we’ve been asking since late 2011. Will the central government step in with more infrastructure stimulus to reach its growth targets? If not we’ll see a rebalancing process begin. If it does then the added infrastructure stimulus will mean investment growth continues to outpace consumption growth and this package will be more about shifting around debt – less for local governments and more for the People and Beijing – than it is about reform.
