From FTAlphaville today comes a useful lineup of Plenum aftertastes:
Barclays Jian Chang:
The Third Plenum has met our expectations . In particular, it upgraded the role of the market in resource allocation to “decisive” from “basic” previously, and reiterated the “push for domestic reforms though further opening-up”. It is worth noting that the Third Plenum emphasised “the public sector remains the important pillar”, while private business will be encouraged.
Based on the communiqué, we judge that there will be meaningful progress in deregulation, fiscal reform (our gauge of the new leaders’ ability to push for reforms), legal and judiciary reform, service sector liberalisation and a push to the Shanghai pilot free trade zone… We expect some initial progress in rural and land reform and social security reform, but judge major SOE reform looks unlikely.
The communiqué put special emphasis on administrative/government reform, fiscal reforms, rural reform, and judiciary reform. It supports our long-held positive view on the new leadership’s determination and ability to push through reforms, and is also consistent with our judgment that sweeping reforms are neither feasible nor desirable. While the lack of mention of family planning policy or Hukou reform may have disappointed some, it has been our long-held view that meaningful or revolutionary progress in these two areas is simply unlikely given various social, economic, and fiscal constraints.
The emphasis on fiscal issues is particularly encouraging as we have long believed that fiscal reform is key to addressing some major financial and economic risks around local government debt, soft-budget constraints, and the property bubble. We believe that without meaningful fiscal reform, acceleration in financial liberalisation would be premature and would lead to greater financial risks. The communiqué matches our expectations…
Credit Suisse’s Dong Tao:
The most radical deviation from China’s existing establishment comes from Xi’s idea of redefining the role of government and market. The party intends to let the market play a “decisive role” in resource allocation, while the government, the current dominating factor in the economy, plays a supportive role in managing the country. The plenum called for innovative governing and strengthened environment for rule of law… To us, this is revolutionary in the philosophy of governance by the Chinese standards.
The communique took some space addressing the fiscal/tax reform, which probably has the greatest chance being launched next year. The tax reform appears to be least opposed by cadres, hence has a good chance of materializing in the near future…
Rural reform is the third economic area to which the communique dedicated a paragraph to address, under the name of urban-rural unified development strategy… We take this as allowing farming land transactions at market prices and granting farmers the right to access healthcare and education. This probably also reflects the government’s intention to abandon the “Hukou” system…
Ting Lu at BofAML:
Actually, as expectations on reforms were greatly raised in the past couple of weeks, we are concerned that markets could be slightly disappointed because the communiqué highlighted the mandate to increase the control and influence of SOEs, failed to mention the much expected one-child policy reform (though there is still a chance for it to be announced), and failed to even pay a lip service to hukou (urban residence permit) reform…
The communique changes the role of “Market Economy” from “基础性 (Jichuxing)” (used in the past 20 years) to “决定性 (juedingxing)”. For native Chinese speakers like us with years of intensive training in Chinese (and we did well on the grueling GRE too), we found it very difficult to tell the real difference. Bloomberg translated “ 基础性 (Jichuxing)” to “basic”, but we think it could be translated to “fundamental (foundational)” or “essential” as well. Regarding “决定性 (juedingxing)”, it could be translated to “deciding”, “determining” or “decisive”. We suspect the Chinese people won’t interpret too much from this change.
UBS’s Wang Tao:
The market may be disappointed at the lack of words on financial reforms, as the only area it appeared was “improving financial markets”. These words could mean the development of capital markets including the bond market. However, we believe financial reforms will also include interest rate liberalization (“prices should be mainly determined by the market”) and capital account opening (“facilitate the orderly and free movement of (productive) factors, efficient resource allocation, and deep integration of markets internationally and domestically”).
As we had expected, and contrary to the recent market hype, SOE reform seems to have not been considered a priority by the Plenum. The communiqué used the same wording as 10 years earlier, making it clear that public ownership and the state-owned sector is the pillar and “foundation” of the “socialist market economy”. This is disappointing. The communiqué did put non-public economy as “also the base” of the economy, suggesting possible reforms to reduce discrimination against private enterprisesin the coming years
SocGen’s Wei Yao:
The new leadership is aiming for a more prominent role of the market and the private sector in the economy; the importance of the rule of law is emphasised more than before; and a dedicated committee will be set up to coordinate the design and implementation of reform, in order to strengthen execution capability. One surprising point to us is the mention of giving farmers more property rights, which, if referring to land, would be a major breakthrough. Policymakers also set themselves a deadline – having major achievements in all vital aspects of reform by 2020. We wait for the complete decision to provide more assessment.
Given the communiqué, we maintain our view that the most likely and imminent measures will be interest rate liberalisation, more experiments in the Shanghai free-trade zone and relaxation of one-child policy. In order to sustain business confidence, policymakers also need to deliver detailed execution plans on the pension reform, the SOE reform, and the fiscal reform in the next few months. In addition, slower credit growth, tightening measures on local government debt, and as a result higher tolerance for economic slowdown will also serve as important signs of Beijing’s commitment and capability of making difficult choices that are good for China’s long-term outlook.
