Tuesday, November 19, 2013

China reforms positive for medium-term growth

After being somewhat disappointed with the initial communique following the Third Plenum of the 18th Party Congress, the full report detailed a quite ambitious reform program which provided positive surprises in some areas.

Key reforms include encouraging more private investment in state businesses; loosening the one child policy; land and “hukou” (the household registration system) reforms to encourage further urbanisation; price liberalisation to allow the market to play a greater role in determining the prices of energy and resources; faster exchange rate, interest rate and capital account liberalisation; fiscal reforms that transfer some spending responsibilities from local to central governments.

In general these reforms are indicative of a leadership that wants markets forces to play a greater role in the economy, more specifically in the allocation of resources.  That is perhaps most important in investment where an emphasis on Government-led investment has detracted from productivity and led to a build-up of excess capacity.  Furthermore the hukou reforms, along with changes to the social safety net, will act to discourage precautionary savings and support consumption.  That will assist the rebalancing of the economy.

In some areas there is an obvious lack of detail and, as with all ambitious reform programs, the key to success will be the efficacy with which the reforms are implemented.   There is no reason to doubt the commitment to implement, especially given the establishment of a high-level committee to oversee the reforms.  More detail will come out in the next few months as individual Ministries develop their plans.

We’ve always maintained a constructive view on the outlook for China while at the same time acknowledging substantial supply-side reforms were essential for continued robust and sustainable economic growth.  While there is always more that could be done, the Third Plenum has exceeded (at least my) expectations.