Friday 15 November 2013

Plenum of good news!

There was a general sentiment of disappointment in reaction to the Plenum's conclusion earlier this week. It was all based on a brief communique from CPC leadership. Consensus seemed to agree that the communique indicated a CPC leadership that was underwhelming in it's commitment to reform and overwhelming in it's vagueness. The reaction seemed pre-mature, why not wait until the expected more, more detailed vauge report that would be rolled out?

Xinhua has posted this report outlining the reforms that have been rolled out. It really seems to address the complexity of China's reform with a vague roadmap. Certainty, over promising (with no intention of delivering), and wedding itself to a bunch of black and white policy choices has never been the CPC style. In a process that Deng described as, "Crossing the river by feeling for stones" a development plan shaded in grey is my preference. So long as the Chinese leadership keeps to another of Deng's statements,  "seek truth from facts" China might just feel it's way across the development river without getting bogged down in the middle income trap.

As I wrote about in this post, my hope was for some small scale reform on domestic savings interest rates and liberalizing of funds for small and medium sized private companies. I had hoped China would keep reform moving, but not get carried away. While the major downside risk was stagnation; ie. no reform and complacency. I was also worried that a huge rush into allocating resources out of investment could increase the likelihood of China stagnating in the middle class. It looks like we can dismiss the worries of stagnation and complacency.

On Private Finance:
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, the Communist Party of China (CPC) said in a landmark policy document released on Friday.
I think this could have far reaching impacts. In my mind we'd have the potential for credit unions popping up all over the place. By minimizing the size of these banks, the CPC can loosen the reins on financial control while minimizing the impact on their SOE's that have come to rely on their earmarked funds.

On Hukou reform:
The country will relax overall control over farmers settling in towns and small cities, and relax restrictions on settling in medium-sized cities in an orderly manner, the document showed.
China should set reasonable requirements for rural residents to obtain hukou in large cities, and strictly control the size of population in megacities.
Whether the goal is to minimize overpopulation of the coastal megacities, or if it is to build up inland cities, the end result could help facilitate this central and eastern development that I believe is key to China's long term viability.

I was also happily surprised to see the one child policy addressed, allusion to rule of law reform, and even efforts to reduce capital punishment offences.

All in all, I'm pretty happy. Of course these statements are a long way from policy design and implementation. But this isn't an American campaign speech. The CPC wouldn't discuss such broad reforms if they didn't at least intend to move on them. I think this set of issues affirms my hopes that Xi and his team would have the clout and the desire to undertake the reforms required to give them a chance to work their way though the middle income trap.

 Will they be successful? Who knows, but I'll be watching and hoping.

Forex Live has a run down on the details (emphasis theirs):
Well, some more headlines for the moment anyway but it’s more detail than we’ve had so far
They plan to:
  •  greatly reduce govt intervention in resource allocation
  •  improve property rights protection system
  • loosen family planning restrictions
  • transfer some state assets to national social security fund
  • raise dividends paid by SOES to 30% by 2020
  • abolish labour camp system
  • let local govts broaden financing channels
  • let local govts issue bonds
  • reduce capital punishment ” step by step”
  • scrap residence restrictions in small cities
  • lift restrictions on residence registration in orderly manner in mid-size cities
  • integrate urban and rural social security systems
  • push forward price reforms in resource sectors
  • accelerate capital account convertibility process
  • speed up interest rate reform
  • establish deposit insurance system
  • expand consumption tax to cover polluting products
  • speed up property tax reforms
  • quicken resource tax reform
  • push forward environmental tax
  • maintain balanced structure between local and central govt revenues
  • collective owned land to have same rights status as state land
  • encourage overseas investment by individuals and companies
  • remove barriers on private firms entering some specific sectors
  • encourage private firms to take part in SOE reform
  • standardize system of managing local and central govt debt
  • set up debt risk alert mechanism
  • establish exchange market for property rights transfers
  • select more cities to develop free trade zones

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