China reforms

I received a report from a well-known international broker after the China government released a detailed version of its reforms agenda. On the face of it, it looked radical. Somehow, I could not muster the enthusiasm for it since, on three key areas, the reform measures were vague: on reducing and eventually eliminating overcapacity, on local governments’ borrowing and funding problems (no right of taxation extended to them) and on the property sector.

In fact, in some relatively not-so-well commented areas, the reform measures were quite interesting. I mention a few of them here:

Transform the business registration system.

Gradually remove the administrative ranking of schools, research institutions, hospitals and other relevant entities. Promote the transformation of qualified administrative institutions into enterprises or community organizations.

Starting from its neighbors, China will quicken its pace of implementing the strategy of free trade area. Systems on market access, customs control, inspection and quarantine will be reformed. The mainland will also further open up and cooperate with Hong Kong, Macau and Taiwan.

I must concede that this statement about State-owned Enterprises (SoE) was also rather clear-cut:

The functions of different SOE will be clearly defined. For those in natural monopoly sectors, they will separate government from enterprise management and separate government from capital ownership, promote franchises and a government supervision system. Administrative monopolies will be further broken and competitive business will be introduced.

There was also the obligatory reiteration of capital account convertibility goal, market-based RMB exchange rate mechanism, interest rate liberalisation, etc. The last one should actually be, more specifically, ‘to free up bank deposit rates’. The rest of it, I am not sure, is really good for China. Not at this juncture and given the size of the credit bubble that exists in China.

Jamil Anderlini in the FT lends some perspective to the post-reform euphoria that has swept through international brokers looking for the next investment theme.

For those who have to endure the toxic smog of northern China, it often comes as a surprise to learn that Chinese environmental laws and emissions regulations are some of the most stringent in the world.

Over the past 10 years, Chinese leaders have insisted that cleaning up an environment devastated by decades of dirty, energy-intensive growth is a top priority.

But each year the smog thickens and the ecological destruction continues, as officials at every level ignore environmental laws and regulations in their jurisdictions in favour of rapid annual expansion of gross domestic product.

The contradiction between excellent environmental legislation and terrible pollution problems provides just one example.

Last week, the state council, China’s cabinet, and President Xi separately reiterated their commitment to reining in overcapacity in a wide range of industries, such as steel and cement. China’s leaders have been trying to tackle overcapacity in these sectors since 2004, but all have expanded rapidly and in some cases tripled their capacity since then.

The same is true for surging property prices. The government has tried to douse them since at least 2007 but they have soared instead.

Many of the goals mentioned at the close of the meeting on Tuesday have been part of the government’s agenda for many years, and were included in its 11th and 12th five-year plans, which came out in 2006 and 2011 respectively.

Reducing the economy’s reliance on investment and moving to a more service-oriented, innovation-led, consumption-based growth model have been central government policies going back eight years.  [Link – subscription may be required]

May be, just may be, this time, they are serious and might implement them. Even if only some get done, depending on which ‘some’ they are, China might make some good progress in its transition to the next phase of economic growth.

Nonetheless, one does not get the impression that the Communist Party is moving in the direction of loosening its control – of the economy, that is. One is not even murmuring about politics.


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