China held its
much anticipated Third Plenumearlier this month. And markets reacted favourably to the “decision” that followed a few days later.
Policymakers said they would loosen China’s one child policy, abolish the notorious labour-camps, encourage more private investment in state-owned enterprises, push more rural land reforms, and advance more financial reform in the form of interest rate and capital account liberalization.
Clearly this is a lot to digest.
So, we reached out to some of our top China experts and asked them them three simple questions. 1. What were you most disappointed by? 2. What was the most meaningful reform? and 3. What has the media gotten wrong?
Here’s what they said.
Business Insider: What was the most disappointing thing about the 3rd Plenum?
David Cui, Bank of America: “The only disappointment is, other than stating vaguely that the leaders aim to achieve “decisive” results in important areas and critical segments by 2020, there is no other comment on timeline. We are afraid that the implementation will be on a piecemeal basis and only easy reforms, like one-child policy and raising utilities prices, will see any meaningful progress anytime soon, while tough reforms, like land, Hukou and SOE reforms, will be left to languish.”
Bill Bishop, Sinocism: “Perhaps the most disappointing is the language around the state-owned economy. It is better than nothing but there could be some real contradictions in allowing the market to play a decisive role in allocating resources. So we just do not now what is really going to happen over the next few years, and given that there was some expectation that there would be nothing in here about SOE reform this is perhaps a sign of some resolve towards cleaning them up and making them more efficient, even if widespread privatization is not on the table.”
Diana Choyleva, Lombard Street Research: “I think capital account opening and interest rate liberalization and land rights are the most meaningful. …My disappointment is only that they didn’t commit to a more concrete timetable. My view is that such reform will need to be implemented fairly quickly to be successful.”
Alaistair Chan, Moodys: “There are always more reforms in China that could be announced and enacted, as China still has a long way to go in its transition toward developed economy status. One change that was not forthcoming (although the chance of it happening was admittedly slim) was political reform, and providing greater transparency in the government’s actions.”
Patrick Chovanec, Silvercrest Asset Management: “I think what came out of the plenum is about as good as can be expected. I don’t see any major disappointments.”
Alastair Newton, Nomura: “My expectations were a good deal lower than markets’ generally; so there was nothing I expected to see which doesn’t appear to be there in one form or other. The problem with singling out any particular issue is that so many areas are interrelated, ie reform in one necessitates wider reforms. However, if I had to single out one it was the failure – again – of the CCP firmly to grasp the nettle of rural land reform, ie giving the farmers right of land ownership.”
BI: What is the most meaningful reform we’ve seen from the third plenum?
DC: “From [where] we stand, the most meaningful reform resulting from the 3rd Plenum is the decision by policymakers to allow the market to play a decisive role in resources allocation. Furthermore, it is a significant and somewhat surprising development that SOE reform has been given a very prominent position in the larger reform agenda.”
BB: “The most important things about this report are the shift in language to talking about the market playing a decisive role, the establishment of the reform small leading group reporting to party center, and the new national security commission.”
DC, LSR: “The above reform [capital account and interest rate liberalization] and rural land rights.”
AC: “I can’t really point to a single policy that stands out as the best or most meaningful. I think the overall scope and range (the “comprehensive” nature) of the reforms is the most meaningful aspect. It shows Beijing’s commitment to building momentum for a general attitude towards reform in all levels of government. The confident push toward allowing markets to play a “decisive” role in the economy is very welcome and is an acknowledgment that the government is not capable of directing the next era of economic growth.”
PC: “We haven’t seen ANY reforms come out of the plenum yet. We’ve seen a plan. I’ll be watching eagerly to see what actually follows.”
TL: Ending the labour camp, significantly easing the one child policy, and vertically integrate judiciary system.
AN: “I don’t have a view on this other than that implementation will be key irrespective.”
BI: What is the one thing the media is getting wrong?
DC:“There is very little discussion on the negative impact of the coming round of reforms on the market. Take SOE reform as an example, it’s true that SOEs currently in competitive sectors like F&B and logistics will benefit because proper incentive schemes may be put in place for their senior managers. However, these type of companies only account for roughly 10% of MSCI China. On the other hand, government protected SOE sectors, whose franchise value may get eroded by the reforms, account for roughly 75% of the index. The same is probably true for the overall reform program. We assess that it will be negative to major banks because of interest rate deregulation and increasing competition, to property market due to the property tax and rising land supply and to investment led sectors as a result of the rebalancing of the economy as consumption-driven. Again these sectors account for a far bigger market cap than the likely beneficiaries.”
DC, LSR:“They missed the strength of the communiqué message which we got right.”
BB: “Many in the media were too quick to jump on the initial communique and say there is no real reform. my understanding is that the reaction was so negative to the communique (not just in the western media but inside china) that they moved up the release of the Decision from 11.20 to last Friday.
“Now we are at risk of too much exuberance. As I wrote Monday “The Decision is impressive and shows that the leadership is both aware of and committed to deep reforms. Friday’s exuberance however may be a bit overdone as the truly hard part is not the drafting but the implementation of changes that will affect interests throughout society. But at least Xi has clearly articulated resolve and vision for reform. That is huge progress, especially after the last few years. China still faces significant economic and social challenges, but lack of political will no longer appears to be one of them.”
“The other thing is that this may help end some of the misguided commentary about Xi as a Maoist I have been arguing for a while that he looks more Dengist than Maoist, and the Third Plenum Decision only makes that view stronger. Others are coming around, including the WSJ editorial page today.”
AC: “Reform in China is a continual process. Hence this is just one part (albeit an important part) of a multi-decade long process. The plans are a blueprint, and will change based on how fast different parts of the bureaucracy react and on economic circumstances and so on. So the exact ideas are not as important as the general comprehensive nature of the entire document.”
PC: “There’s a big difference between announcing reforms and implementing them. There’s a notion out there that the big obstacle to market reform in China is entrenched special interests, and that the plenum document shows that this obstacle has been overcome. Maybe. But there are also many practical obstacles to reform, because real reform would significant change the dynamics of the Chinese economy, in ways that could very disruptive in the short term. So we need to judge China’s latest reform push by its results, not its intentions (and some of those results need to happen very fast to avoid some serious economic problems that are brewing — just look at what the interbank lending rate is doing while everyone cheers the plenum reform plan).”
TL: “[It’s] hard to see. Media are different.”
AN: “First, it was too up-beat in the run-up, then it was too down-beat last week faced with something well short of its own hyperbole. Now it isn’t giving enough thought to the challenges of implementation.”