China is no hurry to implement reform in one fell swoop, choosing instead to roll out the measures over time, which means it will take a while before something concrete materializes.
“There are several bright spots in the communique and investors should take a long-term view,” Wang Tao, an economist at UBS A.G., told reporters in a teleconference on Nov. 14. “Reform will come gradually in the next year or two.”
In a statement at the end of its third plenum last week, the Communist Party announced a raft of measures to transform the economy and strengthen the country’s social fabric by “thoroughly deepening reform”.
Although short on detail, it offered something for investors to think about. They were unimpressed, triggering a wave of sell-offs in the stock market.
They might have had inflated expectations about the plenum which, in the past, had produced dramatic announcements.
The statement did confirm ongoing reform, mostly trial schemes in certain parts of the country, but beyond saying these will be “furthered in the coming years”, it gave few specifics, particularly about a highly anticipated restructuring of state-owned enterprises (SOEs).
It said only that SOEs will be a mainstay of the economy in the forseeable future and that the government will ensure a level playing field and open more sectors to private capital.
Where the communique carried on at a reasonable length was on the “decisive” role of market forces in the reallocation of resources. In the past, the market had played a “basic” role.
The change means the government will allow the market to dictate labor prices, capital and resources.
That said, price reform will be taken in small doses to manage its impact on the consumer price index (CPI). “The government will try to cap the impact of price reform on CPI within 0.5 percent. Upstream companies will benefit from price reform but downstream operators will suffer from rising cost pressure,” UBS’s Wang said.
To everyone’s surprise, the communique did not mention financial reform that would allow market forces to determine interest rates and exchange rates. It also disappointed many when it used language from a plenum five years ago to describe rural land reform.
Perhaps one of the most significant takeaways was the second-child policy which lets couples have a second child if either of them is an only child. At present, both parents have to come from one-child families to qualify.
However, Wang said the policy may not be launched nationwide anytime soon. Instead, it may be rolled out across regions as a trial program.
The policy is intended to address China’s rapidly aging population and a potentially crippling labor shortage as a result of the country’s low birth rate. This is increasingly seen as an important pillar of a broader effort to restructure the economy.
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