This article is part of Morningstar's "Perspectives" series, written by third-party contributors. Here, Mark McFarland, global chief economist at Coutts gives his thoughts on what the third plenary means for investors.
Investors in Chinese companies have taken a hit today as the stock market reacted badly following the Third Plenum of the 18th Central Committee of the Communist Party of China (CPC).
China’s long-awaited third plenary session concluded Wednesday, revealing few details. This disappointed markets and Hong Kong’s H-share market fell 2.7% today.
Though lacking in particulars, the plenary session’s short communiqué offered the promise of a new oversight committee with a mandate to make market forces “decisive” by 2020. There was much emphasis on furthering trade liberalisation but little explicit detail on the long-term secular themes of rural land sales, reform of urban (Hukou) passports and the one-child policy.
There was similarly no timetable for reforming state-owned enterprises. We will simply have to wait one or two weeks for a fuller statement and possibly another six months to know exactly what will be introduced and how.
Financial / trade reform
The communiqué proposed giving market forces a “decisive” role in the allocation of resources, and an overhaul of China’s fiscal accounts. This could mean almost anything – that there will be more emphasis on financial de-regulation, development of bond markets, or land reforms that protect property rights.
The communiqué also mentioned accelerated development of free trade zones. This most probably refers to the Shanghai Free Trade Zone (SHFTZ) that was initiated earlier this year. The hand of government will be less dominant inside the zone and, if successful, this can be rolled out as a model for the rest of China. It needs to be stressed, however, that nothing new was revealed from when the SHFTZ was first announced.
Overseeing reform
Economic reforms will be placed under the oversight of a committee whose board includes Xi Jinping, China’s paramount leader, and Li Keqiang, the premier. The remit of the committee will be to deliver significant economic reforms by 2020, the date targeted some years ago for Shanghai to become an international financial centre.
There is an implicit statement here about the role of a convertible renminbi since financial centres need a convertible currency. Today’s announcement by the Bank of England that it will help create a deeper renminbi clearing market in London in exchange for increased “qualified foreign institutional investor” quotas is interesting in its timing.
Further land reforms are likely to be announced over time – allowing rural people to sell land – and there is a notice regarding charging for resources in a manner that reduces their environmental impact. Securing property rights would be a first step towards achieving that, although once again details were lacking.
Where there isn’t any clarity
The statement included little on the sensitive issue of land reforms, and made no mention of changes to the Hukou passport programme that gives rural people rights to live legally in cities and access to welfare. That may yet come as the South China Morning Post today translated a portion of the communiqué as: “Allow farmers to enjoy the same benefits of urbanization as urban residents. Grant farmers more property rights and push for equal resource allocation amongst urban and rural areas.”
However, it’s disappointing that nothing explicit was noted. Also, there was a candid statement that no changes are imminent to curb the dominance of the state sector, despite the private sector employing the majority of China’s workforce. This could be a sign that either the reformers felt overwhelmed by the sheer scale of necessary reforms and left the politically difficult ones to later, or that the conservative old guard won out. Time will tell. And unless the entire market missed something, there wasn’t anything on the one-child policy.
Impact
From a macroeconomic perspective, there isn’t much to take away from the communiqué other than the need to wait, and the more medium-term implications of a greater emphasis on free trade zones, and better accountability and reporting of fiscal / banking statistics. It will be a few weeks if not quarters before we discover Beijing’s true desire for reforms.
