x Abu Dhabi, UAEFriday 21 July 2017

Outlook generally sunny as China’s third plenum takes place

Observers see hope as Chinese leaders meet to discuss major overhauls of the financial and economic arena's that will shape the country's destiny for the next decade.

Analysts are broadly optimistic that this week’s Third Plenum of the Communist Party will result in reforms that will boost the Chinese economy over coming years.

“This plenum will conclude with a mega-reform plan to guide the structural changes in the country for the next ten years,” Deutsche Bank said recently.

“Our expectation is that the package may involve a few dozen reforms,” said the Deutsche analyst Jun Ma.

These include deregulation, with entry barriers for private investors reduced by 90 per cent in the medium term, and opening up to private investors sectors such as oil and gas, railways, subways, telecommunications, banking, insurance, medical services, education, and culture.

“We expect China to significantly increase it openness by granting foreign investors market access to most services industries,” said Mr Ma.

These reforms, which would include aspects such as scrapping foreign ownership limits, would include banking, insurance, telecom, education, health care, culture and entertainment, travel services, delivery services, legal and other professional services.

There is growing speculation that the president Xi Jinping will use the third plenum to announce the opening up of China’s capital account, which would allow easier investment abroad by Chinese investors. Such a move would free up China’s vast national savings, which could bring much-needed liquidity into global financial markets – or swamp them, as Diana Choyleva of Lombard Street Research said recently, as she wrote of China’s “wall of money” she believes could well “swamp global financial markets”.

“Very few expect ground-breaking change. But Beijing may well surprise the market with a much swifter timetable for opening China’s capital account,” she said.

US national savings come to US$2.7 trillion while China’s are $4.2tn. She says China’s savings are not likely to go down traditional routes such as treasuries or other government bonds.

“Much more likely it will [go] into US, UK, Australian real estate, private equity and eventually quoted stocks. Higher domestic interest rates in China will be one necessary mechanism through which income and wealth will be transferred from China’s firms to China’s consumers and the much- needed re-balancing of the economy could be achieved,” Ms Cholyeva argues.

In a research note, Macquarie Bank said a recent outline for reform by a state-council-affiliated think-tank, called the 383 Reform Plan, was bold and comprehensive, but had been seen by many as a “wish list” rather than an “action plan”.

“One reason to stay conservative is that [the outcome] will likely be a broad and long-term reform plan like the ones unveiled at the third plenums in 1993 and 2003. As the key economic reforms have been mentioned by the new leaders repeatedly since last November, new surprises would be extremely difficult to come by if a detailed timetable or an implementation plan is absent,” Macquarie said.

The bank reckons the three main reform issues will be environmental conservation, opening-up the economy and urbanisation. In addition, the new government will also probably reiterate the importance of reform in the government administration (deregulation), financial system (liberalisation), and fiscal-tax system, which would serve to gradually remove the institutional obstacles to other necessary reforms.

“In addition, we think it is possible that the new leaders would accelerate the release of follow-up implementation measures of the reform right after the third plenum to strengthen the public’s confidence in reforms,” Macquarie said.

“We suggest investors take a position in the potential beneficiaries in advance.

GDP is set to grow 7.6 per cent this year, beating the government’s 7.5 per cent target, before losing some steam next year as Beijing forges ahead with structural reforms, a Reuters poll of economists showed recently. While an expansion of 7.6 per cent this year would be the weakest in 24 years, it would still be comfortably above the government’s 7 per cent forecast.

“Data for September suggest that momentum had started to fade at the end of the third quarter,” Mark Williams of Capital Economics wrote in a research note.

“Growth in industrial production edged down, with the slowdown particularly acute in energy intensive sectors and among state-owned firms, which were the major drivers of the summer rebound. Cement output, a gauge of construction activity, has also weakened recently.

“This is consistent with evidence that infrastructure spending and investment by state-owned firms cooled last month.”

Mr Ma expects the Shanghai free trade zone to establish an offshore market soon.

“Financial reforms will be positive for brokers, insurance companies and FX [foreign exchange] banks, most positive for privately-owned financial firms, and should improve the transparency of shadow banking activities,” he said.

A Bloomberg survey of analysts in the middle of last month showed the odds of a severe slowdown in China or a credit crisis would fall after this week’s summit as leaders take on local-government debt and financial reforms.

Fifteen of 23 economists and political analysts said policies flowing from the meeting would reduce such risks, and a majority said the plans would help China become a high-income economy by 2030.

Asked which reforms were most needed now and most likely in the next 12 months, survey respondents ranked changes in financial markets and local-government funding as both most urgent and probable. Expectations were lower for reforms to the residence-registration or hukou system, which limits labour mobility, the rule of law and state-owned enterprises.