China and the reform agenda
Comment of the Day

October 29 2013

Commentary by Eoin Treacy

China and the reform agenda

The Chinese Communist Party will be gathering in November for the third plenary session of the current administration. In the strictly choreographed structure of handing over power to a new generation, the first two sessions generally focus on personnel changes, while the third session is reserved for policy statements and for laying out the ambitions or five-year plan of the new administration.

A great deal of speculation is taking place on what exactly will be announced at next month's meeting. The fourth highest ranking person in the Politburo Standing Committee, Yu Zhengsheng, was quoted over the weekend as saying the meeting “will focus on studying comprehensive and deep reform”. Here is a section from a Businessweek article.

The State Council's Development Research Center, an influential government think tank, on Sunday released its proposals for wide-ranging reforms in eight areas of the economy, including “monopoly industries, land, finance, tax and fiscal systems, opening-up, government administration, state-owned assets, as well as boosting innovation and green development,” as the Xinhua News Agency reported Monday. If its proposals are followed—still unclear at this moment—that's good news for those who have worried that the upcoming plenum could disappoint.

Personnel changes have taken place at the top of major Chinese institutions and the upcoming meeting will tell us what the new heads of major arms of the government intend to accomplish. One conclusion we can draw is that the control of major state owned enterprises is a point of contention within the party.

While the Communist Party attempts to portray a united front, internal competition for office and privilege can be broken down into two separate camps. These might be thought of as the reform proponents and the conservative camp. Bo Xilai was a major figure in the conservative camp and has been imprisoned on corruption charges while his wife has been convicted on murder charges. An investigation was launched into Zhou Yongkang over the summer. While Bo Xilai's trial was a public spectacle because it involved the murder of a foreigner, the investigation of Zhou Yongkang is probably more important. This is the first time that a former member of the Politburo has been so publicly investigated for anything. His family controls CNOOC which is one of China's largest state owned companies.

It is a risky business making predictions about the internal machinations of an organisation as large and opaque to Western eyes as China's Communist Party. However, the evidence suggests that the reform proponents, who are currently in power, intend to push through their agenda. The degree to which they succeed is likely to have a considerable influence on the stock market.

The CSI300 Index continues to pause in the region of the 200-day MA. It fell to break its four-month progression of higher reaction lows on Friday and will need to continue to hold in the current area and subsequently sustain a move back above 2500 to confirm a return to medium-term demand dominance.
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