China's Bold, Contradictory Reform
Comment of the Day

November 18 2013

Commentary by David Fuller

China's Bold, Contradictory Reform

Here is the opening to this interesting editorial from Bloomberg

Call it policy presentation with Chinese characteristics. After the meeting of its leadership last week, China's Communist Party issued a muddled communique that aroused no great excitement. Then, on the weekend, well ahead of the usual schedule for such announcements, the party released a longer follow-up statement worth getting excited about.

It's radical stuff -- in principle, if not (yet) in policy. Maybe China's new president, Xi Jinping, aspires to be another Deng Xiaoping after all.

The "Decision on Major Issues Concerning Comprehensively Deepening Reforms" was nothing if not wide-ranging. Tucked inside it were the biggest headlines, so far as many foreign observers are concerned: China's notorious one-child policy is to be softened, and the system of arbitrary confinement to "re-education" in labor camps, a tool of political repression, is to be ended.

Most of the statement, though, is devoted to a comprehensive list of economic and financial reforms. This emphasis is deliberate: "The reform of the economic system is the focus of all the efforts to deepen the all-round reform." Many of the proposals echo the long-standing recommendations of pro-market advocates at home and abroad.

The statement calls for China's financial sector to be liberalized. There will be new private banks, as well as further moves toward exchange-rate flexibility, market-determined interest rates and capital-account convertibility. The blueprint calls for price reforms in water, energy, transportation and telecommunications. Farmers will be given new property rights, including the right of succession and the ability to sell shares in their land or use it as collateral. The system of household registration, which controls workers' movement from countryside to city, will be eased (though curbs on migration to the biggest cities will remain).

David Fuller's view

Bloomberg's second paragraph above summarises the reaction of numerous China watchers. Many of us hoped for another Deng Xiaoping when Xi Jinping was first appointed. He had more power than his immediate predecessors but the new President obviously did not have Deng's political stature. Consequently he had to negotiate his way and has successfully done so, judging from this abridged 60-point document.

The market's response has been dynamic, as you can see from Monday's jump in these five indices: Hong Kong Hang Seng (weekly & daily), CSI 300 (weekly & daily) Shanghai A-Shares (weekly & daily), Shenzhen Composite (weekly & daily) and especially the HS China Enterprises (H-Shares) (weekly & daily) which rose 5.65% on Monday.

Heaven knows we have seen plenty of China disappointments in the last four years. However, the new government is not only in place, but we also have a far better idea of where it is heading. Meanwhile, China's shares are also cheap, as I was pointing out again last week.

Here is the opening from this latest, informative report: China Reforms Poised to Reshape Landscape, by Jasmine Wang for Bloomberg:

China's planned economic reforms are poised to reshape the competitive landscape, allowing private companies such as Alibaba Group Holdings Inc. to compete with state-owned banks, and easing the one-child policy to bolster demand for products from Nestle SA (NESN) toGeneral Motors Co. (GM)

Plans to change the nation's financial sector include a new registration system for initial public offerings and allowing qualified private investors to set up small-to-medium sized banks. Tencent Holdings Ltd. (700), Asia's biggest Internet company, is part of a group applying for a banking license in China.

"Companies that got too comfortable with the old system now are going to have to change," said Tim Condon, chief Asia economist at ING Financial Markets in Singapore, who previously worked for the World Bank. "This is potentially a huge step forward in opening up the economy."

President Xi Jinping's reforms, which may be the most sweeping since Deng Xiaoping's liberalization in 1978, are aimed at giving more influence to market forces and loosening government controls. The changes outlined in a 60-point document after a Communist Party meeting last week present opportunities -- and risks -- to companies in almost every segment of the world's second-biggest economy, which is heading for its weakest annual expansion since 1999.

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