A brief summary and my thoughts on the final release of the communique from the conclusion of the Third Plenum Meetings held in China.

Chinese leaders concluded their four-day Plenum Session Meetings late on November 12, 2013, and the final communique released by the official Xinhua News Agency was touted by many of China observers as ‘mild’, with no policy reforms being discussed on the issue of the country’s one-child policy, local government borrowing, and interest-rate liberalisation. The major highlights of the final communique included two statements that stood out, namely, “Markets such play a decisive role in allocating resources, and “The State shall play a dominant role in the economy”. Based on the initial understanding on the policy outcomes drawn from these two statements, it is believed that going forward, at least for the next decade or so, policy implementations shall revolve along the lines of non-interventionist roles played by the Chinese government, and market-oriented policies shall form the core basis of overall economic reforms. The Chinese government will facilitate the implementation of the economic reforms, but will step in if things go awry. Other than that, the markets shall play a bigger role in setting the course of direction of the economy.

For the past four days, there has been much hype that led to build-up of the latest round of the Third Plenum Meetings, or the 18th Central Committee. The Chinese government has tried to use this round of meetings as a platform for outlining the various goals, and objectives for reforms going forward for the next decade. Bloomberg News Online reported on November 13, 2013 that the final communique contains 5,000 characters which referred “reform” 59 times, “development” 37 times, and “socialism” 28 times. However, it used the word “finance” just once. Judging by this level of details in providing media coverage on this single event, one cannot possibly imagine that many media outlets, including Bloomberg News are all scrutinising for any details of reform, and rhetoric that stands out. It also goes to show the amount of intensity that is built around the meeting which is undoubtedly no less than just a non-event, ordinary type of gathering, or weekend retreat by the Chinese leaders.

According to Bloomberg News Online, several economists being interviewed have expressed their cautious optimism that the latest round of policy statements shall translate into concrete reforms being implemented in China. These are some of the few quotes drawn by Bloomberg News including one that has a headline, “Curb Your Enthusiasm” from Bank of America Corp.’s Hong Kong-based economist Lu Ting, who said that investors may be disappointed by omissions from the communique and the stance on SOEs. Other economists like Stephen Green, Head of Research for Greater China region representing Standard Chartered Plc in Hong Kong, who said that the reference to a “decisive” market role “may sound small, but it should provide critical air-cover to detailed reforms which supports the market.” Such views being expressed by many economists, whom Bloomberg News has interviewed, have generally narrowed down to a single sentence, “Lots of rhetoric, but lack of implementation details.”

The build-up going into the latest Third Plenum Meetings have been largely focused on the need for much needed reforms including social policy changes like the “hukou” system which has unfairly treated rural migrants, and denied them of equal access to welfare benefits in the cities which they have settled in, narrowing the income divide between the rich and poor, and the one-child only policy which hampers economic growth. As China starts to transform gradually into a market-based economy, many Chinese people have progressed towards the middle-income levels, and are delaying marriages. This resulted in a growing population of elders, where the ratio of dependency among the young and the elderly has largely widened. There are also several issues relating to environmental reforms which are in need for urgent review in view of the pollution, and several cases of food hygiene-related cases being reported for the past few years. In addition, there are several local and nation-wide financial reforms including the privatisation of state-owned enterprises (SOEs), and local government debt reforms that have to be looked into for critical changes as the nation transitions itself to a more market-oriented economy, with the State taking on a backseat role, allowing the markets to dictate the direction of the economy. However, with the lack of details across all areas, it remains to be seen whether words will translate into implementation actions. Nevertheless, there is still hope by many that party leaders will release more details over the course of next few weeks.

My thoughts on the outcomes set out by the Chinese government are mostly in line with several economists, and China observers, and that it is quite ‘underwhelming’ despite the hype that is built into the meeting. However, I remained quite hopeful that the Chinese government is trying to send a signal that it is willing to relax its grip hold on the economic development policies and allow markets to take on a bigger role in charting the course of direction of the economy. If such reforms were to be implemented, it does signify a bold step taken by the Chinese government to transform the country into a much modernised economy, with less government intervention. The progress is slow, as many SOEs will need time to adjust. Already, on Monday, November 11, 2013, the Chinese government has announced that it has granted approval for private entities to take up as much as 15.0 percent stake in SOEs. This also marks the positive start towards introducing market competition, allowing private entities to compete fairly with the SOEs. During the early Asian trading hours on November 13, 2013, one of the Bloomberg News journalists was quoted as saying that with the upcoming visit by United States Treasury Secretary, Mr. Jack Lew to Beijing, the nation’s central bank, the People’s Bank of China (PBOC) will be fixing the mid-point range trading band for the Chinese Yuan currency lower at 6.1342 to the US Dollar starting on Nov. 12, from the previous mid-point range of 6.1360. This is part of the move to fend off some of the criticism being expressed by the US Treasury Department on some of the highly undervalued currencies, including the Euro currency, which has led to a number of trade and commerce-related issues that the US is facing as it tries to stay competitive in a much globalised trade environment.

In conclusion, I think that the Chinese leaders will be putting forward their agenda over the course of the next few weeks, although many of the initial expressions made by several China observers and economists have been somewhat disappointed. It is quite a natural reaction expressed by people due to amount of coverage and excitement that is being built into the event. Unfortunately, at this stage, it remains a question mark until there is more clarity on the exact details with regards to the extent, and timelines for the implementation of these new policy changes.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc

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