How has the past reform plans in China helped shaped the country’s economic fundamentals going forward?

Bloomberg News Online reported on December 06, 2013 that based on its recent survey of nineteen economists, it found that China’s broadest reform plans during the 1990s when former President Jiang Zemin, and Premier Zhu Rongi (also known as China’s economic czar) were at the helm of the Chinese government, will add less than half a percentage point to annual growth this decade.

According to the findings from the Bloomberg survey, fourteen of the nineteen economists think that policies introduced by the Chinese Communist Party through its recently concluded Third Plenum held in early November 2013 will at most boost gross domestic product (GDP) by a negligible amount of less than 0.5 percent as compared with their previous outlook. Ten of the economists surveyed by Bloomberg think that China will need at least a small amount of monetary, fiscal, and credit stimulus to meet the government’s “bottom line” or its GDP of 7.0 percent growth in the next five years.

Based on the results of the latest Bloomberg survey, it appeared that the November 2013 Third Plenum meetings were just ‘all talk’, and it is unlikely to make much of a difference to the core economic fundamentals in China. The plan was originally been seen as a grand scale attempt on reforms targeted at the major facets of the country’s economic structure, including the demographics, market, governance system, and distribution of welfare across the nation. However, those perceptions have apparently been watered down when it is further being analysed as the survey results have revealed a much subdued impact coming from those reform plans.

Some of the major highlights in that 60-point Third Plenum Plan have outlined broad reforms including the dismantling of the ‘one-child’ only policies, where family planning regulations were relaxed, allowing a second child, provided a parent comes from a single-child family; the revamping of the so-called ‘hukou’ policy which will allow migrant workers equal opportunities to the accessiblity of welfare programmes that were previously limited only to large cities such as Beijing, and Shanghai; Allowing greater private sector involvement and ownership of state-owned enterprises (SOEs); Scrapping its previous two-year Initial Public Offering (IPO) ban; Imposing tighter restrictions to the availability of credit to the local governments, among many market reforms intending to boost the economy with the overall theme of limited government intervention. Given the results of the latest Bloomberg survey, and trying to link them to the various reform plans being outlined, it does represent diverging views regarding China’s economic fundamentals going forward. It is also an issue reflected by many ordinary Chinese people and outsiders, who find it difficult to get a handle of the apparent disparity among the views expressed by the two parties (Economists versus Government), and how the economic polices function in an increasingly uncertain environment, such as navigating the various regulations in order to ensure the smooth delivery of goods and services.

According to some of the remarks expressed by the economists surveyed, most of them have expressed their positive forecasts on China’s growth plans, including the distribution of resources which is expected to benefit many Chinese people, including welfare eligibilities, housing and settlement, education, among others. However, there could be risks when accessibility becomes an inhibiting factor due to a general lack of public awareness, income inequalities become wider, the inability to access foreign capital timely, due to the nature of the existing financial structure which continues to place tight conditions on Chinese Yuan currency convertibility, and foreign participation in managing local enterprises, especially the state-owned enterprises (SOEs).

Despite the various reforms being outlined, China continues to face emerging risks including the issues concerning potential credit issues that could potentially jeopardise the country’s overall economic progress. The late 90s and early 2000 era has brought about massive infrastructure spending undertaken by the Chinese government to boost consumption, and spending, but these levels of infrastructure spending require a significant amount of leverage, which puts China at a disadvantage in terms of its sovereign credit rating. Other issues including the potential mismanagement of the infrastructure, neglect, lack of upkeep, and proper maintenance that will ensure durability of the infrastructure system. These issues are especially critical as most of the man-made disasters happening in the country occur as a result of lack of conformity to safety regulations, ignoring signs of deterioration, and irregular inspections that could have prevented such accidents.

Based on the findings of the latest Bloomberg survey, it appears that risks of a downturn are much higher than the potential growth that could be achieved. However, the downturn is not likely to turn into a so-called ‘hard landing’, given that the Chinese government is tightly monitoring any significant signs of asset ‘bubbles’ that might create unwanted risks, including the latest crackdown on Bitcoins, which was announced on December 05, 2013 that going forward, domestic financial institutions are barred from undertaking transactions involving the use of Bitcoins as a medium of exchange. The current official government forecast for GDP growth during 2014 is expected to come in at 7.0 percent, a 50 basis point (bps) drop from this year’s expected GDP growth rate of 7.5 percent, and most economists surveyed by Bloomberg agreed that a slowdown in the Chinese economy is inevitable, given that the Chinese government will be limiting their involvement in managing the economy, and leaving it to market forces which does not provide as much of a knock-on effect on the economy in general, if there is no government backing (the so-called ‘Keynesian’ kicker in the study of Macroeconomics).

The Bloomberg survey has also tried to gather the economists’ views about the long-run growth rate of China. One of the economists named Mr. Dariusz Kowalczyk, a senior economist and strategist at Credit Agricole CIB in Hong Kong, predicted a long-run growth rate of 5.0 percent to 6.0 percent, requiring policy makers to generate one to two percentage points of growth annually “for the foreseeable future”. This estimate seemed quite reasonable given that the trend has so far pointed downward revision of growth each year. China appears to be moving towards a mature economy, and the ongoing economic slowdown is inevitable. Many economists have largely dismissed the notion that the scrapping of the ‘one-child’ only rules will generate population expansion, given the gradual rise of the ‘middle-income’ class families who desire fewer children, and it is regarded as a ‘Malthusian’ form of thought by linking directly to the relationship between population growth and economic growth.

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