What are the likely policy reforms coming off from this week’s conclusion of China’s Third Plenum Meeting?

The Chinese Communist Party held its Third Plenum Meeting this past weekend, and is expected to conclude by the end of Tuesday, November 12, 2013. The four-day meeting is closely monitored by many market observers, and world leaders, as the country marks its milestone with the March leadership transition under President Xi Jiping, and Premier Li Keqiang. The recent economic growth numbers, especially those coming out of the industrial production side seems to suggest that the Chinese Government’s growth projections for 2013 are intact at approximately 7.5 percent annualised Gross Domestic Product (GDP) growth.

The Chinese Politburo members, State-owned Enterprise (SOE) leaders and other important members of the Communist Party are participating in the four-day meeting, where the communique is expected to show that Chinese leaders are laying out a comprehensive plan to guide China’s economic growth over the next decade, ranging from liberalising the financial sector, allowing for foreign participation in the growth of the country, restarting the Initial Public Offer (IPO) markets, and introducing social reforms, including the possible removal of the so-called ‘hukou’ policy, where migrant workers are given equal treatment when it comes to receiving welfare benefits in the cities which they have settled in, and fair employment rights. The one-child only policy is expected to be discussed. The final details of the final plan are expected to be released following the conclusion of the meeting on Nov 12.

Recent production numbers have indicated some positivity in China’s path to achieving its targeted economic growth, including the latest industrial production output figures which came in at greater than the estimated 10.3 percent from a year earlier in October, and manufacturing investment strengthened. The October HSBC Purchasing Managers Index (PMI), and the official PMI numbers have also indicated some strength in the production output, with both indices showing readings of north of 50.0 (50.0 is the neutral level between decline and growth in the production outlooks, and figures). The customs data has also shown been driven by overseas sales, suggesting that export growth might also be robust. Inflation data released over this past weekend showed some minimal increases, but are unexpected to slow down the pace of China’s economic growth.

Chinese consumers are also showing some optimism in their discretionary purchases, and it is not a surprise that retailers are capitalising on special events such as the October’s ‘Golden Week’ holidays, and November 11, 2013 which is the start of the so-called ‘Singles Day’. Many singles in China are expected to be given preferential shopper treatments including various bargains and discounts. The shopping experience is quite similar to United States post-Thanksgiving Day shopping, or commonly known as ‘Black Friday’. E-commerce website operators like Alibaba.com are expected to report double-digit growth in online purchases, and sales on ‘Singles Day’, and domestic shippers have reportedly indicated increases in domestic package delivery volume, with some freighters rescheduling the number of overnight deliveries by air to accommodate with the increase in online demand. Chinese consumers have also travelled overseas to hunt for bargains, including luxury goods items in places such as Europe, Hong Kong, South-East Asia, among others. The optimism over on the domestic consumption, especially the discretionary spending power does indicate some resiliency, despite the expected slowdown of China’s economic growth might have on consumer spending power.

With all these hype and expectations coming out of the latest economic figures, and the potential policy reforms that might be outlined and implemented following the conclusion of the Third Plenum Meeting on November 12, there are many concerns expressed by many market observers who have warned of the potential speculative excesses that are still lingering among some pockets of the economy including the relatively heightened property prices, credit growth, which are of some of the sectors partially fuelled by the ‘Shadow’ banking system. In a Bloomberg Television interview early this morning during Asian trading hours on November 11, 2013, a Bank of Singapore economist, Mr. Richard Jerram, was quoted as saying that he is concerned over the increase in credit growth, which might cause some instability down the road for the Chinese banking system. It was reported in a Bloomberg News Online article on November 11, 2013 that the People’s Bank of China (PBOC) is expected to report the country’s October money supply, new loans, and aggregate financing, which is the broadest measure of credit this week, and is most likely to have shown that the central bank is reining in on credit growth, and at the same time, unlikely to act irrationally by going all out to curb credit growth, which will be in line with the Chinese government’s goal of achieving a ‘soft’ landing for the economy. The PBOC’s monetary policy moves have also been made quite clear in various occasions, when they chose to delay their interventions in the domestic money markets by allowing interest rates to move higher, and then step in to intervene when volatilities seem to go out of control. Market participants might not be too enthusiastic over the PBOC’s recent monetary policy actions, but the central bank is unlikely to change anytime soon as it continues to monitor the pace of credit growth in the economy, and will be ready to step in when there are excesses in some pockets of the economy, including the property sector.

I believe that the actions by the Chinese policy makers will be one of the most closely watched events, when it unveils the reform agenda on November 12, 2013. One of the reasons is the potential implications that this set of latest reform agenda might have on the world economy going forward due to relative size of economic power China holds globally and as well as domestically. The latest reforms are expected to transform China into a vibrant and dynamic economic superpower. However, some sceptics might point out that China needs to set its policy straight on how the country tackles corruption at all government levels, bring about improvement in the livelihoods of its people, cracking down on political dissent and free speech, achieving stability in the Chinese economic system, resolving some of its environment issues, and various other social reforms that encourage greater cohesion among the Chinese people, and preserve the social fabric of China.

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