Xi Jinping plans to introduce new structural reforms to the Chinese economy as Beijing slowly opens the door to global capitalism.
Next month, China’s leaders will outline at the Communist Party’s Third Plenum precisely how they plan on slowly cracking the door open on the economy.
“We are expecting some positive reform info from Communist Party leaders,” said Marc Tommasi, head of international investment strategy for Manning & Napier in Rochester, NY. “I’ve been more constructive on China this year than consensus. I’m not yet concerned about growth deceleration,” he said. “I think a lot of that has been engineered by the government.”
What are investors going to learn next month about China’s new growth strategy?
Yu Zhengsheng, member of the Standing Committee of the Political Bureau of the Party’s Central Committee, said the meeting would be about “unprecedented” reforms. “The reforms this time will be broad, with major strength, and will be unprecedented,” Xinhua news agency reported Yu saying.
Yu’s comments on the reforms are among the first from China’s leaders about the Third Plenum, where President Xi Jinping is expected to press for greater economic reforms. The idea is to steer China from a reliance on government investment to a more balanced growth model driven more by consumption, services and innovation rather than exports. The meeting will mark the third time the 200-member Central Committee has gathered since a leadership transition last March.
China’s economic challenges are growing, and so most pundits agree that changing the way China does business is critical for containing risks and achieving sustainable growth. The upcoming meeting provides an opportunity for the new leadership to provide guidance both to Chinese businesses and foreign investors on how Beijing plans to address these challenges.
Anoop Singh, the International Monetary Fund’s director of the Asia Pacific Department, has his “wish list” for the Third Plenum.
New financial reforms are essential to contain the buildup of risks, enhance the efficiency of investment, and boost household capital income, he wrote in a blog post on the IMF website on Oct. 22.
Another issue was structural in nature. Structural measures include leveling the playing field within and across sectors through deregulation and easing barriers to entry — particularly in services.
“The biggest risk in China is politics,” said Chris Ruffle, a China fund manager at the Open Door Capital Group in Shanghai.
After 30 years of unprecedented expansion, during which nearly 500 million people have been raised out of poverty, China’s growth model is under stress. Pressure points are beginning to develop in the financial sector and in local government finances as state’s spend their way to full employment. While China tries to shift away from its export dependent economic model, the population is aging and the safety net is mediocre at best. China has to build out those social services, and all that entails, from pension fund services and better health care delivery.
China’s strains arise from a development strategy heavily reliant on government investment in infrastructure and the relocation of surplus labor from the countryside to urban factories.
“Implementing these significant measures is a tall order and involves tough choices, including possibly accepting slower growth as the economy adjusts to the new path,” wrote Singh. ”Starting now will allow China to sustain its convergence to the level of higher income economies and deliver the benefits of growth to an ever-wider cross section of its population in a way that’s environmentally sustainable and sound. But delay reforms and the challenges grow larger, raising the probability of stalled convergence,” he wrote.
(Reprinted from Forbes.com)