Download A promising communiqué from the 3 Plenum of 18 Party Congress

CHINA ECONOMY
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A promising communiqué from the 3rd Plenum of 18th
Party Congress
Wednesday, November 13, 2013
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China’s top leadership concluded its four-day long 3rd Plenum of 18th
Party Congress on Tuesday. In its 3000-word communique released after
the meeting, Chinese new leadership committed to deepen the reform on
the broad base covering five key areas including reforms on economic
system, political system, cultural system, social system and ecocivilization system with economic reform top the priority. Although
detailed reform measures have not been released (based on previous
experience, detailed measures will only be announced one week
after the release of communique), the communique, which set the
general tone for the next five to ten years, is pretty much promising in our
view.
Markets to play “decisive” role
Chinese government said in the communique that it will allow markets to
play a decisive role in the economy including allocating resources,
upgrading from “basic role” set in 16th Party Congress back in 2003. The
shift from basic to decisive role shows that China will further streamline
administrative measures, limit the intervention of government and
deregulate in certain industries. However, the communique also
reiterated to maintain the main role of public ownership, signaling
that the pace of reform is unlikely to be drastic. This may disappoint
some investors calling for swift and aggressive SOE reform.
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Treasury Research &
Strategy
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Tel: 6530-4887
Tommy Xie Dongming
+(65) 6530 7256
[email protected]
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A new group to lead the reform
China will form a new top-level working group to lead the reform. The
new group will design the reform plans, coordinate between different
government bodies and supervise the implementation of reform
measures. The setup of a new working group is definitely not a creation
of additional layer of bureaucracy. In fact, it shows top leadership’s
commitment to manage the vested interests and push through major
reforms.
Fiscal reform is underway
China will design a modern mechanism to achieve more balanced fiscal
revenue and expenditure systems for both central and local
governments. Most importantly, China will define the government
responsibility to clear match fiscal expenditure responsibility. This is likely
to solve the dilemma faced by local governments currently which have
large social responsibility but lack fiscal expenditure power. Although
there is no direct mention on the municipal bond issuance, we
believe it is likely to be announced in details later.
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Treasury & Strategy Research
One step closer to land reform
Another bright spot from the communique is that China will grant more
property rights to farmers as a move to narrow the gap between urban
and rural areas. Meanwhile, the government will ensure rural residents
can equally benefit from China’s development. The land reform usually
meets strong resistance from local government as land sales revenues
are an important fiscal revenue avenue for local government. Should land
reform be carried out, this will be an important support to drive the new
leadership’s urbanization initiative.
Not only about the economic reform
One of the key surprises from the communique is that China will reform
its judicial system to better protect rights and interests of people. This
suggests that China’s judicial system may move forwards beingly
independent from the local government. An independent juridical system
will help the market to play a decisive role in China’s economy going
forward.
In conclusion, we think the wording from the communique is quite
promising. It is to be expected that the communiqué does not touch on
detailed measures as it only serves to outline the strategy for the next
five years. The brave move on judicial reform and land reform suggests
the new leadership’s commitment to reform in our view. Although there is
almost no mention on financial reform, we suggest investors not to pay
too much attention to that as financial reform is the easiest compared
with other reforms mentioned in the communique such as fiscal reform,
land reform and judicial reform. As such, there is no need for the
communiqué to elaborate too much on the financial reform. Let’s wait for
more details ahead.
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