The author is Nomura economist Zhiwei Zhang
We expect the Third Plenum to release a far-reaching reform plan on structural issues.
Relatively speaking, we believe financial reform – in particular, capital account
liberalization and exchange rate flexibility – may pick up speed.
The People’s Bank of China (PBoC) has been pushing hard for financial reforms to improve the effectiveness of monetary policy.
The November meeting may reiterate the need for a more flexible exchange rate and announce a timetable for capital account liberalization, which we believe faces less resistance than other reforms.
That said, we do not expect the removal of all capital controls in the short term; rather, the government may increase the size of the QFII and QDII schemes and expand such schemes to assets other than just equities.
The government may also further widen the CNY daily trading band in the near future. We also expect the Plenum to reiterate lower entry barriers for private capital to the banking sector and interest rate liberalization, but, except for launching large certificates of deposit in the interbank market, we do not expect interest rate liberalization to come any time soon.
We believe reform of (State-Owned Enterprises) SOEs and monopolistic industries is very important from a macro perspective because they may be able to generate higher productivity to support the economy’s long-term growth potential.
SOE reform was highlighted in China 2030 – the joint report by the World Bank alongside government think-tank the Development Research Center of the State Council, in 2012 – we believe the meeting may reiterate improving SOE efficiency.
We would also expect a reiteration of the desire to reduce entry barriers for private investors and have private capital investment in the railway, utility, medical and telecommunications sectors.
Land reform is also crucial to improve productivity, especially in the agriculture sector and rural areas. The Third Plenum will likely touch on rural land reform, probably in a general statement covering the confirmation of rural land rights, land transfers within rural areas for unaltered purposes, and establishing an integrated rural-urban residential land circulation market.
But these reforms are a highly controversial issue and we will need time to see the effect.
Fiscal reform has garnered the attention of many investors, given heightened concerns over the size of local government debt. We expect a continued push for VAT reform and an expansion of the property tax trial (currently in Shanghai and Chongqing) to more cities.
It is also possible that the government will allow local governments to issue more municipal bonds, while we believe there will also likely be a redistribution of expenditure responsibility between central and local governments covering areas such as the judicial system and basic pensions.
Other areas that we feel are likely to be mentioned include reform of the administrative system, urbanization, social welfare, the one-child policy, utility and resource pricing, and further opening-up of the economy, but at this stage we do not expect a meaningful impact on our GDP forecasts for 2013 and 2014.
We believe the Central Economic Working Conference (CEWC) may provide better signals on the policy stance for 2014. The most critical signal from the CEWC will be the GDP growth target, which we expect to be cut to 7% from 7.5% in 2013.
While this is consistent with the growth target in the 12th five-year plan (2011-15), the decision to cut the growth target will still be significant for investors as it will send clear Chinese-style forward guidance that the government’s preference is slower growth and tight policies to address the inflation, financial risk and pollution issues.
We believe this would be the right policy choice as it is consistent with the government‟s long-term objectives.
(The article has been edited for clarity)