China elevated the role of markets while maintaining the state’s dominance in the nation’s economic strategy, seeking to balance finding new sources of growth with sustaining the Communist Party’s grip on power.
The nation will make markets “decisive” in allocating resources, according to yesterday’s communique from the third full meeting, or plenum, of the party’s 18th Central Committee in Beijing, which stopped short of unveiling detailed policy shifts. The state will remain “dominant” in the economy, indicating limits on reducing government involvement.
The statement from the President Xi Jinping-led session suggests freer pricing on interest rates, farmland and energy without changing the central role of state-owned enterprises, according to Bank of America Corp. The party will set up a team to coordinate and supervise policies under the updated principles and more specific measures may follow in the coming weeks or months.
“It remains to be seen whether actions are as loud as words,” Kevin Lai, an economist at Daiwa Capital Markets in Hong Kong, said in a note. “There will be reforms but they will not go far enough to break many old state-owned entity interests.”
The benchmark Shanghai Composite Index (SHCOMP) fell 0.8 percent at the 11:30 a.m. local-time break and Hong Kong’s Hang Seng Index was down 1.3 percent as the statement disappointed investors looking for specifics on policy shifts to combat cooling growth in the world’s second-largest economy. Hao Hong, a Hong Kong-based strategist at Bocom International Holdings Co., said yesterday that the meeting “underwhelms in details.”
China’s leaders are under pressure to revamp the nation’s finances as swelling local-government debt highlights the risk of a buildup of bad loans and state businesses’ access to bank funding crowds out small firms. The document didn’t explicitly discuss specific issues such as regional borrowing, interest rates or the one-child policy, while referring generally to giving farmers more property rights.
“It’s going in the right direction is the most you can say,” said Louis Kuijs, chief China economist at Royal Bank of Scotland Group Plc in Hong Kong. “Even though some of the phrasing is new, the ideas are not so new.”
The communique, published by the official Xinhua News Agency, reiterated the role of state ownership while saying development of the non-public sector will be “encouraged.” That emphasis “probably precludes drastic state-owned enterprise-related reforms,” said Kuijs, who previously worked for the World Bank in China.
U.S. Treasury Secretary Jacob J. Lew, who visits China later this week, said the communique is at a “very general level” and there are a “lot of questions still be answered.” “It does lean toward more market-oriented policies,” Lew said on CNBC television from Singapore. “We’ll see what the details are.”
The 5,000-character statement referred to “reform” 59 times, “development” 37 times and “socialism” 28 times. It used the word “finance” just once.
Last year’s combined revenue of about 120 companies under the State-owned Assets Supervision and Administration Commission was equivalent to 43 percent of gross domestic product. Companies overseen by the commission include China National Petroleum Corp., the country’s largest oil producer, and China Mobile Communications Corp., parent of the world’s largest phone company by users.
Stephen Green, head of Greater China research at Standard Chartered Plc in Hong Kong, said that the reference to a “decisive” market role “may sound small, but it should provide critical air-cover to detailed reforms which support the market.”
Chang Jian, a Hong Kong-based economist at Barclays Plc, said the statement indicated limited prospects for SOE reform. She saw the likelihood of “meaningful progress” in areas such as the fiscal relationship between central and local government; social security; and the legal system. “Some initial progress” may occur in land reform, she said.
The document said China will establish “a leading group on deepening reform” that will be responsible for broader planning and coordination of policies and supervising implementation. Green said such a move is “very positive” and Kuijs said that group may help China shift away from consensus-driven policy making and overcome resistance from interest groups opposed to change.
The full report from the meeting may be published in a few days, Goldman Sachs Group Inc. said in a note. Credit Suisse Group AG said ministries will unveil packages of specific policies in the coming months.
China had previously defined markets as having a “basic” role in allocating resources since the country decided to build a “socialist market economy” in 1992, Xinhua reported. That wording had been repeated as recently as last month, when Xi said in a speech that China would “let the market play its basic role in allocating resources to a greater degree and in a wider scope.”
“Economic reform is key, and the core solution is the proper relationship between the government and the market, leaving the market to play the decisive role in allocation of resources and the government to play a better role,” Xinhua said yesterday, citing the communique.
When Premier Li Keqiang took office in March, he pledged to open the economy to market forces and strip power from the government, saying at the time that the process would be “very painful and even feel like cutting one’s wrist.”
GDP expanded 7.8 percent in July-to-September from a year earlier, up from a 7.5 percent gain in the previous period, bolstering Li’s chances of meeting the government’s 7.5 percent full-year growth target.
State media had heralded the meeting as a “watershed” for reform, putting it in the same category as 1978’s third plenum. That’s when former paramount leader Deng Xiaoping broke with three decades of Maoism and introduced pro-market policies that paved the way for growth averaging 10 percent a year.
“What we have seen from the plenary’s communique is broad principles,” said Ramin Toloui, Pacific Investment Management Co.’s co-head of emerging-markets portfolio management in Singapore. “The devil will be in the implementation -- how those principles are translated into specifics and a timetable for action.”
China will create a committee to improve “national security strategy and to protect national security,” according to the communique, which didn’t provide further details. The committee “should be” the counterpart to the U.S. National Security Council, Bank of America said in a note. The Chinese-language characters for the new body are identical to those it uses for the U.S. advisory body.
The communique also announced the party’s determination to draw a “red line” to protect the environment, after years of economic expansion have polluted China’s soil, water and air. China will also reform its judicial system to protect people’s rights, it said.
Elsewhere in Asia, Japanese core machine orders, an indicator of future capital spending, fell 2.1 percent in September from the previous month. South Korea’s unemployment rate was unchanged in October at 3 percent, and bank lending to households rose to a record in the same month.
The number of jobless claims in the U.K. probably dropped for a 12th straight month in October, according to a Bloomberg News survey of analysts ahead of data due today. Brazil will release figures on September retail sales.
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