Xi Gets a ‘C’ in Report Card on China’s Policy Program: Economy

China’s government scored a ‘C’ for progress on President Xi Jinping’s policy blueprint announced a year ago that plans to give markets a “decisive” role in the economy, according to a survey of economists.

Analysts were most impressed with progress on fiscal policy, where the central government is redefining the taxation and spending relationship with China’s provinces. Advancement on financial liberalization, rural-land policies and measures to change the ownership structure of state-owned enterprises were seen as lagging behind expectations, the survey showed.

China’s leaders in November 2013 vowed to expand farmers’ land rights, loosen the one-child policy and encourage private investment in state businesses in the biggest expansion of economic freedoms since at least the 1990s. Changes to residency rules, provincial governance, state-owned enterprises and environmental regulation were also announced.

“Reforms post the 3rd Plenum have so far progressed largely in line with our expectation,” UBS AG economists led by Wang Tao wrote in a note last week on China’s economic outlook for 2015-2016. “In the coming two years, as the government increasingly moves toward systematic ‘rule by law’ and as the negative impact of the property downturn persists, we see increased space and pressure to accelerate economic reforms.”

The National Development and Reform Commission, the country’s top economic planning body, and the People’s Bank of China didn’t immediately respond to faxes sent yesterday seeking comments on the economists’ grading.

Bloomberg invited respondents to mark from ‘A’ to ‘F’ progress on implementing some of Xi’s key policy changes. ‘A’ represents very effective, ‘B’ is exceeded expectations, ‘C’ is met expectations, ‘D’ is lagged behind expectations, and ‘F’ is a fail.

Fifteen economists participated. The grade with the most responses is applied below. Comments are not necessarily from economists who participated in the survey.

OVERALL POLICY IMPLEMENTATION: C * Comments: “Generally the reform policies have met the expectations,” said Le Xia, Chief Asia Economist at Banco Bilbao Vizcaya Argentaria SA in Hong Kong. “But the implementation progress is diversified in terms of different fields.”

“Xi has blown through that sense of resistance,” said Daniel Rosen, founding partner at Rhodium Group, which produced an October-dated report on the 3rd plenum policy progress. “I think there’s adequate demonstration of a new seriousness and concrete steps in all nine dimensions of regulatory reforms that we looked at.” * Vote tally: A-1, B-2, C-11, D-1, F-0.

POPULATION POLICY: C * Policy includes: Loosening of one-child policy allowing couples to have two children if either parent is an only child. * Comment: The reaction has been slow so far, with just 690,000 families applying to have a second child by the end of August, according to data from the family planning commission. * Vote tally: A-1, B-4, C-7, D-3, F-0

HUKOU CHANGES: C * Policy includes: Acceleration of internal passport system reform and loosening residency system in small and medium-sized cities. * Comment: While some economists would prefer the relaxation also be applied in the biggest cities, the change was seen as credit positive by Moody’s Investors Service because it will help to promote urbanization, which is a fundamental driver of personal income and broader economic growth. * Vote tally: A-1, B-2, C-8, D-4, F-0

FINANCIAL LIBERALIZATION: D * Policy includes: Acceleration of yuan convertibility and liberalization of interest rates. * Comment: “Some of the innovations or changes that the PBOC did introduce go in some ways against the reform process,” said Louis Kuijs, Royal Bank of Scotland Group Plc’s chief Greater China economist in Hong Kong. “What the PBOC has done a few times this year is use instruments in a way that is very specific, injecting liquidity into certain banks or directing credit to specific sectors of the economy. That may well be an attractive kind of policy, but it does go against the reform orientation which is supposed to bring China’s monetary policy to a more market based, indirect monetary policy.” * Vote tally: A-1, B-4, C-4, D-6, F-0

FISCAL RULES: B * Policy includes: Allowing local governments to expand financing channels for construction via methods including issuing bonds. * Comment: “I regard the fiscal reform moving in the right direction and a big positive surprise,” said Yao Wei, a Paris-based China economist at Societe Generale SA. * Vote tally: A-1, B-7, C-6, D-1, F-0

RURAL LAND POLICIES: D * Policy includes: Allowing transfer of non-farming rural land and reducing scale of land acquisition from farmers. * Comment: UBS expects an “acceleration of rural area reforms including transfers of farm land,” economists wrote in the Nov. 4 note. * Vote tally: A-1, B-2, C-4, D-7, F-1

STATE-OWNED-ENTERPRISE RESTRUCTURING: D * Policy includes: Setting up more companies to manage state assets and developing a “mixed ownership economy.” * Comment: “The authorities identified 6 SOEs to participate in the ‘mixed ownership’ pilot program, which was deemed to be another milestone trial for SOE reform,” said BBVA’s Xia. “However, the scale of the pilot program is very limited and still, the state-owned assets dominated the ownership structure of the SOEs. We expect a further expansion of the mixed ownership reform will be conducted” in the coming year. * Vote tally: A-1, B-2, C-4, D-6, F-1, did not vote 1.

ENVIRONMENTAL PROTECTION: C * Policy includes: Putting more emphasis on management of resources, environment, when assessing officials performance. * Comment: “There is agreement in senior policy circles that China needs to put more emphasis on this,” RBS’s Kuijs said. “Of course, it takes time to formulate policies and it takes even longer for the policies to have any impact. It’s going slow, but there have been steps in the right direction.” * Vote Tally: A-1, B-2, C-6, D-4, F-1, did not vote 1.

— With assistance by Cynthia Li

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