China last week announced a major program of economic and other changes that together have the potential to boost the nation’s investment appeal. This is one of the most ambitious attempts at liberalizing China’s economy since Deng Xiaoping opened up the country to global markets starting in the late 1970s.Chinese stocks jumped on the news. The key now is if, when and how the reforms will occur.
The 20-page blueprint outlines 60 initiatives that would boost China’s reliance on market forces and open more of the economy to private-sector and foreign competition. The agenda also would give the nation’s people more social and economic freedom.
The most prominent item on the list calls for easing the longtime limit of one child for most families. By one estimate, the nationwide easing of family size restrictions could lead to one million to two million more births in China every year, in addition to approximately 15 million a year now.
Among the economic and financial reforms, market forces are to play a more decisive role. “The market should be left to decide the price of anything whose price can be decided by the market, and the government should not make any improper intervention,” the program statement said. This is to apply particularly to prices of key resources such as water, oil, natural gas and electricity.
For foreign investors, a noteworthy component is that dividends from state-owned firms are supposed to increase under the plan. There’s a specific goal: a 30 percent payout rate by 2020. State-owned firms now pay 5-15 percent of profits in dividends. While the government would get most of the money, ordinary shareholders should also benefit.
State-owned enterprises make up more than 80 percent of the value of Chinese-listed companies, and include many that trade in the US. The most prominent examples include PetroChina (NYSE: PTR), ! China Mobile Ltd. (NYSE: CHL), China Petroleum & Chemical (NYSE: SNP), China Life Insurance Co. (NYSE: LFC), China Telecom Corp Ltd. (NYSE: CHA) and China National Offshore Oil (CNOOC) Ltd. (NYSE: CEO).
A consumer reform of note is deregulated interest rates. There currently is an interest-rate ceiling on bank deposits and loans that effectively subsidizes banks and borrowers at the expense of savers. In theory, this should result in better lending controls and higher savings yields. Also called for is establishment of deposit insurance, similar to the FDIC in the US.
In addition, private investors are to be allowed to set up banks. And the government is supposed to make efforts to improve the country’s bankruptcy system.
The program also targets greater property rights, particularly in rural areas. Farmers would be able to more freely rent, sell and mortgage their land, with greater protection against government confiscation.
Xi Jinping became chairman of the Communist Party a year ago and president of the People’s Republic of China eight months ago. He is said to have led the group drafting and finalizing the plan. This is in sharp contrast with previous programs, whose development typically has been delegated to the prime minister and others.
Xi’s active leadership is seen as a way to give the program increased credibility while strengthening his leadership position. “He’s not hanging out a sheep’s head and selling dog meat,” said one expert, using a popular Chinese expression that means selling bogus goods. “He’s hung out a dog’s head and is selling dog meat.”
A sheep’s head and sheep meat likely would be preferable, even in China. However, execution is the key. Recent efforts to make big structural adjustments in the economy generally have fallen far short. In 2007, Premier Wen Jiabao called China’s economy “unstable, unbalanced, uncoordinated and unsustainable.”
Yet! China’s ambitious five-year plans in 2006 and 2011 accomplished little. And because of the global financial crisis, Wen Jiabao introduced a huge economic stimulus plan with heavy investments in real estate and infrastructure, which have exacerbated the problems.
The new reform document lays out few timetables. And implementation is largely up to China’s huge bureaucracy. While the Communist Party sets overall policy direction, the central and provincial government agencies will handle the reform details and operation. As in many government bureaucracies, China’s have many conflicting interests, rivalries and ties to interest groups that benefit from the status quo.
China experts believe that while the leaders want to improve the economy, their ultimate objective is to strengthen the Communist Party’s position and traditional one-party rule.
This is why the party simultaneously is tightening political ideology, with a crackdown on dissent, including stricter control of the Internet.
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