Credit Suisse agrees with me today that the Chinese reform agenda is likely a net negative for Australia:
- The Chinese authorities have further clarified their reform agenda post the 3rd plenum, with recent announcements suggesting that they are about to embark on the biggest change to the country’s economy for many years (see – China: Detailed reform framework announced). The key points are:
- Commitment to increasing the market’s role in allocating resources, with a commensurate reduction in government direction of economic activity. Fitting this, the government should move to a more “arm’s length” relationship with SOEs.
- Fiscal reform – aiming for greater clarity over local government debt and a rebalancing of revenue collection and expenditure between central and local government. Central government to also play a greater role in the construction and management of cross-regional infrastructure projects.
- Financial sector reform – interest rate liberalization and RMB internationalization.
- Rural land reform – clarifying farmers’ land ownership rights so they can buy, sell and mortgage land.
- Hukou reform – widening benefits access to rural migrants in small and medium sized towns.
- Easing the one child policy – if at least one parent is themself an only child, the couple may have a second child.
- Unfortunately, while the reforms (if implemented) would have a very positive medium-term impact on Chinese growth, the impact on commodity markets – particularly in the near term – is far from clear.
- On the one hand structural reform in China would be a clear positive for Chinese growth over the medium term.
- In the near term, however, there is a risk that reforms could see growth slow, as the adjustment takes place. And over the longer term the aim is to move to more balanced growth model, which by definition would be less basic material intensive.
- …the de-emphasised role of local government in economic development may also dampen commodity demand on account of their reduced infrastructure investment. The de-emphasized role of local government in economic development may suggest uncertainty in commodity demand generated from local government infrastructure, which has been one of the two key demand drivers in 2013E (along with property). The role of local government will probably be changed, along with the amount of infrastructure and industrial projects which they can lead. To start with, their role in economic development is de-emphasised, and their ability to borrow will likely be put under more stringent control with the establishment of the debt warning system. Finally, with farmers given more right to sell their land to final users in the rural land reform, the amount of money local government can get from land sales could be reduced.
As I say, though, it is all about implementation. If slowing growth is to supported by centrally co-ordinated stimulus then there will be no rebalancing.
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