Supply-side, state-owned enterprise (SOE), fiscal and financial reforms will likely continue to rank high on the reform agenda, although the full version will be finalised only at the third plenary session in the fall of 2018. While reiterating the need to reduce overcapacity, leverage and property inventory as well as improve infrastructure and provision of public services, Xi also called for a need to develop high-end manufacturing, better utilise developments of internet technology, big data, and artificial intelligence to support the real economy. He highlighted mid-to-high-end consumption, innovation, green energy, environmental protection, modern supply chain development, a shared economy, and human resource services as the new growth drivers.
A modern fiscal system should be established, with clear, well-balanced central and local fiscal alignments. Regulation on local government off-balance-sheet borrowing has been tightened. Financial reforms are likely to balance innovation with stability. Financial deleveraging will likely continue and regulation will be strengthened to prevent systemic risk. The “dual-pillar” macro management framework of ‘monetary policy’ and ‘macro prudential measures’ will be improved to safeguard the economy and financial stability. The latter includes a Macro Prudential Assessment (MPA) of banks, capital flow management, and property market measures, etc. The banking regulator will guard against cross-market financial risks and focus on interbank, wealth management products (WMPs) and off-balance sheet businesses in its crackdown on regulatory arbitrage and malpractices in the banking system. Financial regulation will be more coordinated under the newly-established Financial Stability and Development Commission, with the PBoC taking a leading role. Xi highlighted the importance of developing the capital markets and promoting direct financing. China will deepen interest-rate and exchange-rate reform and improve foreign access to its financial markets.
We think the authorities will move towards a more flexible exchange-rate regime amid ongoing FX reform. PBoC Governor Zhou Xiaochuan indicated during the Party Congress that widening the daily trading band is not the current priority, as the current band of +/-2 per cent around the fixing has not constrained RMB movements. SAFE pointed out that the PBoC had exited routine intervention and that FX flows are basically balanced, although this statement does not rule out ‘non-routine’ intervention. However, we do not expect a rapid pace of FX reform or an aggressive opening-up of the capital account. Meanwhile, Governor Zhou is set to retire, and we think the new governor is likely to ensure policy continuation. The Party’s top leadership will set the overall tone of monetary policy and financial reform.
Curbing speculation will remain the primary target of property policy. Xi reiterated that “property is for living, not for speculation” and called for an acceleration of the establishment of a housing system that focuses on both the purchasing and rental markets. Public/affordable and rental housing will become more important and receive more policy support. In large cities, rental home supply will increase significantly to meet the demand of low-income families, migrant workers and young graduates. Urbanisation and the build-up of city clusters, coupled with a bigger middle class, would lead to higher upgrading demand over the medium term.
While reiterating that the market will play a decisive role in resource allocation and China will improve market access for private investment (with the introduction of a “negative list” approach) and eliminate practices that impede fair competition, Xi also emphasised the leading role of the party and state in the economy. SOE reform is intended to make state capital stronger, better and bigger, and foster globally competitive, world-class Chinese corporates (the ‘national champions’). This could include facilitating the exit of loss-making zombie SOEs to channel state capital into more efficient enterprises. SOE reform will likely continue to focus on de-leveraging, mixed ownership to encourage private participation, restructuring and consolidation within sectors to achieve efficiency gains, and improving corporate governance, among others.
China will accelerate innovation-driven development, revitalise the rural sector, and coordinate regional development. China will push forward rural land reform, especially the “separation of three rights” i.e. (village collective) ownership, contractual and operation rights. The government will protect farmers’ long-term contractual rights to farmland and extend leasing contracts by another 30 years when they expire. The government has recently extended the rural land reform pilot, which started in 2015, to end-2018. The trial meant to develop mechanisms for rural land use rights to be transferred on markets, allowing rural residents to receive more of the benefits from their rights to land. China will also continue to promote urbanisation and city clusters, especially the Beijing-Tianjin-Hebei area and the Yangtze River economic zone as well as the big bay area linking Hong Kong, Macau and greater Pearl River Delta provinces, etc.
There is great emphasis on environmental protection, anti-pollution and green development, employment and household income growth, as well as income distribution and social security. A comprehensive, sustainable, multi-tier social safety system should be established, with provision of nationwide social security, pension and medical insurance coverage.
The Belt and Road initiative will be a key strategy of the opening up policy. China will grant more autonomy to free trade zones and explore the construction of ‘free trade ports’. Shanghai has embarked on the plan to build a free trade port, although details are pending. China will also significantly liberalise market access via the full implementation of a “negative list” system, open up service sectors to foreign investment, and protect foreign enterprises’ legal rights in China.