22 NOVEMBER 2013
China’s Third Plenum “Deepens” Reforms; Pushes Towards Market Economy
By Dr Chan Yan Chong
When US Federal Reserve Chairman Ben Bernanke announced that it may be tapering its stimulus package in May this year, Singapore and Hong Kong stock markets went into a correction which lasted until June. In the meantime, the People’s Bank of China tightened its monetary policy, which sparked a liquidity panic that saw the Shanghai Composite Index (SCI) fall below the 2,000-point level. The Hang Seng Index (HSI) also fell below 20,000 points, causing much consternation among the men-in-the-street.
Back then, I penned a few articles to express my optimism in the stock market, reasoning that Hong Kong and Chinese A-share stocks were already priced very reasonably; price-to-earnings ratio and price-to-book ratio were at such low levels that they had limited room to fall. Standing by my words, I bought exchange traded funds of Chinese A-share stocks. At the same time, I also began preparing for my new book which talked about shares that I am more familiar with.
This month, two publishers will be separately launching my two new books, titled 《股市淘宝》 and 《时机为王》 respectively. Both books touch on the same message: Hong Kong shares are priced very low now, so investors should start looking for promising stocks to invest in. Readers interested in Hong Kong shares should have a look at these books.
The 18th Central Committee of the Communist Party of China (CPC) held its third plenary meeting from 9 to 12 November. At the end of the plenary meeting, the Central Committee issued a brief communiqué on the outcome. The next day on 13 November, the markets were clearly disappointed with what was announced as the HSI fell 1.91 percent, while the SCI fell 1.83 percent. Singapore was spared the brunt of the repercussion and fell rather modestly; after all, China is quite far away. At the same time, the US stock market enjoyed a bull run.
Could the disappointment of the market with the post-plenary statement be due to over-expectations with the Third Plenum? Or perhaps investors do not know how to interpret the CPC’s communiqué? The Third Plenum is the party’s meeting, not the government’s, hence, it is expected that no concrete policies will be introduced at the meeting.
On 13 November, the HSI closed at 22,463 points. Just four days later, on 19 November, the HSI touched a peak of 23,856 points. The reason behind this breathtaking rise is that on 15 November, the CPC decided to bring forward the release of details of its policy reforms endorsed at the Third Plenum to supplement the earlier communiqué that only touched on principles.
The release listed a total of 60 areas to be reformed that finally proved that a number of rumours in the market over the past few months were correct. These include: reforming the one-child policy; clearing the way for the setting up of private banks; clearing the air over price reforms in the oil, electricity, water, gas, telecommunications, transportation and other industries that will allow market forces to determine prices.
While the overall Chinese economy is still driven mainly by state-owned enterprises (SOEs), the party’s endorsement of private enterprises means that SOEs and private enterprises will compete on an equal footing in the future. Their only difference is the sources of funds. Reforming the one-child policy will accelerate China’s population growth, which will in turn cause a three-fold jump in total spending as Chinese parents spend generously on their children.
I feel that the gist of the Third Plenum is its push towards market economy. The sentence “let the market play a decisive role in allocating resources” appeared three times in the post-Plenary communiqué. In addition, the communiqué also pointed out the need to effectively transform government functions and build a government that obeys the rule of law and is service-oriented. This means that government intervention in the market price will be reduced.
Despite the Chinese government’s tight leash on the property market in the past years, property prices have always managed to rise defiantly. If the CPC stays true to the spirit of the Third Plenum, the government is likely to step back from directly intervening with property prices, but will instead influence prices by increasing land supply.
The communiqué mentioned the need to “let the majority of farmers have equal participation in the process of modernisation and share the fruits of modernisation.” This can be either a push for the reformation of household registration or a green light for farmers to offer their farmland for auctions in the market. Selling directly to developers would definitely fetch a higher price than the acquisition price offered by the local government. Land sales can also include collective sale of public land held by the villages. Allowing farmers the freedom to release land for sale will substantially increase land supply, which should cause land prices to fall, thereby helping to keep property prices from skyrocketing further. This in turn may deal a blow to certain Chinese property stocks. In addition, though the liberalisation of the electricity market will increase competition, whether prices will rise or fall is still anyone’s guess.
I remain optimistic about the outcome of the Third Plenum, but I would not be so naive as to think that the reforms will sail through smoothly. This year’s emphasis of the Third Plenum is on deepening the reformation effort.
Within the Chinese media today, comments such as “Decrees are ineffectual beyond Zhongnanhai” and “Policies from above can always be countered at ground level” have been floating around for a while. To reform resource prices is to relax price controls, which in effect amounts to stripping some officials of their power. Of course there will be some dissenting voices. Also, will liberating prices lead to higher prices and therefore costs of living? Currently, the prices of resources such as electricity, petrol and medicine are under the strict control of the National Development and Reform Commission. I feel that liberating prices must be accompanied by increased competition in the market; otherwise it may very well lead to monopolies, which would naturally lead to soaring prices.
The Third Plenum has decided to open up competition in the banking sector. I believe that the coming year will see a large number of provincial-level banks listing in Hong Kong, which would give investors a lot of choice.
I have never known that 11 November is ‘Singles’ Day’, and this also seems to be a phenomenon unique to China. On this day alone, transactions on Alibaba.com amounted to Rmb30 billion, showing the tremendous purchasing power of a population of 1.3 billion. When Xi Jinping’s Chinese Dream is eventually realised, China’s gross domestic product will surpass that of the US and become the world’s leading economy. The significant impacts will certainly spill over to the Singapore economy. For now, the Singapore stock market will continue to move within a very narrow band.
Publish date: 22/11/13