This article is part of Morningstar's "Perspectives" series, written by third-party contributors. Here, Gary Greenberg, lead portfolio manager of the Hermes Global Emerging Markets Fund, comments on how the Third Plenum of the Communist Party of China, which met last week, has set the wheels in motion for huge market reforms in the country.
“Crossing the river by feeling stones” is how China’s Communist Party leaders described the country’s reform at their recent Third Plenum. But as President Xi Jinping marks his consolidation of control, the potential changes of policy China is contemplating are anything but cautious; they are seismic.
So far, the Third Plenum’s decisions have been outlined with only the broadest of brushes. More details will emerge over the coming weeks.
‘Decisive’ markets
Greater weight was put on the role of the market, which has been promoted to being of “decisive” importance for the first time. State-owned enterprises were said to be on an equal footing. If this turns out to be anything like the reality, then it can only favour the more efficient companies.
This, combined with further financial reforms, should see capital flow to stronger businesses. For instance, the liberalisation of lending rates means the pricing of capital will be determined by the market. This in turn leads to more rational allocation of capital – starving the SOE (state owned enterprise) beast over time, and feeding the private sector.
Land rights
Perhaps most significant, greater land rights have been mooted – to potentially sell land. Or, more precisely, as the state owns the land, for farmers to sell the cultivation rights to that land, or to sell their homes on that land, as city dwellers are able to do with their homes. Just the property values of these rural homes alone is estimated to total RMB140 trillion – three times Chinese GDP, or 1.5 times US GDP.
A consequence of this would be the consolidation of agriculture, allowing greater efficiency, another long term priority. The scarcity of arable land and usable water make efficient farming an imperative for China, and economies of scale are necessary for the purchase of technology required to increase efficiency.
Accelerating urbanisation
This unlocking of capital will transform the agricultural population into an urban workforce, supplied with sufficient “starter capital” to head for the bright lights of the burgeoning cities and purchase a flat. Increasing urbanisation is high on Xi’s agenda, with a target of 70% urbanisation by 2030 from the current level of 50%. This will need to be supported by removing the outcast status of the hukou unregistered workforce. Bringing the hukou into the organized economy would help the transition to a more broadly-based industrial and service sector economy.
Pulling it all together, a properly-capitalised private sector and more modern agricultural sector combined will underpin the development of China as an efficient, competitive economy.
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