By Jun Ma, Published Oct. 30, 2013
The Central Committee of the Communist Party announced yesterday that it would hold the Third Plenum of the 18th Party Congress from November 9-12. This plenum will conclude with a mega reform plan to guide the structural changes in the country for the next ten years. According to Yu Zhengsheng, Chairman of Chinese People’s Political Consultative Congress, the scope and aggressiveness of the reform package will be “unprecedented” and the impact on all aspects of the economy and society will be “profound”.
Many investors asked what will likely be the key reforms in the package. Our expectation is that the package may involve a few dozen reforms and the following may be most significant and relevant to investors:
1) Deregulation: We expect China to reduce entry barriers (investment restrictions for private investors) by 90% in the medium term. The sectors to be further opened to private investors will likely include oil and gas, railway, subway, telco, banking, insurance, medical services, education, and culture. Take oil and gas as an example, private investors will likely be allowed to engage in oil and gas exploration, trading (imports and exports), and pipeline operations. The implication will likely be a reduction of the market share of major oil and telc SOEs, but it will mean much greater efficiency and economic growth potential due to faster private sector development.
2) Opening up: We expect China to significantly increase it openness by granting foreign investors market access to most services industries. The main sectors to be open to foreign investments (e.g., via lifting the foreign ownership limits) will likely include banking, insurance, telecom, education, health care, culture and entertainment, travel services, delivery services, legal and other professional services. China may also show its increased willingness to join negotiations of high standard FTAs such as TPP. Increased foreign competition may be initially negative for some large SOEs, but the medium-term implication is to incentivize domestic reforms and improve productivity via competition.
3) Financial liberalization: We expect deposit rate deregulation to be completed within 2-3 years and the capital account to become basically open within 3-5 years. We expect Shanghai Free Trade Zone to establish an offshore market soon. We expect a few thousand privately owned banks to be set up in coming 5-7 years. Financial reforms will be positive for brokers, insurance companies and FX banks, most positive for privately-owned financial firms, and should improve the transparency of shadow banking activities.
4) Land and Hukou reforms: We expect the government to grant titles of land use rights to 200mn rural families with the next five years, as a basis for trading rural land use rights. The Hukou system will be further relaxed and social services to be enhanced for migrant workers in cities. These reforms should speed up the pace of urbanization and be generally positive for developers and rural-based banks.
5) SOE reform: We expect China to list most of the unlisted SOEs on the stock market, and establish a Temasek-like state asset management company to run the SOE portfolio. This could enhance the efficiency and resource allocation of state assets.
6) Property tax: We expect the property (holding) tax to be launched in a larger number of cities in the coming 5 years as a key part of the long-term property stabilization mechanism. Such a tax may initially be viewed as negative for developers, but would be positive for the sector in the longer-term as it helps reduce the chance of property bubbles.
7) Social security reform: We expect China to introduce annuities (as part of the pension reform) and critical illness insurance (as part of the health reform). These will be positive for the insurance sector by adding new product lines.
8) Developing a municipal bond market. We expect the government to permit a greater number of local governments to issue municipal bonds independently, to replace the current financing mechanisms of LGFVs. This reform will be highly positive for banks as it helps remove a major overhang on banks’ NPLs.
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