‘Significant movement’ is nearing in reform
China watchers should expect “significant movement” from the government in the next six months as the country begins implementing planned reforms detailed in the Third Plenum document, an American expert has said.
Barry Naughton, economics professor at the University of California San Diego, in a keynote address at a New York University Center on US-China Relations conference on the Chinese capital markets, said he anticipates much more government action in the coming year.
He said the movements were signaled when the China Securities Regulatory Commission announced earlier this month that initial public offerings would resume as early as next month.
Share offerings in China have been suspended for more than a year and the announcement, Naughton said on Friday, is in line with the call for market forces to play a “decisive role” in the economy made at the Third Plenary Session of the 18th Central Committee of the Communist Party of China in mid-November.
Naughton said that the results of the Third Plenum were a “success”, despite any skepticism China watchers may have had leading up to the meeting of China’s top leaders.
“Whatever your beliefs are about how feasible the economic reform is, the likelihood of serious economic reform substantially increased after the Third Plenum,” Naughton said. “Even if you’re a deep skeptic, you have to acknowledge that there’s a little bit less grounds for skepticism. If you’re a strong optimist, then your optimism has been confirmed.”
The detailed Third Plenum document was a “vision statement plus a to-do list”, he said, representing a clear movement toward a very different, revitalized policy for State ownership.
Naughton noted that the document revealed that the government was headed toward a mode of governing that relied less on excessive government regulation.
“If there’s anything in the document that’s strong, it’s the idea that this type of presumption — that government approval is necessary — has to be reversed,” he said.
Audie Wong, president of Amway China and also vice-chairman of the China Association of Enterprises with Foreign Investment, also hailed the move to give greater play to the role of market forces in resource allocation.
“It’s good news for both domestic and foreign companies in China,” he said.
Wong said he believes the Third Plenum will help create a better investment environment and more business opportunities for all companies in China.
While the list of planned reforms is ambitious, the big number of todos might slow down the process of reform, Naughton said. “If you look at Xi Jinping, you can’t help but feel that he has an awfully full agenda,” he said.
“There is a danger that the process will get bogged down. So much has been laid out in this document, there’s a danger that there won’t be large enough breakthroughs in any particular area,” Naughton cautioned.
Another major risk is China’s potentially precarious financial system, Naughton said, given some signs of trouble in June during a credit crunch when interest rates spiked.
“There are lots of transactions taking place outside of the standard bank credit system,” he said. “The basic cause...is that so much bank credit is tied up in nonperforming local government-sponsored investment vehicles.
“This does create a very substantial measure of risk, because the system is just not well-adapted to dealing with situations where the liquidity of these different financial instruments is thrown into question.”
Naughton suggested the government needs to set up a national wealth task force, one that can begin the liquidation of the “worst of these local government financial vehicles”, working through bond refinancing and defaults in case anything unexpected happens in the financial market.