Expect stronger implementation of reforms to cut China's debt overhang and push BRI projects, say analysts

BEIJING - Besides unveiling China's top leadership for the next five years, the Chinese Communist Party's recently-concluded national congress also saw the adoption of major planks of President Xi Jinping's economic platform into the party constitution.

These include supply-side structural reform and the Belt and Road Initiative (BRI).

Analysts say this reflects a "buy-in" by the rest of the party elites to Mr Xi's agenda, and therefore stronger implementation of his reforms can be expected.

Measures aimed at cutting excess capacity and reducing financial leverage will be deepened. And reforms to introduce mixed-ownership of state-owned enterprises (SOEs) are expected to pick up pace in the coming weeks and months.

"There is a big section on supply-side reforms in the work report," said Mr Andrew Polk, co-founder of research firm Trivium China in Beijing, referring to the 3½-hour speech that Mr Xi made at the opening of the congress on Oct 18.

"These have been in place since December 2015, as a reaction to the stock market crash, yuan devaluation and the outflows of capital," he said at a recent forum on the Chinese economy. "There will be no pivot in the trajectory of the economic policies - what you see is what you get."

Given Mr Xi's successful consolidation of power at the five-yearly party congress, finance professor Michael Pettis of Peking University said he believes the government will start to take serious steps to tackle the debt overhang in the world's No. 2 economy.

"We will begin to see that soon," Prof Pettis said at another forum.

  • Key measures and reforms

  • Supply-side structural reform

    This refers to a slew of measures aimed at improving the structure of the Chinese economy for better quality growth. The five key areas are cutting excess capacity of heavy industries such as coal and steel, reducing the housing stock of third and fourth-tier cities, lowering financial leverage, cutting business costs and improving social security.

    Belt and Road Initiative (BRI)

    The BRI is an ambitious plan to connect China with the rest of Asia, Africa and Europe through a series of infrastructure projects. It involves the building of roads, railroads, ports and industrial parks along two ancient Silk Road trade routes via land and sea.

    Mixed-ownership reforms of state-owned enterprises

    It is a scheme to allow private investors or even foreign investors to have a share in companies wholly owned by the Chinese government so as to drive them to be more efficient and market-oriented.

    Formation of mega-city clusters

    This is a strategy to link key urban centres such as Beijing, Shanghai, Guangzhou and Shenzhen with neighbouring satellite towns. The aim is to alleviate problems such as congestion and pollution in the key cities while driving more development in the surrounding areas. Two key examples will be the integration of Beijing, Tianjin and Hebei province in the north and the Guangdong-Hong Kong-Macau Greater Bay Area in the south.

"The Chinese government has the assets to pay down debt. The problem lies with the powerful and the unwilling. After the 19th party congress, it looks to me that they (the government) will be successful," said Prof Pettis.

He also believes the Chinese government is set to abandon the GDP growth target as "it is poison".

Given the lack of hard budget constraints, the country can grow at whatever target it sets for itself based on borrowings, he said.

"This is essentially a credit growth target," he added.

Other than a stronger push to cut debt, analysts also expect to see more SOEs restructured to allow private investors to have a share in the companies as a way to increase efficiency.

And this seems to have already started. The official Xinhua news agency reported last week that more that 40 listed SOEs have announced trading suspensions "due to major asset reorganisations" on China's two stock exchanges. The report noted that most of these companies are SOEs administered by local governments.

While such "experimentation" will deepen, DBS senior economist Chris Leung said in a note that "the state will continue to dominate" when it comes to important decisions.

He also expects China to make a major push for BRI projects in Malaysia and Pakistan.

"It is imperative that some successful examples of BRI projects can be displayed to the rest of the world. These two countries are the easiest for China to nudge, given the strong diplomatic relationship," he said.

China will also enter a new phase of urbanisation where mega-cities are created by connecting urban hubs with satellite cities, he noted. Two key examples will be the integration of Beijing, Tianjin with the surrounding Hebei province and the Guangdong-Hong Kong-Macau Greater Bay Area.

Given that Mr Xi has firmly placed his allies in the powerful Politburo and as heads of key provinces, analysts also expect to see better policy coordination between the central government and the localities in the next five years.

And for those who remain resistant, party discipline through the Central Commission for Discipline Inspection could be used to ensure compliance, said Mr Polk, who thinks that the anti-corruption agency could double as a policy watchdog.