News analysis

China to see stronger push for economic reforms, say analysts

Expect more measures aimed at cutting excess capacity, reducing financial leverage

Besides unveiling China's top leadership for the next five years, the Chinese Communist Party's national congress last month also saw major planks of President Xi Jinping's economic platform adopted in 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 economic 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, referring to Mr Xi's report on Oct 18, the first day of the congress.

"These have been in place since December 2015, as a reaction to the stock market crash, yuan devaluation and the outflows of capital," he told 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 from 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.

The key reform areas comprise cutting excess capacity of heavy industries such as coal and steel, reducing housing stock, lowering financial leverage, cutting business costs and improving social security.
The key reform areas comprise cutting excess capacity of heavy industries such as coal and steel, reducing housing stock, lowering financial leverage, cutting business costs and improving social security. PHOTO: REUTERS

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

China's rapid debt build-up, especially in the state sector, has triggered warnings from global observers. According to the Bank for International Settlements, China's overall leverage ratio stands at 257.8 per cent of gross domestic product (GDP) at the end of the first quarter this year.

  • 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 

    The initiative 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, railways, ports and industrial parks along two ancient Silk Road trade routes on land and sea. 

    MIXED-OWNERSHIP REFORMS OF STATE-OWNED FIRMS 

    It is a scheme to allow private investors and even foreign investors to have a share in companies that are wholly owned by the Chinese government, in a bid to drive them to become 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 to 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 provinces in the north, and the Guangdong-Hong Kong-Macau Greater Bay Area in the south.

In recent months, rating agencies Standard and Poor's and Moody's cut China's sovereign credit ratings on the back of worries about its prolonged build-up of debt.

"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.

Analysts also expect to see more SOEs restructured to let private investors have a share in the companies as a way to increase efficiency.

And this seems to have already started. The official Xinhua news agency said 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 firms 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."

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 and 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 expect to see better policy coordination between the central and local governments.

And for those who remain resistant, the Central Commission for Discipline Inspection could help ensure compliance, said Mr Polk, who thinks the anti-corruption agency could double as a policy watchdog.

A version of this article appeared in the print edition of The Straits Times on November 09, 2017, with the headline 'China to see stronger push for economic reforms, say analysts'. Print Edition | Subscribe