Stock markets in Hong Kong and Shanghai jumped to a two and a half year high on news that China will be amending her one child policy, abolishing labour camps, and tweaking land, market, financial and social welfare reforms. The changes announced as part of Beijing’s third Plenum reforms are expected to be a precursor of the good times ahead. Much needed changes, announced at a time when the initial reforms disappointed China watchers, the more recent reforms seek to bail China out of her doldrums and escalate her progress. As a sign of what the people felt – the Chinese stock market which has been one of the worst-performing world markets over the last three years or so with valuations remaining at a substantial discount to global and emerging market peers, is now expected to witness a soaring streak especially in baby and consumer products.
The third Plenum, expected to set the economic vision for China’s next decade was watched eagerly by all with a stake in the nation. Expected to not only alter the fortunes of the billion plus people within Chinese territory, but more than half the world, the reforms announced at the end of the three day session, just before the weekend threw everyone in a tizzy. Having just digested the news, here is a brief of the five major reforms expected and their impact on domestic, Indian and International markets.
- Amending China’s one child policy
Enacted in 1979 to curb rapid population growth in a country that was stretching natural resources at its seams, China enforced a policy that allowed every couple to have only one child. While Chairman Mao’s policy shook the world, many of its negative side effects ballooned to create huge social problems. Since the past decade successive governments have been amending the policy to enable more Chinese to have more then one Child. The newest amendment allows a couple any of whom may be a single child to have more than one child. The new policy saw stocks in the baby, education and consumer durable sectors rise as analysts expect the market to grow by US$2-3 billion by 2020.
- Labour camps abolished
In keeping with the social progress of the country a dire need was to eradicate labour camps which were put in place by Chairman Mao in 1957 to serve as a form of re-education for criminals through manual labor. More popularly used today to imprison political dissidents and anti-nationalist sentiments, abolishing labour camps altogether is a huge step forward in China’s social road map towards a more free society.
- Land reforms
The restriction on transferring usage rights of rural land that is classified as “for construction” has been lifted, which will benefit both poor rural households and make the process of urbanization smoother. The new policy will enable farmers to sell their land to the highest bidder – which a windfall for farmers, local government who earlier played intermediaries will now lose out on a huge source of revenue. While market forces will bring better prices in play, the policy will also speed up urbanisation in China – its actual implementation will decide whether this remains a good or bad move for citizens.
- Financial reforms
Financial markets will be freed up. Interest rate and capital account liberalization will be accelerated, a system of deposit insurance will be set up, and private banks will be allowed for the first time. China’s mechanism for setting the exchange rate and its fledgling bankruptcy system will also be improved.
- The role of State Owned Enterprises
The third plenum altered the role of China’s SOE’s long considered elephants within the system. Large, over bearing, slow to change and a lag on a system that demanded increased competition to improve efficiencies, Beijing decided to reduce her influence over SOE’s thereby throwing the playing field open to competition from private domestic companies and international conglomerates. The move is expected to both greatly widen the market and improve goods and services in China.
Guided and directed personally by President Xi Jinping, the third plenum reforms are one of the most dynamic China has seen since Deng Xiaoping’s opening of China’s economy to the western world in 1980. Besides the five major reforms mentioned above, beijing has also decided to amend her Hukou system which currently binds a citizen’s right to social welfare to the province in which he was born – a highly archiac system considering Chinese cities have one of the worlds largest domestic migrant communities. Further reforms were also announced in setting up an Intellectual Property Court and making natural resource prices more market determined amongst others.