This past week, the blue print for the direction of China’s reform agenda in the coming years was published following the conclusion of the Third Plenum.
While the initial press release was short on specifics (as one would expect from a general statement of intentions) details soon began to emerge that point to a highly ambitious reform agenda.
The direction of travel is nevertheless clear: China is going to accelerate the role of markets in resources allocation. This is unambiguously positive for China. The reforms set China on track to becoming a modern mixed economy that relies more on domestic led growth and consumption.
State involvement will be scaled back and concentrated in core areas typically reserved for the government, such as social services and security, while the state will retreat from production, while market forces will be left to determine prices in most sectors barring the most strategic.
Private participation will be introduced to state owned enterprises, which will be required to pay dividends. Land reform will establish property rights for farmers and it will be possible to buy and sell land. Social security will no longer be non-transferrable, so that rural-urban migration can become more permanent. The one child policy will be relaxed in what will eventually be hugely important in helping China cope with its ageing population.
Bond market development and interest rate liberalisation will continue as centre pieces in the reform agenda as the country gradually replaces exchange rate manipulation with interest rates as the most important instrument of controlling the temperature of the economy. As this new system is established the capital account will gradually be liberalised.
