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Marcuard's Market update by GaveKal Research
Are China’s leaders efficient technocrats who can rule without the messy impediments of democracy, or hapless bureaucrats ensconced in a corrupt system they cannot change? Many foreign admirers prefer the former picture, but within China the corrupt-bureaucrats image is ever more widely held. Former Premier Wen Jiabao stoked popular cynicism by repeatedly making grand, sweeping statements about the urgency of economic and political reform, and then delivering modest incremental change at best. Now his former deputy Li Keqiang is running the show. Will he continue Wen's sorry record, or improve the walk-to-talk ratio? The signs suggest that Li will be a far more aggressive reformer than his mentor.
On Monday, Li ran a meeting of China's State Council which resulted in a published agenda for economic policy change that goes far beyond Wen-era platitudes in its boldness and specificity. The two most notable measures are the following:
– The government will this year publish an “operational plan” for capital-account liberalization, including the creation of a system allowing Chinese domestic investors to invest abroad. In the past, Chinese officials have talked vaguely about opening cross-border capital flows eventually. The new language implies specific plans to gradually prise open the capital account beginning within a year or two.
– The government will speed urban income and consumption growth by setting up a new and more flexible residence permit system, which will eventually displace the much-maligned household registration system (hukou) as a mechanism for Chinese citizens’ access to social services and public benefits. The two-tier hukou system discourages social mobility and income growth, by entrenching divisions between urban and rural residents and inhibiting migration to urban areas. (Related to this, the State Council should issue a national urbanization strategy by mid-year; this will not be yet another investment stimulus plan for local governments, but an attempt to ensure stronger household income and consumption growth:
Other interesting items on the State Council's agenda include: budget reforms to control the accumulation of local government debt; reform of utility prices paid by consumers; and an overhaul of the public hospital system. But perhaps the most important one to watch is what Li has chosen as his signature initiative: a push for deregulation, aimed at cutting the endless government approvals required for Chinese companies to make investments or conduct routine business operations. Given the enormous reach and highly interventionist character of China’s government regulation, the potential productivity gains here are substantial—Li himself has called it a “self-imposed revolution.”
The risk to this idealistic deregulatory plan has always been that it gets bogged down in lower levels of the bureaucracy that are unwilling to give up power. To his credit, Li has enforced the delivery of regular, quantitative progress on his promise to cut 1,700 line items of government approval by a third. The State Council had already approved the elimination of 71 of these, and came up with another 62 to pass at the latest meeting.
Li himself proclaims he wants to be judged on deeds, not words: on taking office in March he commented on national TV: “in advancing reform the important thing is to take action; talking the talk is not as good as walking the walk.” With the structural problems in China’s economy mounting, the country cannot afford another all-talk, no-walk leadership. Yet a crash program of liberalization "shock therapy" has never seemed a likely prospect—the divisions among China’s different leaders and interest groups mean that reform can only advance through bargaining and compromise. But fortunately, Li is now taking steps to turn the new leadership’s early and laudable rhetoric on economic reform into action. If he keeps this up, we may have to get accustomed to the novel spectacle of China actually walking the walk of reform.
Disclaimer: This information may not be construed as advice and in particular not as investment, legal or tax advice. Depending on your particular circumstances you must obtain advice from your respective professional advisors. Investment involves risk. The value of investments may go down as well as up. Past performance is no guarantee for future performance. Investments in foreign currencies are subject to exchange rate fluctuations. Marcuard Cyprus Ltd is regulated by the Cyprus Securities and Exchange Commission (CySec) under License no. 131/11.
