China Economic Comment – November 2014

Twelve months ago, China’s Government announced its reform agenda, following on from the Third Plenum. So far, progress on these reforms has been limited, primarily in social policies such as loosening the Hukou system – which we have argued could go further – and the One Child Policy.

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Modest progress on reform could constrain China’s longer term growth

Twelve months ago, China’s Government announced its reform agenda, following on from the Third Plenum. So far, progress on these reforms has been limited – primarily in social policies, such as loosening the Hukou system (which we have argued could go further) and the One Child Policy, along with reforms to the budgetary relationship between Beijing and local governments (which should ease some of the concern around local government debts). In contrast, progress towards broad deregulation and liberalisation of the finance sector and expanded competition across the economy has been slow.

Last year we expressed cautious optimism towards the proposed reforms, anticipating a long and slow path. We highlighted that the Government had set an implementation target of 2020, that there were significant obstacles presented by vested interests and that there had been a history of sweeping reform proposals that fell by the wayside.

That said, the slow pace of reform is somewhat concerning, given the widespread view that China’s growth model has run out of steam, and that transition towards a consumption based economy (as opposed to the investment model that has fuelled the country’s growth in recent decades) is urgently required. The reform agenda has been viewed as necessary to support this transition – particularly financial market reforms (such as deposit insurance and liberalisation of interest rates) which would end the long standing policies of financial repression and boost the household sector’s share of the economy.

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