Air of cautious optimism on reform

He says that China with a per capita income of about $7,000 (5,090 euros), has reached the stage when the previous "miracle economies" of East Asia, like Japan and South Korea, began to slow from double digits to about 5 to 6 percent GDP growth.

"The popular narrative is that slower growth will feed joblessness and social tension. This fear is misplaced. Every percentage point of growth in China's maturing economy now produces 1.6 million to 1.7 million new jobs, up from 1.2 million 10 years ago. So even at GDP growth of 5 to 6 percent, China would generate enough new jobs, particularly at a time when the population is aging, and fewer young people are entering the workforce."

Louis Kuijs, chief China economist of the Royal Bank of Scotland in Hong Kong, says the conference made clear that reform would not be done overnight and that the agenda set out at the Third Plenum should not be seen as a short-term project.

"It (the Central Economic Work Conference) was relatively cautious. I don't think we should expect any rapid breakthroughs relatively soon," he says.

Miranda Carr, head of China research at NSBO, based in London, agrees with that assessment.

She says that although the government has a radical agenda, the conference for her made it apparent it was not going to be easy to implement.

"While China's reform program promises to lift China's economic development quite radically over the longer term, it is not going to be plain sailing," she says.

"The conference promised stability and steady development and not major change. This indicates that consensus has been difficult to achieve on more contentious issues."

Many were looking to see pointers that the government was intent on introducing financial reform, such as bringing competition into a banking sector dominated by the Big Four state-owned banks, and further opening up the capital markets.

Ding at Citi believes the conference pointed to a series of announcements on financial reform.

He expects progress on such measures as the widening of the renminbi trading band, the setting up of private banks and pressing ahead with QDII (qualified domestic institutional investor), which will allow private individuals to invest in assets abroad such as equities and bonds and maybe even property. Chinese citizens are currently restricted to sending just $50,000 abroad in any one year.

"All these measures seem to be ready to be rolled out, so we may see a lot of small steps in 2014," he says.

"Taking a longer view, I think complete interest rate liberalization and a free system is some time off. I do think Zhou Xiaochuan, the governor of the People's Bank of China, is, however, completely committed to that."

Carr at NSBO says there were obvious risks with financial reform that the government had already encountered.

She points out that e-commerce giant Alibaba Group's Yu'ebao fund lured 100 billion yuan ($16.5 billion; 12 billion euros) away from the country's bank deposits in just four months.

"New innovative financial products such as this are already causing quite a lot of disruption to the financial system," she says.

For George Magnus, senior independent economic adviser at UBS based in London, reforming the banking system could prove risky.

He is worried about the over-indebtedness of the local government sector and says this makes it a difficult time to introduce such reforms.

"Financial liberalization could end up backfiring. If you allow interest rates to go up and the market a free rein in determining the cost of capital while you have a legacy of debt within local governments and SOEs, you are going to get the problems of non-performing loans and asset prices going the wrong way. You can't afford to get the sequencing wrong."

There was also interest in a separate work conference, the Central Urbanization Conference, held at the same time.

It placed emphasis on the reform of the hukou or household registration system so that migrant workers enjoy the full social benefits of the cities they migrate to.

Some believe this is the key to China becoming a more consumer-led economy, because if workers move with their families to cities, they are likely to spend more rather than save money and remit it home.

Some commentators are worried that the government is trying to make urbanization an object in itself rather than an outcome of other policy initiatives.

According to management consultants McKinsey & Co, China's urban population might hit 1 billion by 2030.

Junheng Li, founder of JL Warren Capital, a New York-based equity research company focusing on China, and author of Tiger Woman on Wall Street, says there did not seem to be any sense of urgency coming from the conference about hukou reform.

"When I grew up in Shanghai, they tried to urbanize fast, but they didn't have enough jobs for migrant workers, so the crime rate went up too fast. My mom used to say I needed to be extra cautious when I rode on the buses," she says.

"You can't just wield a stick at 300 million and tell them to move to the cities without anything to go to in the first place. That goes right to the heart of the hukou system. When migrant workers go to the cities, they should not be treated as second-class citizens. They need to be provided with equal opportunities."

Kuijs at Royal Bank of Scotland says at some point the government may have to throw some red meat to convince everyone that they are really serious about reform.

He says one key reform he would like to see is dividends from China's state-owned enterprises going directly to the Ministry of Finance and not, as at present, going to the State-owned Assets Supervision and Administration Commission, the body that runs SOEs.

"This would really send a strong signal about the resolve of the government," he says. "This is public money and if it goes back to the overall fiscal envelope there can be a proper discussion about what should be done with this money."

Magnus at UBS says the difficulty for the government is affecting change without the risk of creating dangerous imbalances.

"Economic history is littered with seemingly innocuous moves that have butterfly-wing effects. It was a small interest rate rise in Germany that precipitated the global stock market crash in 1987. It was also one of the last interest rate rises in Japan in 1989 that led to the great Japanese bust. These could be warning signs for China."

Ding at Citi says the government is aware of the risks but is determined to press ahead with the reform agenda.

"I think the government will accelerate reform in 2014, particularly in the areas where they have reached a consensus, such as in the financial sector," he says.

andrewmoody@chinadaily.com.cn

(China Daily European Weekly 01/03/2014 page6)