China's Bold Reforms Are Bad News For Markets

China has unveiled its most sweeping reform agenda in more than 30 years, but the market impact is likely to be net-negative.

A key meeting of Communist Party leaders wrapped up mid-week and the leaders then issued a statement which said little. The financial media and China bears had a field day bagging the meeting. Meanwhile China bulls groaned but urged patience as further announcements on reform might still be forthcoming.
Fast forward to Friday and the state news agency, Xinhua, released a 20,000 word document from the meeting. It was a bombshell as it went above and beyond the expectations of a even the most ardent China optimist.
Let’s go through the key items:

Market reform
  • Accelerate yuan convertibility and interest rate reform.
  • Push pricing reform for oil, gas, power, water, transportation, telecom & other sectors.
  • Allow local governments to expand financing channels for construction projects, including the issuance of bonds.
  • Set up free-trade zones in more areas.
  • Improve treasury yield curves to reflect market supply and demand.

Property reform
  • Push through legislation for a property tax and go ahead with further reforms at “an appropriate time”.

SOE reform
  • 30% of profits from state assets will go toward public finances, principally social security. That’s up from 15%.
  • Allow non-state involvement in government projects.
  • Proactively pursue a “mixed ownership economy”.

Population reform
  • Relax the one-child policy. Couples may have two children if either of the parents was an only child.
  • Accelerate so-called Hukou (residentship) reform. This will allow people in rural areas easier means to move into urban areas.
  • Study policies to delay the retirement age.

Political reform
  • Abolish re-education labor camps.
  • Place more emphasis on management of resource consumption, overcapacity, debt and the environment.
  • Change policy of judging performance of officials primarily by growth rates achieved.
  • Strengthen anti-corruption measures.

Legal reform

  • Reduce the power of local governments over the court system and move towards an independent and fair judiciary.



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