Evolution, not revolution, is the key to a fair grade of China’s report card on economic reforms
Just one single action out of the 183 initiatives identified in the 12th five-year plan has been achieved – Hong Kong’s Stock and Bond Connect programmes
This week, in the corporate world, it’s performance review week. Line managers across the globe are sitting down with their team members, scorecards in hand, assessing past year’s performances, and setting targets and budgets for the next.
As many of us know, this can be a nervous time, not least because one’s remuneration – if not one’s job – largely depends on a positive outcome.
It’s no different in China. This week, the appropriately communist-sounding Central Economic Work Conference kicks off in Beijing with the aim of reviewing the previous year’s performance and setting the economic agenda for the next.
Quite possibly, this year’s meeting will also generate nerves. Alongside the usual challenge of tackling the country’s growing mountain of debt, a bubbly property market, and a slower growth trajectory; there’s also a rather large Trump in the room in the shape of pending tax reforms in the United States, rising US interest rates, and still tense bilateral Sino-US trade relations.
A positive outcome is by no means assured, although we are likely to never know whether jobs and livelihoods are at stake, given the secretive nature of the conference and the vague reports typically published after the three-day affair concludes.
But even wearing the pinkest, rose-tinted, half-full glasses, it will be difficult to point to concrete examples where reforms have meaningfully advanced.
The problem for investors is that there is no multiyear, overarching blueprint for China’s economic reform programme, beyond a slightly woolly commitment towards broad-based economic and financial sector liberalisation. As such, policy initiatives can be proposed, shelved, and proposed again apparently at random; which can be confusing to say the least.
China’s approach towards the convertibility of its currency, the renminbi, also known as the yuan, is a case in point. The People’s Bank of China, as the country’s central bank is called, first committed to a fully liberalised capital account during the 1990s.
In 2010, it moved the target for a full opening to 2015. According to the central bank’s deputy governor Yi Gang – who spoke at a New York conference earlier in 2017, full convertibility is now scheduled for 2020. Personally, I think it might take even longer.
Of course, China does publish economic targets, goals and ambitions, although these tend to be short term in nature and delivered via its regular five-year-plan cycles. In fact, the most important economic reforms – the so-called 60 Decisions – were promulgated at the previous, 12th five-year plan, which ran from 2011 to 2015.
In general, 10 areas of reform were identified, being fiscal, financial, trade, cross-border investment, innovation, competition, reform of the state-owned enterprises (SOEs), the environment, labour, and land. In other words, pretty much everything.
But reform is so much easier said than done. Just one single, solitary action out of the 183 initiatives identified during the lifespan of the 12th Five-Year Plan has been achieved so far; being Hong Kong’s Stock and Bond Connect programmes. Critics might even suggest that was due more to the tenacity of the Hong Kong Monetary Authority (HKMA). Meanwhile, the remaining 182 goals and targets remain either unstarted, semi-finished, stalled, or abandoned entirely.
Put another way – particularly from a foreign investor’s perspective – China’s empirical progress towards reform, as represented by its report card, might charitably be described as “mixed”, or more accurately as “underwhelming, lacking conviction”, with possibly “must try harder” thrown in for good measure.
But these criticisms inevitably miss the wider picture. China’s development as a Communist-led, sovereign nation is required to account for much more than the running of an economy alone.
The debate between reform and stability has been something of a challenge in China for the past 5,000 years; and the last 68 years since the establishment of the People’s Republic have been no different.
Arguably, the debate has sharpened considerably in the last 10 years as the cost of buying stability – to prevent an economic collapse or financial crisis – has spiralled ever higher. Critics will point to China’s estimated 260 per cent debt-to-GDP metric in 2017 as a chilling precursor to a possible debt-led meltdown.
But there’s also an important counter argument at work; what might have happened had the Chinese authorities not provided massive stimulus after the 2008 global financial crisis? The inevitable recession and subsequent rise in unemployment, likely accompanied by a sharp rise in social instability, would have had far-reaching, profound consequences not only in China, but across the globe.
In the five years after the crisis, unemployment levels across the European periphery soared, and remain elevated even today. In Greece, unemployment peaked at 28 per cent in 2013.
Should that tragedy have ever visited China – with a working population of 1 billion – the resultant level of unemployment would have been roughly equivalent to the entire population of the United States, without jobs. In such a context, the “pace of economic reform” becomes somewhat moot.
Nevertheless, despite political exigencies, economic reform cannot entirely be ignored either. As Greece found out to its cost, if you do not restructure your debt, then ultimately, your debt will restructure you.
Of course, China’s 60 Decisions mentioned previously are precisely the measures required to gradually guide the economy to a more efficient, less debt-dependent, outcome.
Economic reform with Chinese characteristics – more Darwin, less Einstein; more adaptive, less revolutionary – is likely to prevail, in my view.
That President Xi Jinping emerged from October’s party congress with a refreshed, politically enhanced mandate to lead, is a critical prerequisite for change. But change comes at a price, and in China that will only be paid slowly, surely, and at a minimum of disruption.
John Woods is the chief investment officer, Asia-Pacific, at Credit Suisse