LETTER FROM CHINA: Early birds will score when Beijing opens the floodgates
by Kobus van der Wath,
2013-11-27 07:00:50.0
THE communiqué published at the third plenum of the 18th Central Committee has undoubtedly been perused by analysts and observers from around the world.
One of the key takeaways is that it seems as if some details regarding the reforms to be carried out are definitive, while others are not. In what has developed into a trend, the Chinese government does not want to be too specific about planned reforms and to be held to its word unless it is unequivocally certain that such reforms can be implemented.
The time frames for carrying out such reforms will be largely dependent on the market’s regulatory flexibility and the ability to enforce the changes, among other aspects.
An opinion held by various analysts that companies’ chances of success in China will rise over time as China reforms and opens up may be true, but that does not mean they must wait before they enter.
To the contrary, the benefits of entering early and riding China’s impressive growth as well as favourably setting up a position to tap future growth far outweigh the challenges of entering China. In fact, entering now qualifies you as a latecomer already.
The general language resulting from the third plenum indicated a gradual move towards fewer monopolies and giving the market a greater role in China’s economy with the intention of increasing its dependence on domestic consumption for sustainable growth. Companies entering the world’s second-largest economy once all these barriers are removed may find themselves overwhelmed by the existing and likely strengthening competition. Entering in the near term would provide a crucial few years of acclimatising to the environment that could have led to the overcoming of such competition.
Three examples of reform policies that were specific enough to be reasonably certain of implementation are related to the hukou system, farmers’ land rights and the one-child policy. While these reforms have numerous direct and indirect implications, increased consumption is a common theme in all three.
The hukou system, which essentially restricts citizens to living in designated cities by reducing their access to medical, educational and housing benefits in other cities, will be loosened. It is estimated that more than 200-million migrant workers will now have the opportunity to move from towns and small cities into larger ones without the loss of these benefits. Some of the largest cities such as Beijing, Shanghai and Shenzhen will remain inaccessible to outsiders for the time being. The subsequent increased urbanisation will no doubt play a part in increased consumption and an enlarged service sector.
While the move to strengthen farmers’ land rights can be interpreted as an effort to reduce inequality and increase agricultural efficiency, it will also contribute towards increased consumption. Previously, farmers were not able to sell, rent or leave their homes and the land they live on to their children. Now farmers will be able to make use of possibly the only capital asset they possess. Farmers can now better fund their migration to cities or invest into expanding and improving their farms with the knowledge that they have security to their land and the right to mortgage it.
Originally, only couples that were both single children were allowed to have two children. That has now expanded to families where just one parent is a single child. Although the effects of loosening this policy may be seen as negligible in the near term, it is a step in the right direction. Over time it will have a huge effect. With China’s working population now decreasing, any effort to arrest that trend while also contributing to increased domestic consumption will be welcomed.
These three specific examples only begin to scratch the surface of how China will increase domestic consumption. Other pertinent statements in the communique, such as "select more cities to develop free trade zones; remove barriers on private firms entering some specific sectors; encourage overseas investment by investors and companies; speed up interest rate reform; accelerate capital account convertibility process; and establish deposit insurance", will all support the next stage of consumption growth.
It is understandable that vague statements such as these are seen in a sceptical light as they have minimal accompanying information as to how they will be implemented and regulated. However, China’s record for the past three decades should be evidence enough to allay fears of them not materialising. The communiqué promising that "decisive" results will be seen by 2020 means some in the business community that are not yet in China will not have to wait too long to see how their decision pans out.
• Van der Wath is group MD of The Beijing Axis. He can be reached at [email protected]
THE communiqué published at the third plenum of the 18th Central Committee has undoubtedly been perused by analysts and observers from around the world.
One of the key takeaways is that it seems as if some details regarding the reforms to be carried out are definitive, while others are not. In what has developed into a trend, the Chinese government does not want to be too specific about planned reforms and to be held to its word unless it is unequivocally certain that such reforms can be implemented.
The time frames for carrying out such reforms will be largely dependent on the market’s regulatory flexibility and the ability to enforce the changes, among other aspects.
An opinion held by various analysts that companies’ chances of success in China will rise over time as China reforms and opens up may be true, but that does not mean they must wait before they enter.
To the contrary, the benefits of entering early and riding China’s impressive growth as well as favourably setting up a position to tap future growth far outweigh the challenges of entering China. In fact, entering now qualifies you as a latecomer already.
The general language resulting from the third plenum indicated a gradual move towards fewer monopolies and giving the market a greater role in China’s economy with the intention of increasing its dependence on domestic consumption for sustainable growth. Companies entering the world’s second-largest economy once all these barriers are removed may find themselves overwhelmed by the existing and likely strengthening competition. Entering in the near term would provide a crucial few years of acclimatising to the environment that could have led to the overcoming of such competition.
Three examples of reform policies that were specific enough to be reasonably certain of implementation are related to the hukou system, farmers’ land rights and the one-child policy. While these reforms have numerous direct and indirect implications, increased consumption is a common theme in all three.
The hukou system, which essentially restricts citizens to living in designated cities by reducing their access to medical, educational and housing benefits in other cities, will be loosened. It is estimated that more than 200-million migrant workers will now have the opportunity to move from towns and small cities into larger ones without the loss of these benefits. Some of the largest cities such as Beijing, Shanghai and Shenzhen will remain inaccessible to outsiders for the time being. The subsequent increased urbanisation will no doubt play a part in increased consumption and an enlarged service sector.
While the move to strengthen farmers’ land rights can be interpreted as an effort to reduce inequality and increase agricultural efficiency, it will also contribute towards increased consumption. Previously, farmers were not able to sell, rent or leave their homes and the land they live on to their children. Now farmers will be able to make use of possibly the only capital asset they possess. Farmers can now better fund their migration to cities or invest into expanding and improving their farms with the knowledge that they have security to their land and the right to mortgage it.
Originally, only couples that were both single children were allowed to have two children. That has now expanded to families where just one parent is a single child. Although the effects of loosening this policy may be seen as negligible in the near term, it is a step in the right direction. Over time it will have a huge effect. With China’s working population now decreasing, any effort to arrest that trend while also contributing to increased domestic consumption will be welcomed.
These three specific examples only begin to scratch the surface of how China will increase domestic consumption. Other pertinent statements in the communique, such as "select more cities to develop free trade zones; remove barriers on private firms entering some specific sectors; encourage overseas investment by investors and companies; speed up interest rate reform; accelerate capital account convertibility process; and establish deposit insurance", will all support the next stage of consumption growth.
It is understandable that vague statements such as these are seen in a sceptical light as they have minimal accompanying information as to how they will be implemented and regulated. However, China’s record for the past three decades should be evidence enough to allay fears of them not materialising. The communiqué promising that "decisive" results will be seen by 2020 means some in the business community that are not yet in China will not have to wait too long to see how their decision pans out.
• Van der Wath is group MD of The Beijing Axis. He can be reached at [email protected]
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