A Summary of China’s Third Plenary Economic Reforms:
- One-child policy relaxed: The controversial policy introduced in 1979 has contributed to falling birth rates. Now the policy is to be eased to allow couples to have two children if one the parents is an only child. Baby-product related stocks such as Goodbaby International soared in Hong Kong on Monday following the easing of the one-child policy.
- Welfare-system reformed: China said it would relax its system of household registration, known as the hukou system. Under this system, migrants give up the public services they are entitled to when they move to urban areas. Analysts say changing this system is a key step towards liberalizing the labor market, allowing the free movement of labor and encouraging urbanization.
- Greater rights for farmers: According to China’s official Xinhua news agency farmers will be granted rights to “possess, use, benefit from and transfer their contracted land, as well as the right to use their land ownership as collateral or a guarantee.”
- Stepping up financial reforms: These include setting up a deposit insurance system by early 2014, giving qualified private investors the go ahead to set up banks, loosening controls on the pricing of water, electricity and natural resources and revamping the system for Initial Public Offerings (IPOs).
State-Owned Enterprises (SOEs): SOEs will be required to pay larger dividends to the government, with 30 percent of earnings from “state capital” to be paid back to the state and used for social security by 2020. Private firms, meanwhile, will be encouraged to play a greater role in the economy. According to a report by Agence France-Presse, China’s 113 large SOEs under direct government control typically pay five to 20 percent of their profits to the government in dividends.
Major News and Events:
- The easing of China’s one-child policy has already created a frenzy of anticipation among households, businesses and the stock market for the expected baby boomlet. Shares of baby-formula producers and even piano makers jumped after news of the policy change came out late Friday. Tutoring companies’ shares rose on the assumption that urban families would expect their second children to produce the same academic excellence they demand from their first.
- Investor Jim Rogers believes “the most important economic event of the next 10 to 20 years is what happened in Beijing at its Third Plenary meeting” And it’s something he says has been largely ignored, notably by Western media. Rogers has begun buying Chinese stocks after being out of the marketplace since 2008.
- US direct investment into China between January and October rose 12.4% ($3.04 Bln). EU increased 22.3% ($6.4 Bln)
- China’s planned economic reforms are poised to reshape the competitive landscape, allowing private companies such as Alibaba Group Holding Ltd. to compete with state-owned banks and easing the one-child policy to bolster demand for products from Nestle SA (NESN) to General Motors Co. (GM) Plans to change the nation’s financial sector include a new registration system for initial public offerings and allowing qualified private investors to set up small-to-medium sized banks.
According to Eurasia Group, the share of internet users based in the US was 66% of the global population in 1996, by 2012 the US accounted for only 13%. China is the Number 1 user of the internet. India rapidly approaching the US as the Number 2 largest user.
Local Broker Insight:
Maybank-Kim Eng Securities – Third Plenum Summary
The large move in Hong Kong stocks, and the huge surge in volume, clearly reflect the view that taken as a whole the announcements following the plenum do represent a clearer recognition and understanding of the issues facing China and a clearer statement of how the new administration intends to face them. Although the devil will be in the detail and in the execution, and although many of the measures being announced have already been in place informally for some time (for example higher payments from State Owned Enterprises to the government and selective relaxation of the One Child Policy) the announcements might be as ground-breaking as Deng’s famous “it’s good to get rich” speech in 1979. We are obviously coming off a much higher, and profoundly changed base and though the moves might not be as transformative as Deng’s it is certainly possible to see this as the beginning of stage two of the reform process http://www.maybank-ke.com/
CICC – Third Plenum Summary – Expected Market Reaction
“We are taking a relatively more positive stance towards the market, as we believe investors may underestimate the resolve and capability of the new leadership to deliver far-reaching reforms in the coming years,” Hong Liang, our Beijing-based Head of Research said to II. “As a result, they may underestimate China’s growth potential as well as its corporate earnings capabilities. http://www.cicc.com.cn/cicc/english/about/index.htm
CICC – Third Plenum – Environmental Issues
Reading the Plenary Decision, we think some key changes merit investors’ attention: 1/ environmental treatment will no longer be a one-off administrative task, but will become one of the major initiatives; 2/ government officials now face a lifelong accountability system for environmental damages and polluters are responsible for corresponding treatment, leading to more demand for professional environmental protection; 3/ there could be tradable emission rights in the future and tax incentives (high tax on high-pollution and high energy-consuming products) will guide the market in the right way; 4/ the Decision also mentioned its intention to turn environmental protection fees into a tax and this should make paying environmental costs more legally-binding. http://www.cicc.com.cn/cicc/english/about/index.htm
For more information about investing into China, KraneShares or KraneShares’ ETFs please contact Brendan Ahern at brendan.ahern@kraneshares.com or +1.650.866.9975.
Brendan Ahern | www.kraneshares.com | Managing Director
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