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Third plenum declares market as crux of reform

At the close of the Third Plenary Session of the 18th CPC Central Committee (the Third Plenum) on 12 November, the Decision on Major Issues Concerning Comprehensively Deepening Reforms was announced. About one third of the content of the Decision involves economic reform, fully setting out the direction of China’s future strategies on deepening reforms. Although part of the content of the reforms has already been raised before for discussion over a period of time and implementation of the reform measures could not be carried out at once, the agenda-setting document shows the central government’s commitment to advancing reform of the economic system and its determination to let the market take the lead. This is sure to make a far-reaching impact on China’s economic development.

Market forces as engine of economic reform

The Decision affirms that in the course of deepening economic system reform, the market is to play a decisive role in resources allocation, whereby the market game rule of survival of the fittest is brought into play to raise economic efficiency. This echoes the “reform as biggest dividend” claim raised by Premier Li Keqiang, i.e. enhancing overall productivity by means of deepening the role of market economy in resources allocation. According to findings of a study, while China’s labour productivity has sustained growth in recent years, its rate had slowed down from the average annual growth of 12% between 2003 and 2007 to less than 9% between 2008 and 2012. Deepening market operation reform and enhancing the efficiency of resources allocation to maintain productivity growth can help boost the long-term economic development and competitiveness of China.

The Decision also puts forward that while efforts are made to advance marketisation, action will also be taken to adjust government functions, reducing direct government intervention in the economy and giving play to market forces. To quote Premier Li Keqiang, the hand of the government will be replaced by the hand of the market.

Changes in government functions, streamlining approval procedures

The Decision suggests that steps will be taken to deepen reform of the administrative system and investment system, and to establish the investment subject status of investment projects undertaken by enterprises. For all such projects, with the exception of those involving national safety and ecological safety, nationwide distribution of key production forces, strategic resources exploitation, and major issues of public interest, the autonomy in decision making will rest with the enterprises themselves according to law and regulation. Examination and approval by the government will no longer be required. All economic activities that are effectively regulated by market mechanism will also be free from examination and approval. The major functions and roles of the government are to maintain stability of the macro economy, strengthen and optimise public services, provide a level playing field, tighten market supervision, and maintain market order.

The government will also promote the purchase of services from outside. On principle, the competitive mechanism will be introduced into all administrative services, whereby such services can be purchased from the private sector by way of contract or commission. This development direction will not only promote investment facilitation, but also open up a government service outsourcing market to non-government service providers. By so doing, the efficiency of utilising government resources will be raised.

Facilitating business with negative list system

The Decision proposes that a market system allowing the free flow and fair exchange of commodities and production factors is to be established. Efforts will be made to remove market barriers and implement a unified market access system. On the basis of formulating a negative list, various kinds of market entities may participate in sectors outside the list on a level playing field according to law. China will look into a management model of pre-establishment national treatment and negative list. Action will be taken to streamline the industry and commerce registration system, cut the number of projects requiring qualifications accreditation, and change the procedure of “permit first, licence later” (i.e. applicants applying for business licence from industry and commerce administration department are required to obtain a permit from the competent supervisory industry department first) to “licence first, permit later”.

In fact, some policy measures have already moved along this direction lately. For instance, on 25 October 2013 the State Council decided to reform the registration system for company registered capital, lifting the requirements for minimum registered capital. In other words, the requirements for minimum registered capital of Rmb30,000 for limited liability companies, Rmb100,000 for one-person limited liability companies, and Rmb5 million for joint stock companies are to be removed. At the same time, the enterprise annual inspection system will be replaced by an annual report system. In accordance with the principle of easy registration in a regulated and orderly manner, conditions for the registration of market entity domicile (place of business) will be eased. However, these measures can only be enforced in full steam upon revision of the relevant laws such as the Company Law and the Wholly Foreign-owned Enterprise Law.

All along, China has been giving people the impression that its procedures for market access, examination and approval, and registration are rather cumbersome. In particular, this has caused a great headache to foreign investors not familiar with operations in the mainland. Reform of the market access system will greatly simplify formalities and will bring convenience to both domestic and foreign investors, especially small and medium-sized players. It will also encourage business start-up and investment thereby creating more jobs.

Marketisation of interest rate and exchange rate

The financial sector will open up further to both domestic and foreign players. Under the premise of strengthening supervision, qualified private capital is allowed to set up financial institutions such as small and medium-sized banks according to law while steps will be taken to launch reform of policy financial institutions. Efforts will be made to improve the multi-level capital market system and advance reform of the stock-issuing registration system. Financial innovation will be encouraged in a bid to add breadth and depth to the financial market and expand the range of financial products.

Allowing private capital to participate in the banking sector will intensify competition, making a positive impact on the effective allocation of financial resources. It is only by liberalising access to the financial market and increasing supply that interest rate marketisation can be realised. As regards reform of the stock-issuing registration system, the general understanding of the market is that when an issuer applies for permission to issue shares, all it needs to do is submit a full set of complete and truthful documents to the supervisory department, while the supervisory department is responsible for conducting a formal examination of the totality, accuracy, truthfulness and timeliness of the documents submitted. This will replace the current “approval system”.

The Decision also sets out that the formation mechanism for RMB exchange rate marketisation will be improved and it will expedite the implementation of interest rate marketisation. Action will be taken to advance the dual-track liberalisation of the capital market, raise the convertibility of the yuan in cross-border capital and financial transactions, establish a foreign debt and capital flow management system under the framework of prudent macro-economic management, and accelerate the pace of realising convertibility of the RMB under the capital account.

Efforts will be made to gradually achieve RMB convertibility under the capital account. For example, by raising the degree of RMB convertibility in cross-border capital and financial transactions, mainland enterprises may utilise cross-border loans or make outward investments with greater flexibility. This can help expand the demand for services provided by Hong Kong as an international financial centre.

The Decision also mentions that action will be taken to improve the financing terms of small and medium-sized technology enterprises, promote the development of the technology market, improve the technology transfer mechanism, create new business models, and promote the monetisation and commercialisation of technological achievements. These development directions will bolster China’s demand for technology import and will in turn bring about opportunities for Hong Kong as an intellectual property trading centre.

Further opening up, domestically and externally

Where liberalising foreign investment is concerned, the Decision points out that efforts will be made to unify laws and regulations on domestic and foreign investments, and maintain the stability, transparency and predictability of foreign investment policies. Service sectors such as finance, education, culture and medical care will be liberalised orderly, while access restrictions on foreign participation in such services as caring for infants and the aged, architectural design, accounting and auditing, commerce and logistics, as well as e-commerce will be eased.

The move to further open up different service sectors is no doubt a positive message released by China. However, it has to depend on its detailed provisions and progress. Take e-commerce as an example. Since the business content of e-commerce is extensive, it may involve many kinds of services including online sales, online payment, software development and online business operation. As such, the market access policies for foreign companies investing in e-commerce may differ. Currently, where online sales are concerned, if the business involved is providing online services for third parties, application for an ICP licence is mandatory. But generally it is difficult for foreign-invested enterprises to apply for this licence. If the e-commerce service sector is fully liberalised, foreign companies can have more flexibility in expanding mainland sales by way of online channels.

On the “going out” initiative, the Decision clearly states that outward investment by enterprises and individuals will be further promoted, while their status as outward investment subject will be affirmed. Investors will be allowed to “go out” in innovative ways and engage in investments in greenfield projects, merger and acquisition, securities, as well as joint projects. Further liberalisation of outward investment, especially on an individual level, is bound to generate huge demand for services provided by Hong Kong as an international financial centre and commercial service platform.

The recent establishment of the Shanghai Pilot Free Trade Zone has aroused great attention. The Decision reiterates that the free trade zone represents a major move by China in launching reform and opening-up, with an aim to exploring new ways to fully deepen reform and further liberalisation. The Decision also puts forward that on the basis of the current pilot zone, a number of locations with the right conditions will be selected for the development of free trade (port) zones. There are reports that Guangdong province is interested in applying for permission to set up a free trade zone comprising Nansha, Qianhai and Hengqin. If Guangdong develops along this direction, Hong Kong will stand to benefit, given its close economic and trade ties with and geographic proximity to Guangdong, and its role as an international business centre backed by this free trade zone as its hinterland.

Measures stimulating consumer spending

Bolstering domestic demand, especially consumer spending, is an important strategy in China’s adjustment of its growth model. Among the many policies set out in the Decision, some of them are bound to bring about a direct positive impact on stimulating consumption. In order to push for a balanced long-term population growth, China will ease its “one-child policy” and allow couples to have two children if one of them is an only child. China has been enforcing the “one-child policy” for over 30 years, with birth rate dropping significantly from 3.5% to 1.2%, which has in turn caused major changes in its demographic structure. It is believed that the policy of easing one-child restrictions will directly boost the demand for baby products and toys as well as related services.

In a move to increase the proportion of middle-income earners, China will continue to raise the share of labour remuneration in primary income distribution, optimise the mechanism of returns for investors of listed companies, and increase the asset-derived income of the people through different channels. These developments are set to stimulate domestic demand, especially demand for medium to high-end products and services.

Urbanisation is an important force in driving domestic demand. China will make efforts to promote the urbanisation of rural migrant population, expedite reform of the hukou (household registration) system, and provide housing and social security benefits to rural migrants who have settled down in urban areas. Moreover, China will set up a more equitable and sustainable social security system. In pursuing urbanisation, a lot of infrastructure and social services (e.g. education, medical care) are required, which will increase domestic demand. When people have more social security, more spending power will be unleashed which will in turn stimulate consumption.

Furthermore, full-scale marketisation of interest rates should include the marketisation of deposit interest rate. This will raise the asset-derived income of the people, which will in turn boost consumption.

Some possible negative impacts

The Decision puts forward that prices formed by the market will be regulated by the market. This will promote price reform in such areas as water, oil, natural gas, electricity, transportation and telecommunications. During the planned economy era, China adopted the “low price, low income, low consumption” model for a long time in order to drive economic growth and safeguard the basic living of the people. Under this model, the prices of basic commodities such as resources and energy were suppressed. It can be expected that price reform in these areas may bring about price hikes, leading to higher prices and production costs.

China will continue to adopt such measures as minimum wage and wage payment protection system. In the medium term, labour cost will rise steadily, exerting extra pressure on labour-intensive and low value-added industries. This can on the one hand encourage mainland and foreign-invested enterprises to move towards automation, transformation and upgrade, while on the other, prompt enterprises to quicken their pace of relocation, including relocating to other inland provinces in China and to Southeast Asian countries where production cost is lower.

Content provided by Picture: Billy Wong
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