Thoughts on the Plenum

Well the Chinese Party Plenum in Beijing is over and after an enormously underwhelming communiqué, the policy releases since then have been significant and positive.  The one child policy is officially being relaxed, supposedly a policy is being developed to increase the number of privately owned banks, state owned enterprises will be reformed, and hukou residency permits will be addressed.  In all the talk of the policy releases, I believe there are some important points that are being overlooked.

First, while I won’t go so far as to say these reforms are “unprecedented”, putting this level of reform and detail into an official Party policy documents is significant.  The Party has never gone this far in policy documents and it is encouraging the direction they have charted out before them.  The Party is committing themselves to what they intend to accomplish and I sincerely hope they accomplish most everything they have announced.

Second, we must keep in mind that announcing policy intentions are very different from actual accomplishments.  It is important that they have declared what they want to do, but before we get carried away, let’s remember they haven’t accomplished any of these things yet.  China has talked about rebalancing, moving away from an export driven economy, and increasing consumption for about a decade and for about a decade, those numbers have done nothing but become more extreme in the wrong direction.  Don’t mistake talk for results.  Remember: in the communiqué, they emphasized the importance of publicly owned industry.

China is going to have an extremely difficult time rebalancing away from excessive credit growth and fixed asset investment to drive GDP.  State owned enterprises, and especially the major banks, are not going to take kindly to competition.  There are going to be a lot of battles to realize this policy wish list and a thousand ways to derail many of these proposed reforms.  While the policy declarations are important, hold the euphoria for when you see it implemented.

Third, many of the policy prescriptions are not announced out of strength but due to a recognition of just how bad things are.  Winston Churchill is reported to have quipped about the United States that “when all other options have been exhausted, Americans can be counted on to do the right thing.”  This seems to fit this round of economic reform declarations.  To take one obvious example, any population boost from relaxing the one child policy won’t enter the labor force for 20 years.  By that time, the Chinese working age population will have been declining for nearly 25 years.  Assuming continued economic prosperity and China following the path economic development and declines to child bearing, the Chinese population will become very old with little real boost to the population.  Relaxing the one child policy today isn’t going to change the direction of the Chinese population Titanic headed for the old age iceberg.  Population is now counting against GDP growth due to its decline.  Unfortunately, Beijing decided to reverse this policy about 10 years too late.

Banks aren’t being invited to compete in China because the leadership realizes that competition is good but because Chinese banks are in such bad shape.  They are raising capital in Hong Kong as fast as they can file the paper work at enormous discounts.  This door is being opened because Beijing has a better idea of the enormous misallocation of resources and bad loans than the rest of us that we just don’t have the privilege of seeing yet.

I don’t want to downplay the importance of what has been announced but neither do I want to pop the champagne cork.  What has been announced is a good first step but let’s reserve judgment until we see some of this executed.  The best intentions of politicians don’t always see the intended results.