Towards a free-market China

China’s Communist Party has produced “its most wide-ranging and reform-tinged proposals for economic and social change in many years”.

China's Communist Party has produced "its most wide-ranging and reform-tinged proposals for economic and social change in many years", says Economist.com's Analects blog.

The plenum of the Party's central committee brought forth a bland communiqu early last week, but the detailed blueprint published on Friday impressed investors. Hong Kong-listed mainland shares, or H shares, gained 8% in the following two days.

The government will reduce its role in setting the prices of water, oil, gas, electricity, transport and telecoms. Private and foreign firms will be allowed access to more of the economy. The financial sector will be liberalised further, and private banks will be allowed for the first time. Some protections for financial institutions will be eased so that banks are more likely to go bust. The one-child policy is being relaxed and farmers will be granted more rights over their property.

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The basic theme is that China is committing itself to giving the market a greater role in the economy and continuing to move away from state socialism. Seeing all these reforms in one document, with "a clear sense of urgency, is heartening", says Standard Chartered's Stephen Green.

Still, pushing these ambitious reforms through will take time. There are plenty of special interest groups in government and the state-owned sector that will resist change, as Deutsche Bank's Jim Reid points out. And the thrust of the changes is to give the market the "decisive" role in resource allocation. While this is clearly good news in the long term, it implies that the profits of the state-owned firms in the Chinese stockmarket will fall in the next few years. Two-thirds of earnings stem from sectors that have benefited directly from the system of price controls, says Josh Noble in the FT.

Nor do these reforms change the fact that the economy could have a rough ride in the next few years as the state-fuelled credit bubble subsides, as Robin Wigglesworth points out in the same paper. Policy makers "clearly want to restrain the debt boom, but have so far been unwilling to sacrifice growth to do so". So stocks seem unlikely to shoot to the moon in the near future. Still, those keen to make a long-term bet on a free-market China can research the JP Morgan Chinese Investment Trust (LSE: JMC).