China's Leaders Pledge Financial Reform, but State Control to Continue

China’s
leaders have unveiled reforms designed to overhaul the country’s economy over
the next couple of years.  

Talks
at the third plenum of  the 18^th
Communist Party of China (CPC) central committee concluded with senior leaders
indicatingthe
whilst state ownership would remain at the core of the economy, markets would
be allowed to play a more influential role in future.

Outlining the communiqué, the state-run
Xinhua News Agency said the market would play a ‘decisive’ role in allocating
resources but public ownership would still dominate.

“The overall goal is to complete and develop the socialist system with Chinese
characteristics and push forward the modernisation of the governing system and
governing ability,” it added.

Commenting on the communiqué,
Dean Cook, investment analyst at Duncan Lawrie Private Bank said: “The
third plenary session has set the agenda for the next decade of China’s
economic and social development. 

“In
previous sessions it has been left to provincial governors to interpret and
implement, however this time it looks like there may be a move to reduce
the freedom of the provinces and drive reform from the centre. This will give
the potential for real change some significant impetus. 

“As with most emerging markets, we must approach announcements about economic
and social reform with a degree of caution. Given China’s size, it cannot
overhaul its long-established institutions overnight, but this week’s events
have set a positive tone from which real change may soon occur.

“Reducing the dominance of state-owned enterprises (SOEs) going forward should
give non state-owned companies space to flourish. Compared to the larger, less
efficient SOEs, smaller companies are more likely to ‘innovate’ and drive China
up the value chain.

“If China is committed to these reforms, then foreign investors can also think
more seriously about committing to investment in the region. Real economic
growth and investment opportunities can present themselves, but only if these
statements of intent are translated into action.”

China’s leaders need to refresh a growth
model based on trade and investment that provided the country with three
decades of double-digit economic growth but which has recently started to
weaken. Pressure for change has mounted as economic growth slowed over the past
two years, hitting a two-decade low of 7.5% in the second quarter of 2013.

Reform advocates such as the World Bank say that Beijing
needs to curb the dominance of state companies in areas from banking to energy
to telecoms if strong growth is to be maintained.

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