Can China’s Market Reforms Match Investors’ Expectations?

When it comes to China’s vaunted market reforms, the devil is in the details. For November’s Third Plenum of the Chinese Communist Party’s 18th Congress, the top leaders of the country’s new government held four days of private meetings at a heavily fortified Beijing hotel. They followed this enclave with a communiqué that sketches out President Xi Jinping and Premier Li Keqiang’s agenda for the rest of the decade. Setting 2020 as the target for achieving several important goals, the 4,600-word document promises to unshackle markets by giving them a “decisive” role in the Chinese economy. But it’s light on specifics, a fact not lost on restive investors.

The plenum’s stated goals for 2020 include establishing a “unified, open, competitive and ordered market system” that encourages transparency and fair competition. The communiqué pledges that China will adapt to globalization by loosening restrictions on investment and expediting the development of free-trade zones such as the one launched last September in Shanghai, which Beijing aims to transform into a global financial center by 2020. It also promises to clean up government by boosting anticorruption measures.

In early December, China tried to show it means business by announcing the end of a 15-month moratorium on initial public offerings. “China’s leaders have made a commitment to speeding up reforms,” says Guan Anping, a Beijing-based securities lawyer and adviser to the Chinese government. “This commitment in effect also sets the path for some form of political reform, because without political reform there can no longer be economic reforms in China.” But Guan, a onetime legal aide to former Chinese vice premier and foreign trade minister Wu Yi, adds that investors and the population at large are skeptical that the plenum’s goals can be met by the end of this decade.

Another crucial reform is allowing private investors to buy into China’s large and small state-owned enterprises. Although SOEs won’t lose their dominant economic role, the government will end their monopoly status outside sensitive areas such as defense, sell minority and strategic positions, and allow joint ventures. “Authorities will actively court private investors to buy into many local government–owned companies as well as take stakes in major state-owned conglomerates,” Guan explains.

Then there’s the commitment to opening China to global capital and giving private money a bigger role in the financial sector. “The document repeated that the government would increase the level of convertibility in cross-border capital and banking transactions,” says Shen Jianguang, chief economist at Mizuho Securities Asia in Hong Kong.

Shen points out that the Shanghai free-trade zone will help move China’s renminbi internationalization experiment onshore. The zone will let foreign and domestic investors move unlimited capital in and out of the country without going through the People’s Bank of China, the central bank. There’s little information on how such capital flows would work, but the plenum’s mention of the Shanghai zone demonstrates that the government is serious about change, Shen says.

So far, most of China’s renminbi internationalization has been trade settlement offshore in Hong Kong. Shanghai may become an increasingly important partner to the former colony by allowing foreign banks and investors — many of them with Asian headquarters in Hong Kong — to bring funds onshore and remit them offshore without central bank approval, notes Hubert Tse, a Shanghai-based securities lawyer and partner with local firm Boss & Young. At the same time, the free-trade zone will allow Chinese investors to send large sums abroad, Tse says: “The central government in Beijing wants to support the rise of Shanghai as a global financial center.”

Chinese leaders’ vows to liberate them notwithstanding, markets are already playing an important role — as a sounding board, at least. The day after the plenum ended on November 12, the Shanghai Composite Index and the Hang Seng China Enterprises Index dropped 1.8 percent and 2.7 percent, respectively. The market’s skepticism about Beijing’s reforms could stem from lack of detail, the fact that state-owned enterprises will remain powerful and sluggish progress on areas such as financial reform, says Mizuho’s Shen. “In our view, however, the skepticism has come too early, as actual policy details may soon follow,” he notes. “We must keep in mind that the announcement is only a road map.”

Attorney Guan attributes investors’ disappointment to high expectations: “Chinese investors are increasingly becoming demanding and impatient,” he warns. As 2020 draws nearer they’ll be watching, and perhaps waiting.

Get more on banking and capital markets.