It’s not just revising the one child policy – China is aiming to integrate fully into the world economy

18th November 2013

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The relaxation of China’s one child policy has made the headlines this weekend as the BBC reports. The change will allow families where one parent is themselves an only child to have two children. The reform is one of many coming out of the third plenum of the Communist party, a meeting which has in the past signaled fundamental changes in policy direction.

On the policy itself, some China experts say that the wealthy have already been able to pay fines and effectively get round the one child rule, but the move is likely to have an impact on such a large population.

It comes with other liberalising measures.

One that will welcomed internationally is an end to the “re-education through work programme” where local police could imprison undesirables and dissenters’ in local prisons sometimes described as China’s modern gulag.

Economically, the private sector and private banks are to be given a bigger role in the economy and many price controls will be relaxed.

Additionally, there will be greater liberalisation in both interest rates and the country will aim for the free convertibility of the yuan while allowing more international investment.

Some thoughts from Mindful Money about what it could mean for investors and a few useful links

1) The one child policy is likely to help the shift to a more consumer driven economy which is a clearly stated aim with a likely boost for the domestic economy and domestic stocks. But it is just the start of a more general liberalisation aimed at moving China away from its producer-driven economy. One contrarian view from Forbes’ James Gruber says that the process will cut GDP and actually be bad news for markets medium term.

2) China is seeking to manage its own version of a demographic timebomb resulting from the one child policy. It has big implications for China’s future dependency ratio something highlighted by HSBC recently and reported on Mindful Money.

3) The normalisation of China’s financial system and private sector will be a huge step in terms of integrating China into the world economy. But there is one formidable challenge that is managing the growing shadow banking issue. It will be interesting to see how whether China can bring in regulation as it moves from direct state and local Government control. Just this weekend, the South China Morning Post reported a warning from the Financial Stability Board (headed by our own Governor Mark Carney) which said that shadow banking has grown US$5 trillion last year to US$71 trillion and that China is powering the growth. The Nomura Institute wrote only a few days ago that China is trying to establish more modern regulation. This is one of several challenges that requires the Chinese Government to relinquish direct control to achieve its goals. Not easy even in the West.

4) When China is engaged fully with the world economy, the impact is nigh on impossible to predict or quantify. The UK has ambitions to become a centre for Renminbi trading. The Industrial and Commercial Bank of China issued a Renminbi denominated bond reported by CityAM last week. But much more interesting perhaps is when China’s huge reserves begin seeking better returns globally. Up till now China’s investments have had strong political and strategic influence and of course much is in US Treasuries. It will get more interesting when China’s money including money from its $4bn worth of savings starts looking for decent returns as a primary goal. Larry Elliott of the Guardian, prior to this announcement was suggesting that central London estate agents and hedge fund managers will be hoping for a huge windfall. It may be more influential than that.

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