Last week, China's much-anticipated Third Plenum published a raft of policy reforms. Most notably, plans to loosen China's one child policy, abolish its notorious labour camps, encourage more private investment in state-owned enterprises, push through more rural land reforms, and advance more financial reform by liberalising interest rates and capital accounts.
Although the reform package is unlikely to have a big impact on China's immediate economic outlook, Mark Williams of Capital Economics argues that, if implemented effectively, it could allow for stronger growth over the medium term than would otherwise be the case. Most importantly, he says, the reforms will act as a cushion, "reducing the risk of a hard landing".
A pledge alongside the policies promised "decisive" reform in key areas by 2020, but no timetable was included, so we shouldn't hold our breath for a "major shift" in the country's economic model over the next couple of years, stresses Williams. The effect the reforms have will probably be positive, he adds, although "badly-sequenced reforms would create new dangers" - financial liberalisation can "amplify existing risks".
The near-term outlook, he continues, "will be determined to a far greater degree by how policymakers approach monetary and credit policy". Over recent weeks, the message from government has been its concern about the speed of credit growth. It makes sense for China's policymakers "to rein in current excesses as early as possible", in the context of opening up the financial sector (which has, in other countries, led to a credit boom followed by a bust), says Williams.
Senior Chinese officials seem unperturbed by slower GDP, so long as its not partnered with weakness in the labour market. Capital Economics' GDP forecasts remain, for that reason, unchanged - at seven per cent for 2014 and 6.5 per cent for 2015.
For investors, there are two points to note, according to Williams. One is that the composition of growth would shift:
A rising share of income going to households should support consumer spending. Conversely, a shift of income away from state-owned firms and capital intensive industries would dampen investment spending. The service sector will benefit, while heavy industry will slow. Logistics, tourism and healthcare are among the sectors that should do well; commodities producers will suffer.
And two, that the reforms would negate the "threat of hard landing" as a result of badly-designated capital and ensuing widespread overcapacity. Not only would average growth be greater in a post-reform China, points out Williams, "but risks would be lower than if reforms didn’t happen".
Of course, the efficacy of the reforms depends on how quickly and effectively they are implemented. The problems China faced before last week's announcement won't just melt away. Williams concludes: "Growth today is still too reliant on investment channelled through an inefficient financial sector. Overcapacity remains a significant threat. The growing glut of unsold, newly-built properties is a particular concern."