Chinas serious about reforms, says Matthews Asia’s Robert Horrocks

Robert Horrocks, CIO of Matthews Asia, says the outcome of the Third Plenum suggests China’s government is serious about reform.

China’s government released a report on November 15 entitled ‘Decision on Major Issues Concerning Comprehensively Deepening Reforms’. This report was more detailed and wide-ranging than an earlier communiqué released immediately following the Third Plenum, an event during which Chinese leaders map out economic policies for the next decade.

This report laid out 60 reforms in 15 major areas, covering many aspects of China’s social, economic and political policies. It is typical for China to initially announce just the general direction and guidance of new policies before following up later with more descriptive policy details. However, the timing of its latest release came much sooner than had been anticipated.

We believe the level of detail in the report coupled with the breadth of its coverage reveals a strong determination by the government to carry out meaningful reforms. It also sends out a clear message that reform will play a key role in China’s economic restructuring as it moves toward a more efficient market economy.

We are particularly impressed by the measures to reduce the power of the central and local governments, to support the private sector companies, to improve the efficiency of the state-owned enterprises (SOEs), to reform the household registration, or “hukou,” system, and to change its one child policy.

Importantly, the report also sets specific targets for these reforms, with the goal of achieving them by 2020.

We believe that the reforms and the emphasis on the market economy and efficient allocation of resources set the right direction for the next phase of China’s long-term development-an economy that is more efficient, balanced and market-oriented, and thus, more sustainable.

This means less government intervention and a business environment that fosters greater competition.

We see the reform announcements as largely supportive of our approach, in trying to identify competitive companies with long-term sustainable growth prospects that are run on efficient business models. We believe an environment that encourages such companies to grow is a positive one for long-term investors.

Similarly, we see the tweaking of a legal system in the Shanghai Free Trade zone-also announced recently-as an interesting development. The legal system goes from a prescriptive “this is what you can do” method to one based on a list of things you cannot do and, therefore, leaves markets and companies to decide what can be done. This is more like the U.S./U.K. legal systems that have shown to be very supportive of service economies, particularly financial services. This is a very thoughtful and self-aware piece of reform and one that we intend to follow closely.


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