More talk, less action to come from China

Discussions at the Communist Party of China's plenary meetings will include pension, shadow banking and state-owned enterprise reforms, but few concrete plans are expected to emerge.
More talk, less action to come from China

While some may have high hopes ahead of the Communist Party of China’s plenary meetings this weekend, others expect more talk than action to come from Beijing.

The world will be watching China during these sessions, which take place from November 9–12, as they represent an important test to see if the new leadership has the ability to make meaningful reforms across its financial sector, including pensions, shadow banking and state-owned assets.

The country’s pension system is likely to play a dominant role in discussions. Scholars such as Zheng Bingwen, director for the centre for international social security studies at the Chinese Academy of Social Sciences, have been calling for a restructuring of the mainland’s pensions for years.

Swiss bank UBS expects that China’s pension system will eventually be managed by the central government rather than by local authorities – such as municipals or county governments – with some basic payments supplied by the central government. This will help alleviate the financial pressures on local governments.

However, other suggestions – such as cancelling the ‘double-track’ pension system, whereby civil servants in government organisations do not pay pension premiums, while employees in private enterprises pay high premiums – are unlikely to introduced, says a Beijing-based executive who oversees an annuity pension business. There are simply too many conflicts of interest among civil servants and other beneficiaries for such a rule to be introduced any time soon, he argues.

This executive says officials will likely introduce a framework for pension reform as opposed to revealing detailed plans.

“The parties involved have not yet come to an agreement on the prospects of pension reform,” he adds. “I will see it as a big leap if [officials at the] meeting can set up a goal and then work to achieve it.”

State-owned enterprise (SOE) reforms will also be high on the agenda. The Development and Research Centre, the State Council’s think tank, has submitted a blueprint to the plenary on this issue.

One proposal on the table follows Singaporean state investor Temasek, which uses stock holdings in SOEs to set up sovereign investment funds with goals and evaluation criteria. (Those aiming to provide social security should target capital preservation, for example.)  

This is easier said than done, some say.

“It is quite difficult to restructure state-owned assets, as they are now under the supervision of the State-Owned Assets Supervision and Administration Commission,” says Lillian Zhu, research manager at Shanghai-based consultancy Z-Ben Advisors.

At the moment, SOEs only contribute 10% of their shares into the National Council for Social Security Fund when the enterprises go public. But one option would be for SOEs to contribute more, she says.

The mainland’s shadow banking sector and Chinese wealth management products (WMPs) will undoubtedly be a main topic of conversation.

But investors shouldn't expect too much detail to emerge, sources caution. There is no consensus among China’s government departments on the excessive leverage and risks associated with shadow banking, says Wang Tao, chief China economist at UBS.

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