Deutsche Bank: Reforms that will Have Meaningful Implications for Real Economy05-28 15:35 Caijing
On 24 May, the State Council released to the press the "Opinions on Economic Reforms in 2013". This document provides the guideline on key reforms that the government will initiate or push harder this year. These reforms are intended to enhance the potential rate and quality of economic growth, provide a level-playing field for healthier competition, and strengthen social protection for the vulnerable segment of the population. Among the 22 points mentioned in this reform agenda, we believe the following items will have meaningful implications for the real economy:
1. Abolishing and decentralizing administrative approvals, and permitting private sector investment in key sectors. These reforms will permit and encourage private sector investment in previously restricted sectors. We expect more than 100 approval items to be abolished or decentralized in the near term. The State Council document also highlighted that the government would open up the financial, railway, energy, and telecom sectors to private sector investment.
Implications: these reforms should enhance private sector investment and thus economic growth potential, and should in particular boost demand for railway construction, oil and gas drilling, and new energy equipment.
2. Higher taxes and levies on polluting products (e.g., coal) and sectors.
The reform plan stated that the government would "include products that are heavily polluting and consume natural resources excessively into the consumption tax list", "reform the resource tax system by converting the unit tax on coal to an ad valorem tax", and "establish the strictest environmental protection system". In our view, these messages imply that taxes and levies on coal and pollutants generated by coal burning will likely rise.
Implications: coal consumption growth will likely slow in the coming few years. Clean energies, as a result, should replace coal at an accelerated pace.
3. Acceleration in capital account liberalization. The reform plan stated that China would establish a QDII2 system (i.e., permission for wealthier individuals to invest overseas), and facilitate qualified foreign institutions to issue RMB bonds (i.e., Panda bonds) in the on-shore market. We believe that the chance of an announcement of QDII2 in the second half of this year is high. This would allow greater fund flows from the mainland to Hong Kong and other overseas markets.
Implications: banks specializing in FX business, brokers, and the HK equity market will likely benefit from greater fund flows.
4. Developing critical illness insurance. As the first (top priority) item in the paragraph on social security reform, the reform plan stated that the government would promote the provision of "critical illness insurance in urban and rural areas". Policy makers in China now realize that the government-sponsored basic health insurance is unable to effectively cover critical illnesses, and thus commercially provided critical illness insurance will be a key solution. Part of the premium contribution to the basic health insurance scheme will likely be re-allocated to paying premiums for critical illness insurance. Tax incentives will also likely be provided to insurance companies that provide critical illness insurance policies.
Implications: insurance companies' premium growth will be enhanced due to faster development of critical illness insurance on government initiatives.
In addition to the above, the reform plan reiterated the need to further expand the on-going resource pricing reform and VAT reform. For example, the government will extend the gas pricing reforms to more provinces (permitting higher gas tariffs), and expand the VAT reform to the telecom, railway and construction sectors (reducing effective tax rates on these sectors). We believe gas producers/distributors and railway construction/equipment makers will be key beneficiaries.
Jun Ma, Chief Economist, Greater China
Deutsche Bank Hong Kong
Full report in Chinese: http://economy.caijing.com.cn/2013-05-28/112836149.html
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