Beware Beijing’s Commitment Issues; First Up on the Reform Plans: Tackling Overcapacity

Beware Beijing’s Commitment Issues


Nov. 15, 2013 10:50 a.m. ET

China is once again promising an ambitious reform agenda. The latest policy vision is a welcome indication that Beijing understands the economic challenges the country faces as it tries to shift to a consumption-led model from an investment-driven one. Still, given Beijing’s track record of over-promising and under-delivering, skepticism is in order.At the close of a pivotal Communist Party meeting on Tuesday, an initial communique was long on ideological platitudes. A follow-up document issued Friday, by contrast, is a laundry list of ambitious overhauls. It states that prices for resources like water, oil and natural gas will be freed from controls, restrictions on investment abroad by firms and individuals will be eased, a carbon-trading system will be developed, and so on.

In fact, many of the policies called for have been on official lists of things to be done for years. Promises to “accelerate” the pace of interest-rate liberalization and capital-account opening, for instance, have been repeated so many times as to have nearly lost their meaning.

Don’t hold your breath for a full lifting of capital controls. China’s leadership knows full well that this would amount to giving up control over the financial system and opening the country up to fickle international capital flows that have precipitated crises in many developing nations.

Similarly, the promise to accelerate work on property tax legislation should be taken with a grain of salt. It would help shore up local-government finances and constrain a dangerous housing price bubble in major cities. But it would also be a direct strike on the main store of wealth for the nation’s wealthy and middle class, making it politically perilous.

Other promised financial reforms are more feasible, and would help lay the groundwork for more ambitious steps—eventually. The document promises to establish a deposit insurance system. This is a pre-requisite for any broad opening up of the financial system, because it should allow banks to fail without endangering people’s savings and risking social turbulence. Even this basic step has been promised for years, but if it is rolled out soon, it will signal real momentum for financial reforms.

A promise that state-owned enterprises will return more of their profits to the state by 2020 is especially specific. While this will help pay for needed social spending, it still doesn’t mean that private companies will face a level playing field.

For ordinary Chinese, issues like international capital mobility are esoteric. Two more fundamental reforms promised Friday will resonate across the nation and burnish President Xi Jinping‘s credentials as a reformer. The system of re-education through labor, a powerful symbol of political oppression, will be abolished. And the widely hated one-child policy will be loosened, allowing two children for families where one parent is an only child.

Beijing has presented an ambitious written agenda that if implemented would deliver serious changes to a sclerotic system. Now, the test begins for President Xi to turn words into reality.


Nov 15, 2013

First Up on the Reform Plans: Tackling Overcapacity

Tackling China’s problems with industrial overcapacity will likely be a top priority for the new Chinese leadership, which unveiled a portion of its first policy and reform blueprint this week.

Although details of the Communist Party leadership’s reform plans remain sparse (a fuller document is expected in the near future), some of the issues addressed are already starting to trickle out.

In an interview about the plan published Friday in the People’s Daily, the party’s mouthpiece newspaper, a government official responsible for shaping economic policy suggested overcapacity would be a major target of reforms, saying the “core problem” with China’s economy is “excessive allocation of resources” and “unreasonable intervention” by local governments.

Local governments have promoted “blind investment,” which has led to severe overcapacity in sectors such as steel, cement, glass, shipbuilding, wind power and solar energy, said Yang Weimin, deputy director at the Office of the Central Leading Group for Financial and Economic Affairs. That office advises Chinese President Xi Jinping and six other members of the Politburo Standing Committee and operates somewhat like the White House’s National Economic Council.

Beijing has long tried to shutter inefficient manufacturing capacity in its efforts to rise from manufacturing inexpensive goods to making higher-value products, but it has encountered stiff resistance from local governments who rely on these industries to meet local economic growth and employment targets.

In the solar sector, high-profile solar-equipment manufacturers such as Suntech Power Holdings Co.STPFQ +1.43% and LDK Solar Co.LDK +2.03% have found themselvesteetering on the brink of collapse due to a world-wide glut of solar panels—half of which are made in China. However, both companies benefited from 11th-hour rescues by local-government-controlled companies.

In the steel sector, Beijing has sought for more than a decade to curb excess capacity that it views as weighing down the industry’s ability to respond effectively to market changes. The country’s top economic planners estimate that China has about 20% more steel output capacity than it needs. As a result, the central government has halted approvals of new production capacity unless it replaces less efficient capacity or leads to higher-value steel products.

Still, analysts say that steel mills often pretend to shutter unnecessary production only to restart it later, while others have been secretly adding new capacity as local governments—which depend on steelmakers for jobs and revenue—look the other way.

For instance, China’s northwestern Xinjiang region, already home to more than 40 million metric tons of steel production capacity, added almost 20 new blast furnaces in the first half of the year (many of them illegal), according to state media.

Mr. Yang’s comments in the People’s Daily suggest that Beijing recognizes that local governments are the main roadblock to reform and may clamp down harder on industrial overcapacity in the near future.


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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