FACTBOX-Chinese economic, financial reforms in the pipeline
(Reuters) - With the recent ouster of Chinese leadership contender Bo Xilai, some economists fear China's leadership may be entering a period of renewed caution that could delay urgently needed political and economic changes.
Following are details of key reforms in the pipeline in China and their potential barriers. Timeframes below reflect market expectations:
REFORM: Interest-rate liberalization
IMPACT: A phase-out of government control over interest rates would enable market forces to play a greater role in capital allocation, bolstering long-term growth as capital flows to the most dynamic sectors of the economy.
Such reform would also aid the re-balancing of China's economy towards consumption, as higher bank deposit rates would give households more spending power, while higher lending rates would reduce excess investment.
BARRIER: The big state-owned banks profit massively from the guaranteed spread between lending and deposit rates. State industrial firms also benefit from access to cheap capital. These groups are likely to oppose fundamental reform.
China also needs to put in place a deposit insurance system to protect depositors from losses caused by banking failures.
STATUS: Top central bank officials have said the time is ripe for interest rate reform and that the government has a timeline for implementation.
Premier Wen Jiabao recently criticized "monopoly" profits by large banks.
But no concrete measures have been announced, and a rate reform measure originally included in a financial reform pilot project in the eastern city of Wenzhou was stripped out of the plan prior to approval.
TIMEFRAME: Reform is certain to be gradual, but when it will begin is anyone's guess.
REFORM: Open up monopoly sectors to private investment
IMPACT: Allowing private firms to pour money into the railways, banking, energy and healthcare sectors will be a boost for the economy at a time that the government is shunning fresh fiscal stimulus. The potentially lucrative services sectors could help hard-pressed private firms shift from low-end industries.
STATUS: State-owned firms have staged a come-back as they received the bulk of Beijing's massive spending during the 2008/09 global crisis, sparking criticism that "the state advances and the private sector retreats".
The government has launched a fresh bid to open up key sectors dominated by state giants under the so-called New 36-Clauses, following repeated failures since 2005.
The National Development and Reform Commission (NDRC), the country's top planning agency, is drafting detailed rules. But analysts doubt the reform will take off.
Analysts believe China's economic slowdown and growing complaints by private firms over the deteriorating business environment could put more pressures on authorities to jump start the reform.
BARRIER: State industrial giants have long enjoyed favorable positions - reflected by hefty profits even during the economic downturn, and they are reluctant to see more competition.
TIMEFRAME: The NDRC has pledged to publish details of the New 36-Clauses, but how quickly they will be implemented remain questionable given the stiff resistance of state giants.
REFORM: Hukou (residence permit) reform
IMPACT: City dwellers topped 50 percent of the population for the first time last year but Beijing cannot unlock the potential of urbanization unless it reforms the hukou system to turn migration into permanent city settlement.
STATUS: The government has been treading cautiously in overhauling the hukou system with experiments in smaller cities. The system, which dates back to the early days of the People's Republic, prevents people from moving freely to find work, resulting in millions of migrant workers who do not qualify for healthcare, schooling for their children or other necessities.
Some analysts blame the system for persistent labor shortages in coastal provinces, which fuel wage rises.
BARRIER: Chinese leaders fear a sudden influx of peasants into big cities could undermine social stability and create slums that plague other developing countries. The system helps enforce economic policies, such as in the present property tightening measures which stipulate that in Beijing a home buyer can only own one apartment if he does not hold the Beijing hukou, instead of two permitted otherwise.
REFORM: Capital-account opening
IMPACT: Liberalization of China's capital account would allow foreign investors greater opportunity to invest in mainland capital markets and Chinese investors the option to invest overseas. Capital allocation would become more efficient as Chinese financial institutions are forced to compete for funds with overseas counterparts.
Such liberalization would also add to pressure for interest- and exchange-rate reform, as large cross-border capital flows make tight control of these rates difficult to maintain.
STATUS: China's central bank this year released a report outlining a potential roadmap to capital account reform ending with full convertibility of the yuan. But it is unclear if other parts of the government support the plan.
BARRIER: Authorities believe that capital controls protected the Chinese economy from the volatile international capital flows that devastated its Asian neighbors during the 1997-98 Asian financial crisis and again during the 2008-09 global financial crisis.
TIMEFRAME: Gradual reforms over the next 3-8 years.
REFORM: Bond market reform
IMPACT: A more developed bond market - in combination with interest rate reform - would contribute to more efficient capital allocation, ultimately leading to faster, more sustainable economic growth. It would also help to reduce the current concentration of financial risk in the banking system.
The high-yield bond market and the private-placement small- and medium-sized enterprise (SME) that China's securities regulator is planning should widen credit channels for small, private firms now largely shut out of China's state-dominated financial system.
STATUS: China's bond market development is hindered by the fragmentation of the market. Different regulators oversee different types of bonds, which also trade in different markets. However, a recent announcement by the central bank indicated some progress towards greater coordination among regulators.
BARRIER: Bureaucratic turf battles have prevented the unification of China's two main bond markets and the establishment of a single set of regulations governing new issuances.
TIMEFRAME: The high-yield bond market will launch this year, but unification of the regulatory structure appears stalled.
REFORM: Exchange rate reform
IMPACT: China has pledged to make the yuan exchange rate more market-oriented. The market expects the next step to be a widening the yuan's daily trading band against the dollar, currently set at 0.5 percent on either side of the central bank's daily midpoint fixing.
BARRIERS: Some regulators worry that a widening of the trading band may spark speculation on currency appreciation, fanning inflows of speculative cash.
Some elements of the government - notably the Ministry of Commerce - also oppose any reforms that could lead to a stronger yuan.
TIMEFRAME: Widening of the band will likely occur this year, but a free-floating currency will take five years at least, most observers expect.
REFORM: Equity listings by overseas companies
IMPACT: Shanghai's stock exchange is considering launching an "international board" that will allow foreign companies and "red-chip" Chinese companies (those incorporated and listed overseas) to list and give Chinese investors direct access to foreign firms' shares.
BARRIER: This measure is closely linked to capital-account and exchange-rate reform. Regulators are still working out which currency the shares would be denominated in, and currency conversion restrictions would have to be revised to enable foreign companies to transfer capital raised in China for use in other countries.
TIMETABLE: 1-2 years
REFORM: Fiscal reform
IMPACT: A revised tax system would enable local governments to finance their increased social spending obligations - including health care, education, pensions, and low-cost housing - without relying on land sales and fiscal transfers from the central government. A property valuation or transaction tax would also help to reduce over-investment in property.
Allowing local governments to issue bonds directly would also decrease the use of opaque special-purpose vehicles that local governments now use to raise money.
BARRIERS: The central government may be reluctant to cede revenue to local governments.
Property developers and current homeowners oppose new property taxes, which could bring down the value of their assets.
STATUS: Property-tax trials are already underway in Shanghai and Chongqing and may soon expand to Guangzhou and Nanjing.
The cities of Shanghai and Shenzhen and the provinces of Guangdong and Zhejiang became the first local governments to issue local government bonds in late 2011, and the Ministry of Finance expanded the quota for local-government bond issuance for 2012 to 250 billion yuan ($39.6 billion).
TIMEFRAME: This year for expanded property tax trial and local government bonds. Unknown for broader fiscal reform.
REFORM: Financial and commodity derivatives
IMPACT: China is considering launching a slew of new financial derivatives linked to the yuan's exchange rate, foreign currencies, international bonds and Chinese bank interest rates.
Simulated trading of government-bond futures is already underway on the Shanghai-based China Financial Futures Exchange.
Regulators have also said they will gradually open up the country's commodity exchanges to allow foreign investors to trade on its active copper, aluminium and rebar futures.
Plans by various commodity exchanges to launch new products, such as crude oil, silver and carbon, would also depend on regulators' approval.
Plans for crude oil futures on the Shanghai exchange are completed and industry participants say the contract may be the second commodity futures, after gold, to allow foreign investors. The proposal is now awaiting regulators' approval.
BARRIERS: Concern about out-of-control speculation lingers as a government bond futures trading scandal in 1995 is still fresh in the minds of many officials and traders.
Such fears are supported by the fact that China's tightly controlled interest and exchange rates have offered domestic financial institutions little experience managing related risks.
TIMEFRAME: Individual products will be launched gradually.
REFORM: Tweaks to resource pricing, taxes
IMPACT: The National Development and Reform Commission (NDRC) has said it will press on to accelerate reforms to its energy pricing system, which aims to have domestic fuel and gas prices be closer in line with international rates. Such reforms would likely lead to more frequent changes in retail fuel and power prices.
The NDRC said it will "perfect the fuel pricing mechanism" by this year, with media reporting that the Beijing is also studying a trial plan to allow state-owned oil majors to set oil product prices when international crude is set between $40-$130 a barrel.
On power, senior NDRC officials have said as recent as March that Beijing will roll out tiered power pricing for residential customers by the first half of this year to charge higher prices for heavy users.
BARRIERS: Inflationary pressure could prompt authorities to hold off on introducing reforms that would push up prices in the short term.
TIMEFRAME: Some changes are likely as early as the first half.
(Compiled by Gabriel Wildau, Fayen Wong, Lu Jianxin and Kevin Yao; Editing by Jason Subler and Robert Birsel)
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