Tag: news

Submitted by Jim Quinn of The Burning Platform blog,

Reports like the recent one from SNL Financial – Branch Networks Continue to Shrink really get my goat. As I travel the increasingly vacant highways of Montgomery County, PA I’m keenly aware of my surroundings. If I were a foreigner visiting for the first time, I’d think Space Available was the hot new retailer in the country. I’ve detailed the slow disintegration of our suburban sprawl paradise in previous articles:

Available

Are you Seeing What I’m Seeing?

More than 30 Blocks of Grey and Decay

Extend & Pretend Coming to an End

Thousands of Space Available signs dot the bleak landscape, as office buildings, strip malls, and industrial complexes wither and die. Gas stations are shuttered on a daily basis as the ongoing depression results in less miles being driven by unemployed and underemployed suburbanites. At least the Chinese “Space Available” sign manufacturers are doing well. The only buildings doing brisk business are the food banks and homeless shelters.

 

The sad part is that I live in a relatively prosperous county with a low level of SNAP recipients and primarily occupied by a white collar college educated populace. If the clear downward spiral in my upper middle class county is an indication of our country’s path, the less well-off counties across the land must be in deep trouble.

While hundreds of thousands of square feet of retail, restaurant, office and industrial space have been vacated in the last six years, the only entities expanding in my area have been banks, drug stores, municipal buildings and healthcare facilities. I have been flabbergasted by what I’ve viewed as a complete waste of resources to create facilities that weren’t needed and wouldn’t be utilized. I have seven drug stores within five miles of my house. I have ten bank branches within five miles of my house. While two perfectly fine older hospitals in Norristown were abandoned, a brand new $300 million super deluxe, glass encased Einstein Hospital palace was built three miles away by a barely above junk bond status non-profit institution. None of this makes sense in a contracting economy.

This is another classic case of mal-investment spurred by the Federal Reserve easy money policies, zero interest rates, and QEternity. Cheap money leads to bad investments. I’m all for competition between drug store chains and banks. CVS, Walgreens, and Rite Aid are the three big chains in the country. I have my pick of multiple stores close to my house. There are clearly too many stores competing for a dwindling number of customers, with a dwindling supply of disposable income. The only reason Rite Aid is still in the picture is the easy money policies of the Federal Reserve. They have been teetering on the verge of bankruptcy for the last five years, but continue to get cheap financing from the Wall Street cabal, who would rather pretend they will get paid, than write-off the bad debt. Who in their right mind would continue to lend money to a company with $6 billion in debt, NEGATIVE $2.3 billion of equity, and losses exceeding $2 billion since 2008? They are the poster child for badly run businesses that over expanded, took on too much debt and should be liquidated. There are over 4,600 zombie Rite Aid stores littering the countryside waiting to be put out of their misery.

  

Rite Aid will never repay the $6 billion of debt. They know it. Their auditors know it. Their Wall Street lenders know it. The Federal Reserve Bank regulators know it. Anyone with a functioning brain knows it. Tune in to CNBC for those who are paid to keep clueless investors from knowing it. Interest rates that actually reflected risk and weren’t manipulated to an artificially low level by the Federal Reserve would make financing for a dog like Rite Aid a non-starter. Creative destruction would be allowed to work its magic, with winners separated from losers. Instead Rite Aid continues as a zombie entity, barely surviving for now. This exact scenario applies to J.C. Penney, RadioShack, Sears and a myriad of other dead retailers walking. Rather than suffering the consequences of appalling management judgment, dreadful strategic decisions, and reckless financial gambles, they have been allowed to remain on life support compliments of Bernanke, his Wall Street chiefs, and the American taxpayer.

In a truly free, non-manipulated market the weak would be culled, new dynamic competitors would fill the void, and consumers would benefit.  Extending debt payment schedules of zombie entities and pretending you will get paid has been the mantra of the insolvent zombie Wall Street banks since 2009. The Federal Reserve is responsible for zombifying the entire country. And it wasn’t a mistake. It was a choice made by those in power in order to maintain the status quo. The fateful day in March 2009 when the pencil pushing lightweight accountants at the FASB rescinded mark to market accounting rules gave birth to zombie nation. And not coincidently, marked the bottom for the stock market. Wall Street banks were free to fabricate their earnings, pretend they didn’t have hundreds of billions in bad loans on their books, and extend the terms of commercial real estate loans that were in default. With their taxpayer funded TARP ransom, ability to borrow at 0% from Uncle Ben, and the $3 trillion of QE cocaine snorted up their noses in the last four years, the mal-investment, fraud, and idiocy of the Wall Street drug addicts has reached a crescendo.

The mal-investment by zombie drug store chains has only bee
n exceeded by the foolish, egocentric, insane bank branch expansion by the Too Big To Trust Wall Street CEOs. In the last ten years dozens of bank branches have been built in the vicinity of my house and across the state of Pennsylvania. These gleaming glass TARP palaces are on virtually every other street corner across Montgomery County. Stunning, glittery, colorful branches stuffed with bank employees pretending to loan money to non-existent customers. They have become nothing but a high priced marketing billboard with an ATM attached. By 2010, the number of bank branches in this country had reached almost 100,000. The vast majority are run by the usual insolvent suspects:

Wells Fargo – 6,500

J.P. Morgan – 6,000

Bank of America – 5,700

The top ten biggest banks, in addition to holding the vast majority of deposits, mortgages and credit card accounts, operate 33% of all the bank branches in the country. The very same banks that have paid out $66 billion in criminal settlement charges over the last three years and have incurred $103 billion of legal fees to defend themselves against the thousands of actions brought by victims for their criminal misdeeds, decided it was a wise decision to open new bank branches from 2007 through 2010. Only an Ivy League educated MBA could possibly think this was a good idea.

It was almost as if the CEO’s of the biggest Wall Street banks didn’t care about pissing away the $2.5 million to build the average 3,500 square foot bank branch, which would require $30 million of deposits to breakeven. This level of deposits isn’t easy to achieve when your customers are unemployed due to your bank destroying the American economy, broke due to their real household income declining by 10% over the past fourteen years, and your bank paying them .15% on their deposits. It also probably doesn’t help when you charge them $3 every time they withdraw their own money from your bank and you charge them $25 when their bank balance falls below $1,000 because they just got laid off from Merck on Christmas Eve. It is now estimated that one-third of all bank branches in the country lose money. Who can afford to run something that consistently losses money, other than our government? Wall Street bankers can when the taxpayer is footing the bill and Bernanke/Yellen subsidizes their mal-investment by lending to them at 0%, providing them $2.5 billion per day of QE play money, and paying them $5 billion per year in interest to park the excess reserves that aren’t getting leant to small businesses and consumers at their thousands of gleaming bank branches.

Hasn’t one of the thousands of highly educated MBA vice presidents occupying offices at the Too Big To Control Wall Street banks explained to Stumpf, Dimon and Monyihan that bricks and mortar are dead? A new invention called the internet has made in-person banking virtually obsolete. Why does anyone need to go into a bank branch in this electronic age? I’ve been in my credit union branch five times in the last ten years, twice for a refinance closing on my home and a couple times to get a certified check. With ATM machines, direct deposit and on-line bill paying, why would the country need 100,000 physical bank locations? I pay 90% of my bills on-line. If I need cash, I hit the ATM at Wawa, where there are no ATM fees (my credit union doesn’t charge me to get my own money). The only people who go into bank branches on a regular basis are old fogeys that don’t trust that new-fangled internet. The older generations are dying out and the millennial generation has no need for bank branches. Their iGadgets function as their bank connection. Plus, since they don’t have jobs or money, a bank account at the local bank branch of J.P. Morgan seems a bit trite.

The writing had been on the wall for a long time, but the reckless bank executives continued to build branches in an ego driven desire to outdo their equally irresponsible competitor bank executives. Now the race is on to see which banks can close the most branches. Bank consultant Jim Adkins succinctly sums up the pure idiocy of physical bank branches:

“There’s almost nobody in the branches. You could shoot water balloons all over the place and not hit anybody.”

It seems my humble state of Pennsylvania leads the pack in closing branches in the past year, with 149 abandoned and only 43 opened. Only two states in the entire country had more branch openings than closings.

 

After shuttering 2,267 branches in 2012, the industry is on track to closing another 2,500 in 2013. Shockingly, the leader of the Wall Street zombie apocalypse, Bank of America, led the pack in bank branch closings with 194 in the last year. Staying true to his hubristic arrogance, Jamie Dimon actually opened 62 more branches than he closed in the last year, despite his upstanding institution having to pay tens of billions in fines, settlements and pay-offs for their criminal transgressions.

There are now 93,000 bank branches remaining in this country, and one third of them don’t generate a profit. That percentage will grow as the older generations rapidly die out and are replaced by the techno-narcissists who never leave their family rooms.  Online banking already accounts for 53% of banking transactions, compared with 14% for in-branch visits. Younger bank customers increasingly prefer online and mobile banking, as advancing technology enables them to make remote deposits, shop for loans and manage accounts more efficiently from their desktops or smartphones. This trend will only accelerate in the years to come.

Banking industry profits reached a record level of $141 billion in 2012 as more vacancy signs appeared on Main Street. Now that the Wall Street cabal have syphoned every ounce of blood from their customers/victims through ATM fees, overdraft fees, minimum balance fees, credit card fees, late payment fees, and paying no interest on deposits, they are forced to focus on the $300,000 average loss per bank branch. QE and ZIRP might not last forever. Yeah right. AlixPartners, a New York consulting firm, expects the number of bank branches to drop to 80,000 over the next decade. They are wrong. They have failed to take into account the lemming like behavior of Wall Street banks. As their accounting gimmicks to generate fake profits dissipate, the increasingly desperate insolvent zombie banks will rapidly vacate their prime corner locations in droves. With approximately 30,000 locations already generating losses, the Wall Street MBAs will be closing branches quicker than you can say “mortga
ge fraud”. There will be less than 70,000 branches within the next five years. That means another 20,000 to 30,000 Space Available signs going up on Main Street. That means another 200,000 to 300,000 neighbors without jobs. But don’t worry about Jamie Dimon and the rest of the Wall Street bankers. They’ll be just fine. In addition to being endlessly fed by the Fed, they’ll get creative and charge their customers a new bank branch access fee of $50 for the privilege of entering one of their few remaining outlets. By now we should know how cash flows to Main Street in this corporate fascist paradise.

Do your part to starve the beast. Move your bank accounts to a local credit union. Don’t support criminals.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/bgqkW-nXWxs/story01.htm Tyler Durden

China’s Third Plenum has come and now truly gone, following the second, 20000 word “decision” which followed the spares initial communique, which contains much more promises and pledges about the future with a 2020 event horizon, so it is a fair bet that nothing of what was resolved will be implemented in a world that will be a vastly different from the one today, but one has to digest current news regardless. So for the sake of those who analyze such things as promises out of a centrally-planned communist nation, here are three takes on the third plenum, courtesy of SocGen, Bank of America and Goldman Sachs.

From SocGen:

The complete reform decision from the 3rd Plenum of the 18th Central Committee of China’s Communist Party was made public three days after the meeting concluded, which was four days earlier than the last Plenum. Although the communiqué released right away was vague, the decision set new courses and proposed fairly specific changes for a number of big reform areas. The following are a number of points on economic reform that are encouragingly concrete.

• State-owned enterprises (SOEs) will pay 30% of their dividend to the Social Security Fund by 2020, up from 10-20% at the moment. This ratio may not impress everyone, but it is laudable that the leaders are willing to set this target explicitly.
• All investors will be allowed to enter any industry other than those on the “negative list”, which is the new mechanism being tested in the Shanghai free trade zone (FTZ). The eventual nation-wide adoption aimed by policymakers is probably the reason why the first experiment started off cautiously. The decision does also highlight the significance of the Shanghai FTZ, which in our view will lead the path of China’s service sector liberalisation.
• The list of factor prices to be liberalised is specified and extended to include transportation and telecommunication, besides water, oil, natural gas and electricity.
• Rural land for non-agriculture uses that is collectively owned by farmers will be allowed to enter the land market at same prices and with same rights as state-owned land. The language is boldly specific. This revolutionary change would undermine local governments’ monopoly over land markets and boost farmers’ income, thus providing them with the start-up capital to settle in the city.
• Private investors can set up banks. Again, this is an example of being encouragingly specific. Other languages on financial market liberalisation – interest rates, the yuan and the capital account – are mostly the same as stated before. However, this segment of reform has been most clearly laid out planned so far, which actually does not need further clarification from the Plenum.
• Appraisal of local governments’ performance will focus more on aspects other than GDP, such as pollution, excess capacity and debt.
• Fiscal spending will decouple from fiscal revenue or GDP, and fiscal deficit will be assessed over economic cycles.

In addition, the one-child policy will be relaxed. This is a very positive signal that the new leadership is actually walking the reform walk.

The Plenum did not provide any time frame other than “achieving major breakthroughs in all major reform areas by 2020”. It will still be unrealistic to expect everything to happen in 2014, but this is definitely a good start.

 

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From Bank of America:

The dust has not settled yet

We believe markets were disappointed by the brief communique of 3rd Plenum of the 18th CPC (Communist Party of China) Central Committee released on 12 Nov, but then were greatly rejuvenated by the more detailed 20000-character “Decision” released three days later. The communique could be considered dull, crammed with clichés calling on strengthening the party ruling and upholding state-owned sector’s control of the Chinese economy. The “Decision”, however, uses more plain langue to convey forceful messages on pushing for reforms including ending the labor camp, easing the one-child policy and vertically integrating the judiciary system.

It’s a great plenum, but it may not be a watershed

We believe the current leadership did a great job in delivering such a comprehensive collection of reform plans. Given all the social, economic and political constraints, this “Decision” is perhaps the best reform package we can get at the moment if we take into account the fact that these new leaders only took office in just one year. In this regard, Chinese new leaders’ efforts, strength and political skills should be highly praised and appreciated, in our view. However, some of the messages in the “Decision” may conflict with each other, some reform goals are still too vague, some reforms might be just intermediate steps towards a truly appropriate system for China, and some reforms might not be effectively carried out. It’s great to see many reform ideas passed in this party plenum, but dust has not settled yet. In our view, regarding historical importance, this 3rd Plenum could be ahead of many other plenums (including some 3rd plenums) post the Cultural Revolution, but might still be behind the 3rd Plenum of the 11th CPC Central Committee in 1978 and the 3rd Plenum of the 14th Central Committee in 1993.

Many breakthroughs, but not a big surprise

Some people called the “Decision” a big surprise; we disagree. Most of those reforms included in the “Decision” were well expected by us (see our preview of the 3rd Plenum here, especially the table on page 6) and have been circulated in various media for a while. That being said, the long list of reforms in the “Decision”, though well discussed by scholars and covered in media, could arouse enthusiasm among people who have been craving for reforms for many years but were disappointed time and again. On market impact, we expect markets will remain bullish for a few more days, but that the enthusiasm will taper rather quickly as people refocus on the difficulty in implementing these reforms and the limitation of the reform proposals of the “Decision”.

A brief summary of reforms delivered by the 3rd Plenum

In our view, the new party leadership under Mr. Xi Jinping did three things:

Picking the low-hanging fruits to boost confidence, centralizing control of the state by taking away power from local governments and ministries to flex their muscles, and upholding the role of markets to achieve efficiency and fairness.

• Picking the low-hanging fruits includes nationalizing basic pension and ending the much disliked one-child policy and labor camp.
• Centralization includes setting up the new State Security Committee (SSC) and the team for comprehensively deepening reform, vertically integrating courts, procuratorate and party disciplinary units, pushing forward the reform of letting counties report to provinces directly by cutting the prefectural level governments, and integrating the Food and Drug Administration.

  Upholding the role of markets includes raising the role of market from “foundational” to “determining”, promising to protect private property rights, giving farmers’ better rights in trading their non-farming lands, further cutting procedures for examination and approval, shifting to a registration-based stock issuance system and allowing doctors to practice outside hospitals (in their own clinics).

The limit of centralization

A more centralized control under Mr. Xi’s standing committee could help deliver some economic and social reforms. However, there is no free lunch. Political centralization could be the best choice at the moment given all the social and political
constraints, but trusting political centralization is once-and-for-all solution disciplining government officials (or “putting power in a cage” in the CPC leadership’s own words) and fostering fair competition may be naïve. For such a vast country with 1.3bn population and huge regional diversities, the benefits of centralization could be uncertain in some aspects.

• A vertically integrated system would still be bothered by information asymmetry between different layers. So even if upper level officials are clean and honest, it would still be hard for them to guarantee their juniors are equally honest.
• We believe China’s current top leaders are good and reform-minded, but centralizing power to a small team at the central level will naturally bring about the issue of power handover: what if those successors are less reform minded and less honest?
• Emphasizing vertical integration and top-down disciplinary measures could lead to a lack of bottom up check and balance by the people and media. And centralization might be indirectly dependent on the state owned sector.

Those low-hanging fruits

Picking the low-hanging fruits includes nationalizing basic pension and ending the much disliked one-child policy and labor camp. For some reasons including the global financial crisis which consumed too much time of the previous government, a number of relatively easy reforms were left to the new leaders.

Ending the one-child policy

Since November 2012 we have been predicting that the Chinese government would significantly ease its one-child policy at end-2013 or early 2014, and we updated the call in early August that China may significantly relax its outdated one-child policy soon by allowing families to have two kids if at least one parent is a singleton. In the past few months, predicting the end of the one-child-policy has been increasingly become a consensus call and many investors have already taken positions on that. However, investors were quite disappointed last week as the communique of China’s ruling Communist Party’s 3rd Plenum did not mention anything related to population policy or family planning, not to mention an outright on ending the one-child policy. But as expected, the “Decision” released on 15 Nov pretty put an end to the  one-child policy by allowing families to have two kids if at least one parent is a singleton.

The impact: Around 9.5mn incremental babies

If the Chinese government really carries out the reform of the one-child policy soon by allowing families to have two kids if at least one parent is a singleton, what’s the impact? People might be still disappointed that the government does not permit all families to have two children without any restrictions. But we think the difference is quite small. This is because the one-child policy now is only strictly enforced in urban areas and some developed rural areas where most couples at their child-bearing age have at least one singleton (note China’s one-child policy started from late 1970s).

According to the 2005 population survey, singletons account for 29.3% of Chinese aged 30 or under (the generation affected by the one-child policy). The ratio should be significantly higher in urban areas. Assuming 60% of the people of child-bearing age in urban areas are singletons, on top of the 36% families which are already allowed to have two children, 48% urban families at child-bearing age can benefit from the coming reform. Using census data, there are 79mn women of child-bearing age (23 to 42) this year. 48% of 79mn is 38mn. Assuming 25% of them choose to have a second child, about 9.5mn babies could be born as a result of this reform to one-child policy.

Replacing Re-education through labor (Laojiao)

As part of China’s penal and correction system, Laojiao is used to detain persons for minor crimes without any court trial. Due to the lack of court orders and transparency, the Laojiao system could be misused by local officials and has become a source of disaffection among the people. China’s top policymakers mentioned in the beginning of 2013 that they will reform the Laojiao system in the next couple of years. We expect that this point could be briefly mentioned again at the 3rd Plenum, though it might be much more uncertain regarding the timeline for replacing Laojiao with a more transparent correction system for petty crimes.

Social security tax and social security system reform

China’s central government merely set guidelines on the nation’s social security system. Most of the current social security schemes are managed at the local level. In practice, it makes it difficult for people to transfer their contribution to the security schemes from one province to another when they relocate. By contrast, in the US and many other large countries, pension systems are managed at the national level while medical insurance systems are administered by both central and local governments. Besides, the current pension system in China is designed in 1997 as the hybrid of a defined benefit (or pay-as-you-go) system and a fullyfunded individual account  system. However, the system has not functioned smoothly. Individual accounts broadly became “empty” as the administration used the individual account contributions to help pay the pensions of current retirees, with large-scale SOE restructuring in 1998 forcing many workers out of jobs and to start receiving immediate pensions at relatively young ages.

Given China’s aging population and mounting concerns over the current pension and medical insurance system, the social security system reform could become one of the focuses in the coming 3rd Plenum, in our view. The reform should centralize the administration of the social security system to facilitate labor mobility and urbanization. The current pension system should also be restructured to better prepare for the aging population, provide more incentives for individual contributions, and ensure the fairness and sustainability of the insurance system.

A more centralized party ruling

Many Chinese people recognize the key risk the country faces is the development gap between the existing rigid legal/government system and the newly economically empowered middle class which, increasingly equipped with access to internet, mobile phones and social media, has been seeking for more accountability on part of the government. We know very well that reform in this regard faces the biggest barriers and few achievements will likely be made in the near to medium term. Still, we expect some progress could be made in the legal areas as top leaders in Beijing try to rein in corruptions and take lessons from the misbehaviors of the former Chongqing CPC chief Mr. Bo Xilai who had an unchecked control of everything in Chongqing including local judiciary, prosecution and police. On the other hand, local protectionism significantly weakened some government functions, such as examining safety of food and drug and protecting IP rights. A weak central government also prevented the previous leadership from carrying out some reforms which were supported by a majority of people and should be faced with little resistance.

Centralization includes setting up the new SSC and the team for comprehensively deepening reform, vertically integrating courts, procuratorate and party disciplinary units, pushing forward the reform of letting counties report to provinces directly by cutting the prefectural level governments, and integrating the Food and Drug Administration.

A new team for deepening reform and a new SSC

According to the communique and the “Decision”, the CPC central committee will set up a team responsible for comprehensively deepening reforms and vows to reach decisive achievement in reforming important sectors by 2020. It’s still uncertain whether President Xi Jinping or Premier Li Keqiang will lea
d the team, but Han Zheng, the current party chief of Shanghai, will most likely be the first deputy director of the team.

The 3rd Plenum also decided to establish “State Security Committee”, which should be the counterparty of the White House National Security Council (NSC) in the US. Similar to the NSC, China’s SSC will most likely be chaired by Xi Jinping, CPC chief and President of China. Key members will likely include Premier Li Keqiang, the chairman of the CPC Central Military Committee, the Minister of Foreign Affairs, the Minister of State Security, the Minister of Public Security and a bunch of other senior officials related to foreign affairs.

Legal reforms towards a more centralized judiciary

The hierarchy of China’s court system dovetails with the administration. In line with national, provincial, prefectural and county governments, there are sittings of the “Supreme People’s Court” in Beijing, “high people’s courts” in provincial capitals, autonomous regions, and special municipalities, “intermediate people’s courts” at the level of prefectures, and “basic people’s courts” at the level of counties and municipal districts. The shortcoming of this system is that, since local CPC chiefs have absolute control of personnel and funding for the regions’ courts (in additional to policing and prosecution), local CPC chiefs’ power cannot be effectively checked and balanced. This absolute power in turn easily leads to corruption and collusion by senior officials. Under this system, justice could be sacrificed, and people’s disaffection could be accumulated.

 

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From Goldman:

The Third Plenum set out an ambitious agenda.

The full report of the Third Plenum of the 18th Party Congress was released late Friday. In contrast to the high-level summary released earlier (see China: The Third  Plenum sets the tone for continued market reforms, emphasizing fiscal and rural reforms, and a more open economy, November 11, 2013), the full report is much  more substantive and unveils a bold economic reform agenda. The broad agenda encompasses price liberalization measures (energy and resources, and financial market), opening up the market to private and foreign competition, SOE reforms, fiscal reforms, and improving urbanization process through land and hukou reforms. We believe these measures point to a stronger focus on market discipline and medium-term sustainability by the new leadership. .

A number of key messages can be distilled from the report:

1. Pro-market stance: development of the market mechanisms, more opening up of the markets to competition, curbing the power of SOEs (although the state is to remain dominant) and government interventions, and continued financial reforms.

2. Social Fairness: greater focus on farmers’ property/land rights and even access to public services by rural and urban residents, public policies to protect vulnerable
groups.

3. Growth sustainability: significant emphasis on fiscal reforms to increase transparency and re-align central and local spending responsibilities; calls for mechanisms to monitor and manage debt and financial risks, and emphasis on environmental protection.

4. Top-down decision making: centralized strategy to be led by a reform committee at the top. The principle of “top-level design” of reforms was emphasized, to complement the decentralized “touch the stone to cross the river” model that encourages experiments but often leaves the direction of changes unclear.

The current reform agenda bears some similarity in its scope and depth as the landmark economic plan 20 years ago, when the market was just beginning to open up amid initial reforms. There are similar focuses on difficult areas this time: the scope of the market, SOE, and fiscal reforms. Again, the opening up to international markets is used as an important impetus to push forward domestic reforms (Exhibit 1).

Key reforms and interpretation

The reform agenda is broad. The commitment to market/SOE/rural reforms is stronger than our earlier expectation, that to fiscal reforms somewhat softer, and financial reforms generally in line (see Asia Economics Analyst: 13/37 – What to expect out of China’s 3rd plenary session in November, October 10, 2013). There are also a number of new emphases including in particular changes to the population policy and environmental protection.

As discussed earlier, these reform measures could improve China’s medium-term development path from three key dimensions: reducing supply-side growth bottlenecks, aiding domestic rebalancing, and institutional changes to ensure fiscal, financial and resource sustainability. The reforms from the Third Plenum report and their links to growth are mapped out in Exhibit 2 (we leave out population policy given the limited growth impact, in our view).

The Third Plenum’s emphasis on the role of market mechanisms and competition is stronger than earlier expected. The market is to play a “decisive” role in allocating resources. Price liberalization covers a broad set of sectors including utility, water, transportation, and communication. The government can set the price only for  public goods, but should refrain from allocating resources directly. Government procurement of social services will also be broadened. More scope for private sector development through price deregulation and equal market access outside of a negative list (unspecified) is called for, and share cross-shareholding between public and private enterprises is emphasized. Despite the firm language that the state sector will remain dominant, there is also a call for better SOE management through corporate governance, transparency, and higher dividend payout ratio to the budget. The emphasis on market principle and fair competition was greater than we had expected.

Rural reforms emphasize an acceleration of land related and hukou reforms. Instead of targeted agricultural support, the current framework incorporates rural reforms in the national urbanization process, emphasizing the fairness aspect of rural and urban residents (property rights, access to public services). The decision attributes the same land rights in rural areas as in urban ones, which is a significant step forward from the previous dual-structure system for the urban and rural lands. In addition, it requires the establishment of a unified market of the urban-rural construction land, and calls for setting up intermediaries for rural construction land transactions (somewhat sooner than we expected). Land policy reforms aim to prevent wasteful use of land, and reduce local government’s monopsony in rural land acquisition. Hukou reform also received strong endorsement, as we expected.

Fiscal system to improve but the wording is somewhat softer than expected. Emphasis on transparency, shifting of some local spending responsibility to central is in line with our expectation. The budget will focus on the structure of spending rather than on the yearly target, and a multi-year fiscal system is to be established. The process to realign central and local is likely to take more negotiation however (indicated in the document as a “gradual process), somewhat softer than we expected. Municipal bonds will be
introduced to support the urbanization related projects. Property tax related legislation will accelerate, though there is no firm commitment of the timing.

Financial/external reforms in line with expectation. No major surprises on the  opening up to international markets and financial reforms with the expected pledge that financial /interest rate/exchange rate/capital account reform/FTZ will continue. Although the absence of details on financial reforms may be disappointing at first sight, however, given the steady progress of financial reforms, this is also a less controversial area and perhaps does not require explicit further endorsement to proceed.

Environmental protection/population policy: surprise areas. A comprehensive property right registration system over natural resources will be established, and local officials will be evaluated with environmental protection benchmarks. There is also explicit loosening of the existing one-child policy framework, which we believe has possible implication for the urban population to the tune of several million additional newborns each year.

* * *

Implementation of such sweeping changes is the key. One uncertainty is how reforms towards decentralization and a market-oriented system will be carried out in a centralized policy and political environment, and how the risks during the process of liberalization will be monitored and managed. There are also remaining questions on the role of State Capital Investment companies, the pace of property tax introduction, and the strategy to rein in local government debt and reduce moral hazard. On the other hand, the newly set up reform committee could raise market expectations for reform carry-through. Early indications of the reform steps could be given at the Central Economic Working Conference in early December

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/8EwqjCil8oA/story01.htm Tyler Durden

China’s Third Plenum has come and now truly gone, following the second, 20000 word “decision” which followed the spares initial communique, which contains much more promises and pledges about the future with a 2020 event horizon, so it is a fair bet that nothing of what was resolved will be implemented in a world that will be a vastly different from the one today, but one has to digest current news regardless. So for the sake of those who analyze such things as promises out of a centrally-planned communist nation, here are three takes on the third plenum, courtesy of SocGen, Bank of America and Goldman Sachs.

From SocGen:

The complete reform decision from the 3rd Plenum of the 18th Central Committee of China’s Communist Party was made public three days after the meeting concluded, which was four days earlier than the last Plenum. Although the communiqué released right away was vague, the decision set new courses and proposed fairly specific changes for a number of big reform areas. The following are a number of points on economic reform that are encouragingly concrete.

• State-owned enterprises (SOEs) will pay 30% of their dividend to the Social Security Fund by 2020, up from 10-20% at the moment. This ratio may not impress everyone, but it is laudable that the leaders are willing to set this target explicitly.
• All investors will be allowed to enter any industry other than those on the “negative list”, which is the new mechanism being tested in the Shanghai free trade zone (FTZ). The eventual nation-wide adoption aimed by policymakers is probably the reason why the first experiment started off cautiously. The decision does also highlight the significance of the Shanghai FTZ, which in our view will lead the path of China’s service sector liberalisation.
• The list of factor prices to be liberalised is specified and extended to include transportation and telecommunication, besides water, oil, natural gas and electricity.
• Rural land for non-agriculture uses that is collectively owned by farmers will be allowed to enter the land market at same prices and with same rights as state-owned land. The language is boldly specific. This revolutionary change would undermine local governments’ monopoly over land markets and boost farmers’ income, thus providing them with the start-up capital to settle in the city.
• Private investors can set up banks. Again, this is an example of being encouragingly specific. Other languages on financial market liberalisation – interest rates, the yuan and the capital account – are mostly the same as stated before. However, this segment of reform has been most clearly laid out planned so far, which actually does not need further clarification from the Plenum.
• Appraisal of local governments’ performance will focus more on aspects other than GDP, such as pollution, excess capacity and debt.
• Fiscal spending will decouple from fiscal revenue or GDP, and fiscal deficit will be assessed over economic cycles.

In addition, the one-child policy will be relaxed. This is a very positive signal that the new leadership is actually walking the reform walk.

The Plenum did not provide any time frame other than “achieving major breakthroughs in all major reform areas by 2020”. It will still be unrealistic to expect everything to happen in 2014, but this is definitely a good start.

 

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From Bank of America:

The dust has not settled yet

We believe markets were disappointed by the brief communique of 3rd Plenum of the 18th CPC (Communist Party of China) Central Committee released on 12 Nov, but then were greatly rejuvenated by the more detailed 20000-character “Decision” released three days later. The communique could be considered dull, crammed with clichés calling on strengthening the party ruling and upholding state-owned sector’s control of the Chinese economy. The “Decision”, however, uses more plain langue to convey forceful messages on pushing for reforms including ending the labor camp, easing the one-child policy and vertically integrating the judiciary system.

It’s a great plenum, but it may not be a watershed

We believe the current leadership did a great job in delivering such a comprehensive collection of reform plans. Given all the social, economic and political constraints, this “Decision” is perhaps the best reform package we can get at the moment if we take into account the fact that these new leaders only took office in just one year. In this regard, Chinese new leaders’ efforts, strength and political skills should be highly praised and appreciated, in our view. However, some of the messages in the “Decision” may conflict with each other, some reform goals are still too vague, some reforms might be just intermediate steps towards a truly appropriate system for China, and some reforms might not be effectively carried out. It’s great to see many reform ideas passed in this party plenum, but dust has not settled yet. In our view, regarding historical importance, this 3rd Plenum could be ahead of many other plenums (including some 3rd plenums) post the Cultural Revolution, but might still be behind the 3rd Plenum of the 11th CPC Central Committee in 1978 and the 3rd Plenum of the 14th Central Committee in 1993.

Many breakthroughs, but not a big surprise

Some people called the “Decision” a big surprise; we disagree. Most of those reforms included in the “Decision” were well expected by us (see our preview of the 3rd Plenum here, especially the table on page 6) and have been circulated in various media for a while. That being said, the long list of reforms in the “Decision”, though well discussed by scholars and covered in media, could arouse enthusiasm among people who have been craving for reforms for many years but were disappointed time and again. On market impact, we expect markets will remain bullish for a few more days, but that the enthusiasm will taper rather quickly as people refocus on the difficulty in implementing these reforms and the limitation of the reform proposals of the “Decision”.

A brief summary of reforms delivered by the 3rd Plenum

In our view, the new party leadership under Mr. Xi Jinping did three things:

Picking the low-hanging fruits to boost confidence, centralizing control of the state by taking away power from local governments and ministries to flex their muscles, and upholding the role of markets to achieve efficiency and fairness.

• Picking the low-hanging fruits includes nationalizing basic pension and ending the much disliked one-child policy and labor camp.
• Centralization includes setting up the new State Security Committee (SSC) and the team for comprehensively deepening reform, vertically integrating courts, procuratorate and party disciplinary units, pushing forward the reform of letting counties report to provinces directly by cutting the prefectural level governments, and integrating the Food and Drug Administration.

  Upholding the role of markets includes raising the role of market from “foundational” to “determining”, promising to protect private property rights, giving farmers’ better rights in trading their non-farming lands, further cutting procedures for examination and approval, shifting to a registration-based stock issuance system and allowing doctors to practice outside hospitals (in their own clinics).

The limit of centralization

A more centralized control under Mr. Xi’s standing committee could help deliver some economic and social reforms. However, there is no free lunch. Political centralization could be the best choice at the moment given all the social and political constraints, but trusting political centralization is once-and-for-all solution disciplining government officials (or “putting power in a cage” in the CPC leadership’s own words) and fostering fair competition may be naïve. For such a vast country with 1.3bn population and huge regional diversities, the benefits of centralization could be uncertain in some aspects.

• A vertically integrated system would still be bothered by information asymmetry between different layers. So even if upper level officials are clean and honest, it would still be hard for them to guarantee their juniors are equally honest.
• We believe China’s current top leaders are good and reform-minded, but centralizing power to a small team at the central level will naturally bring about the issue of power handover: what if those successors are less reform minded and less honest?
• Emphasizing vertical integration and top-down disciplinary measures could lead to a lack of bottom up check and balance by the people and media. And centralization might be indirectly dependent on the state owned sector.

Those low-hanging fruits

Picking the low-hanging fruits includes nationalizing basic pension and ending the much disliked one-child policy and labor camp. For some reasons including the global financial crisis which consumed too much time of the previous government, a number of relatively easy reforms were left to the new leaders.

Ending the one-child policy

Since November 2012 we have been predicting that the Chinese government would significantly ease its one-child policy at end-2013 or early 2014, and we updated the call in early August that China may significantly relax its outdated one-child policy soon by allowing families to have two kids if at least one parent is a singleton. In the past few months, predicting the end of the one-child-policy has been increasingly become a consensus call and many investors have already taken positions on that. However, investors were quite disappointed last week as the communique of China’s ruling Communist Party’s 3rd Plenum did not mention anything related to population policy or family planning, not to mention an outright on ending the one-child policy. But as expected, the “Decision” released on 15 Nov pretty put an end to the  one-child policy by allowing families to have two kids if at least one parent is a singleton.

The impact: Around 9.5mn incremental babies

If the Chinese government really carries out the reform of the one-child policy soon by allowing families to have two kids if at least one parent is a singleton, what’s the impact? People might be still disappointed that the government does not permit all families to have two children without any restrictions. But we think the difference is quite small. This is because the one-child policy now is only strictly enforced in urban areas and some developed rural areas where most couples at their child-bearing age have at least one singleton (note China’s one-child policy started from late 1970s).

According to the 2005 population survey, singletons account for 29.3% of Chinese aged 30 or under (the generation affected by the one-child policy). The ratio should be significantly higher in urban areas. Assuming 60% of the people of child-bearing age in urban areas are singletons, on top of the 36% families which are already allowed to have two children, 48% urban families at child-bearing age can benefit from the coming reform. Using census data, there are 79mn women of child-bearing age (23 to 42) this year. 48% of 79mn is 38mn. Assuming 25% of them choose to have a second child, about 9.5mn babies could be born as a result of this reform to one-child policy.

Replacing Re-education through labor (Laojiao)

As part of China’s penal and correction system, Laojiao is used to detain persons for minor crimes without any court trial. Due to the lack of court orders and transparency, the Laojiao system could be misused by local officials and has become a source of disaffection among the people. China’s top policymakers mentioned in the beginning of 2013 that they will reform the Laojiao system in the next couple of years. We expect that this point could be briefly mentioned again at the 3rd Plenum, though it might be much more uncertain regarding the timeline for replacing Laojiao with a more transparent correction system for petty crimes.

Social security tax and social security system reform

China’s central government merely set guidelines on the nation’s social security system. Most of the current social security schemes are managed at the local level. In practice, it makes it difficult for people to transfer their contribution to the security schemes from one province to another when they relocate. By contrast, in the US and many other large countries, pension systems are managed at the national level while medical insurance systems are administered by both central and local governments. Besides, the current pension system in China is designed in 1997 as the hybrid of a defined benefit (or pay-as-you-go) system and a fullyfunded individual account  system. However, the system has not functioned smoothly. Individual accounts broadly became “empty” as the administration used the individual account contributions to help pay the pensions of current retirees, with large-scale SOE restructuring in 1998 forcing many workers out of jobs and to start receiving immediate pensions at relatively young ages.

Given China’s aging population and mounting concerns over the current pension and medical insurance system, the social security system reform could become one of the focuses in the coming 3rd Plenum, in our view. The reform should centralize the administration of the social security system to facilitate labor mobility and urbanization. The current pension system should also be restructured to better prepare for the aging population, provide more incentives for individual contributions, and ensure the fairness and sustainability of the insurance system.

A more centralized party ruling

Many Chinese people recognize the key risk the country faces is the development gap between the existing rigid legal/government system and the newly economically empowered middle class which, increasingly equipped with access to internet, mobile phones and social media, has been seeking for more accountability on part of the government. We know very well that reform in this regard faces the biggest barriers and few achievements will likely be made in the near to medium term. Still, we expect some progress could be made in the legal areas as top leaders in Beijing try to rein in corruptions and take lessons from the misbehaviors of the former Chongqing CPC chief Mr. Bo Xilai who had an unchecked control of everything in Chongqing including local judiciary, prosecution and police. On the other hand, local protectionism significantly weakened some government functions, such as examining safety of food and drug and protecting IP rights. A weak central government also prevented the previous leadership from carrying out some reforms which were supported by a majority of people and should be faced with little resistance.

Centralization includes setting up the new SSC and the team for comprehensively deepening reform, vertically integrating courts, procuratorate and party disciplinary units, pushing forward the reform of letting counties report to provinces directly by cutting the prefectural level governments, and integrating the Food and Drug Administration.

A new team for deepening reform and a new SSC

According to the communique and the “Decision”, the CPC central committee will set up a team responsible for comprehensively deepening reforms and vows to reach decisive achievement in reforming important sectors by 2020. It’s still uncertain whether President Xi Jinping or Premier Li Keqiang will lead the team, but Han Zheng, the current party chief of Shanghai, will most likely be the first deputy director of the team.

The 3rd Plenum also decided to establish “State Security Committee”, which should be the counterparty of the White House National Security Council (NSC) in the US. Similar to the NSC, China’s SSC will most likely be chaired by Xi Jinping, CPC chief and President of China. Key members will likely include Premier Li Keqiang, the chairman of the CPC Central Military Committee, the Minister of Foreign Affairs, the Minister of State Security, the Minister of Public Security and a bunch of other senior officials related to foreign affairs.

Legal reforms towards a more centralized judiciary

The hierarchy of China’s court system dovetails with the administration. In line with national, provincial, prefectural and county governments, there are sittings of the “Supreme People’s Court” in Beijing, “high people’s courts” in provincial capitals, autonomous regions, and special municipalities, “intermediate people’s courts” at the level of prefectures, and “basic people’s courts” at the level of counties and municipal districts. The shortcoming of this system is that, since local CPC chiefs have absolute control of personnel and funding for the regions’ courts (in additional to policing and prosecution), local CPC chiefs’ power cannot be effectively checked and balanced. This absolute power in turn easily leads to corruption and collusion by senior officials. Under this system, justice could be sacrificed, and people’s disaffection could be accumulated.

 

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From Goldman:

The Third Plenum set out an ambitious agenda.

The full report of the Third Plenum of the 18th Party Congress was released late Friday. In contrast to the high-level summary released earlier (see China: The Third  Plenum sets the tone for continued market reforms, emphasizing fiscal and rural reforms, and a more open economy, November 11, 2013), the full report is much  more substantive and unveils a bold economic reform agenda. The broad agenda encompasses price liberalization measures (energy and resources, and financial market), opening up the market to private and foreign competition, SOE reforms, fiscal reforms, and improving urbanization process through land and hukou reforms. We believe these measures point to a stronger focus on market discipline and medium-term sustainability by the new leadership. .

A number of key messages can be distilled from the report:

1. Pro-market stance: development of the market mechanisms, more opening up of the markets to competition, curbing the power of SOEs (although the state is to remain dominant) and government interventions, and continued financial reforms.

2. Social Fairness: greater focus on farmers’ property/land rights and even access to public services by rural and urban residents, public policies to protect vulnerable
groups.

3. Growth sustainability: significant emphasis on fiscal reforms to increase transparency and re-align central and local spending responsibilities; calls for mechanisms to monitor and manage debt and financial risks, and emphasis on environmental protection.

4. Top-down decision making: centralized strategy to be led by a reform committee at the top. The principle of “top-level design” of reforms was emphasized, to complement the decentralized “touch the stone to cross the river” model that encourages experiments but often leaves the direction of changes unclear.

The current reform agenda bears some similarity in its scope and depth as the landmark economic plan 20 years ago, when the market was just beginning to open up amid initial reforms. There are similar focuses on difficult areas this time: the scope of the market, SOE, and fiscal reforms. Again, the opening up to international markets is used as an important impetus to push forward domestic reforms (Exhibit 1).

Key reforms and interpretation

The reform agenda is broad. The commitment to market/SOE/rural reforms is stronger than our earlier expectation, that to fiscal reforms somewhat softer, and financial reforms generally in line (see Asia Economics Analyst: 13/37 – What to expect out of China’s 3rd plenary session in November, October 10, 2013). There are also a number of new emphases including in particular changes to the population policy and environmental protection.

As discussed earlier, these reform measures could improve China’s medium-term development path from three key dimensions: reducing supply-side growth bottlenecks, aiding domestic rebalancing, and institutional changes to ensure fiscal, financial and resource sustainability. The reforms from the Third Plenum report and their links to growth are mapped out in Exhibit 2 (we leave out population policy given the limited growth impact, in our view).

The Third Plenum’s emphasis on the role of market mechanisms and competition is stronger than earlier expected. The market is to play a “decisive” role in allocating resources. Price liberalization covers a broad set of sectors including utility, water, transportation, and communication. The government can set the price only for  public goods, but should refrain from allocating resources directly. Government procurement of social services will also be broadened. More scope for private sector development through price deregulation and equal market access outside of a negative list (unspecified) is called for, and share cross-shareholding between public and private enterprises is emphasized. Despite the firm language that the state sector will remain dominant, there is also a call for better SOE management through corporate governance, transparency, and higher dividend payout ratio to the budget. The emphasis on market principle and fair competition was greater than we had expected.

Rural reforms emphasize an acceleration of land related and hukou reforms. Instead of targeted agricultural support, the current framework incorporates rural reforms in the national urbanization process, emphasizing the fairness aspect of rural and urban residents (property rights, access to public services). The decision attributes the same land rights in rural areas as in urban ones, which is a significant step forward from the previous dual-structure system for the urban and rural lands. In addition, it requires the establishment of a unified market of the urban-rural construction land, and calls for setting up intermediaries for rural construction land transactions (somewhat sooner than we expected). Land policy reforms aim to prevent wasteful use of land, and reduce local government’s monopsony in rural land acquisition. Hukou reform also received strong endorsement, as we expected.

Fiscal system to improve but the wording is somewhat softer than expected. Emphasis on transparency, shifting of some local spending responsibility to central is in line with our expectation. The budget will focus on the structure of spending rather than on the yearly target, and a multi-year fiscal system is to be established. The process to realign central and local is likely to take more negotiation however (indicated in the document as a “gradual process), somewhat softer than we expected. Municipal bonds will be introduced to support the urbanization related projects. Property tax related legislation will accelerate, though there is no firm commitment of the timing.

Financial/external reforms in line with expectation. No major surprises on the  opening up to international markets and financial reforms with the expected pledge that financial /interest rate/exchange rate/capital account reform/FTZ will continue. Although the absence of details on financial reforms may be disappointing at first sight, however, given the steady progress of financial reforms, this is also a less controversial area and perhaps does not require explicit further endorsement to proceed.

Environmental protection/population policy: surprise areas. A comprehensive property right registration system over natural resources will be established, and local officials will be evaluated with environmental protection benchmarks. There is also explicit loosening of the existing one-child policy framework, which we believe has possible implication for the urban population to the tune of several million additional newborns each year.

* * *

Implementation of such sweeping changes is the key. One uncertainty is how reforms towards decentralization and a market-oriented system will be carried out in a centralized policy and political environment, and how the risks during the process of liberalization will be monitored and managed. There are also remaining questions on the role of State Capital Investment companies, the pace of property tax introduction, and the strategy to rein in local government debt and reduce moral hazard. On the other hand, the newly set up reform committee could raise market expectations for reform carry-through. Early indications of the reform steps could be given at the Central Economic Working Conference in early December

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/8EwqjCil8oA/story01.htm Tyler Durden