Experts foresee reform of hukou, capital flow

Editor's note: The much anticipated policy meeting of the Communist Party of China — the Third Plenary Session of the 18th CPC Central Committee — is scheduled to open on Saturday. The meeting is expected to steer the country to an historic turning point by unveiling a package of measures to deepen reforms to achieve sustainable development. China Daily invited four experts in economics as well as social and political studies to share their insights and expectations of the meeting and China's future reforms.

Simon Baptist, Asia regional director with the Economist Intelligence Unit

What would be your most expected reform in China? Why?

Opening the capital account would be one of the most expected reforms. The main benefit is that it could lead to better returns for Chinese savers, which could then lead to higher consumption of higher savings.

It would also allow the renminbi to become an international currency, providing benefits to China because foreign central banks would want to hold the renminbi, which could increase the number of buyers for China's government debt and reduce the cost of debt issuance.

The final benefit would be to assist in growing the service sector, particularly in the finance industry. Shipping and insurance are also some of the factors that could grow faster.

Reform of State-owned enterprises is also largely expected, because that would help resolve industrial overcapacity.

In which areas do you think reform would be carried out at the upcoming Third Plenary Session of the 18th CPC Central Committee? And on what scale?

What could drive China's growth are serious policy reforms.

Interest rate and capital account reform are both happening now but slowly. There are also a series of other options such as reform of the hukou (household registration) system and reform of the services sector to allow it to grow like manufacturing has done. But the steps of reform are really small and not enough to get growth back.

The upturn in the third quarter eased worries about a crash due to bad data in previous months. Now it seems there will not be a crash but there will not be an upward cycle either. It's just temporary, partly driven by the stimulus and also recovery in Japan, the United States and Europe that drove up exports.

We see China's growth slowing over the next five years. But a lower gross domestic product doesn't necessarily mean bad news for China if it can enjoy more benefits from the growth via reform.

What would be the biggest challenges and risks in carrying out reforms?

Opening the capital account would probably cost capital flight from China and a fall in property prices.

The issue of a property price crash is definitely the biggest risk as it connects to the banks' loan sector.

Property assets are such a central part of the Chinese financial system, as well as people's savings and people's assets, so movement in the property market has a big impact on China.

Opening the capital account would also expose the currency to more volatility because, with more money coming in and out, it would be more difficult for the government to maintain a fixed exchange rate.