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Under the Banyan Tree - Decoding China's Third Plenum
27 Plays10 months ago
Fred Neumann is joined by Chief China Economist Jing Liu to cut to the heart of China's official message following a major economic policy summit in Beijing. Disclaimer: https://www.research.hsbc.com/R/101/2HrbBwr . Stay connected and access free to view reports and videos from HSBC Global Research follow us on LinkedIn https://www.linkedin.com/feed/hashtag/hsbcresearch/ or click here: https://www.gbm.hsbc.com/insights/global-research.
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Transcript
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Discussion on China's Third Plenum
00:00:45
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Hello and welcome to Under the Banyan Tree.
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I'm your host Fred Newman here in Hong Kong.
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Officials in mainland China have wrapped up the country's third-party plenum where macro goals are laid out for the years ahead.
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Growth and reforms are high on the agenda, but what will that actually look like and what can we read between the lines?
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My guest today is Jing Liu, chief China economist, who's going to help us answer those questions.
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Let's get the conversation started right here, Under the Banyan Tree.
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A little context before we begin.
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There are essentially three broad themes that came out of the third plenum.
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Officials highlighted innovation, regional integration, and risk management as key tools to reach this year's GDP target of around 5%.
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Here at HSBC, we're forecasting 4.9% growth for China in 2024.
00:01:46
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So, Jing, you've had obviously a very, very busy few days.
00:01:51
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The third plenum is a key meeting where some of the reform goals are laid out for the coming years.
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Put the plenum for us a little bit into context.
00:02:02
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What is this meeting?
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Who's actually meeting and what's being decided?
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So the party plenum usually will have the top Communist Party officials, a couple hundred of them, central committee, gather together and decide on important things, such as the economic reform.
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And in China, the most famous
00:02:25
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Third plenum actually dated back to 1978, where the party decided it's a current cause of reform and opening up.
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And every 10 years, the third plenum is about the economic issues, the structural reform and such.
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And this time, the 20th Party Congress third plenum plays this role.
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So the last big one was in 2013, and we had economic reforms being outlined then.
00:02:51
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And so now we have another big meeting of Communist Party officials for the next reform, next reforms for the next 10 years, five to 10 years.
Implications of the Third Plenum for Investors
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Now, they come out with a statement, and everybody reads the statement.
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What should investors pay attention to?
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So I think there are actually quite some hidden messages, especially when we compare the statement this time with previous time.
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We will find out there's actually concrete measures, probably in the pipeline, in order to facilitate reforms in, for example, the structural transition.
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And several things are worth highlighting.
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First of all, it talks about to develop the
00:03:36
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new productive forces, China actually need to tailor the solution according to local conditions, which means probably China doesn't need every local government to push for EV or solar panel, but instead everyone needs to look at their resource endowment and play in comparative advantage.
00:03:56
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There's also an emphasize on unified national market, which basically talk about leveling the playing field, including dealing with local protectionism.
00:04:08
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So I want to unpack that a little bit.
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There's obviously a lot in here.
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We have a communique, which is a broad statement of principles.
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And then we had the resolution that came out a few days after that that had very specific reform areas that they're focusing on.
China's Economic Growth Strategy
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You already mentioned reform and opening.
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That's always a key word that we've heard in the past, and that sort of signifies China's reform process that they started in 1978, which is reforming the economic structure and opening the economy to the rest of the world.
00:04:38
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But you also highlight some new concepts that they're bringing in.
00:04:42
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For example, new productive forces.
00:04:45
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That's a new term we've only heard today.
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in recent years.
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What is new in this term, new productive forces?
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What do they understand by it?
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So from an economist perspective, I would understand the new productive forces as a way to enhance the total factor productivity.
00:05:05
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So essentially, China used to rely on investment, in particular, the housing investment as well as infrastructure to push for the growth.
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But now,
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They want to change the growth path towards something they call high quality growth, which evolves, lift the productivity overall, you know, manufacturing, upgrading technology breakthrough and also expanding the domestic consumption.
00:05:34
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So that's interesting.
00:05:35
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So they're emphasizing much more productivity, high tech, moving the economy towards a more sophisticated industrial infrastructure.
00:05:45
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But it was also the implying then is a shift away from the old growth drivers, which is, you mentioned, infrastructure and housing.
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And housing, of course, is important because infrastructure,
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It's one of the key drags on the economy.
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And investors have been looking for signals that they do a big housing package that they try to stimulate the housing market.
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Was there anything in there for investors to sort of take a signal that maybe they are shifting the policy on housing and bringing in more aggressive policies?
Housing Market and Systemic Importance
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Well, I think basically in a document released by the third plenum, all it says seem to point to, you know, the new housing development model without specifically mentioning stimulus.
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And maybe this is not a platform to announce a stimulus.
00:06:32
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But I think it's interesting when we listened to the press conference last Friday, basically one top official said,
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explained that housing is still the pillar industry.
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This is not new.
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But he also adds that it is of systemic importance to China's economic structure.
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That's quite new.
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In a sense, it might justify further actions even from the central government to stabilize the housing market.
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That's interesting.
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You really hone in on this very key phrase as systemic importance.
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And we're all here obviously perusing what exactly these statements mean.
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And you picked up on this term.
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And you're saying that implies maybe more emphasis, more rescue policies coming in in the coming months.
00:07:22
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Investors are a bit more skeptical.
00:07:24
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Do you think they're misreading the tea leaves here?
00:07:27
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Well, I think, you know, to some extent, the market has been disappointed several times.
00:07:34
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We have seen a lot of measures, but most of them come from the local level, like further relaxation of housing purchase restrictions, or from the top level, it's more or less in the
00:07:48
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area of lowering the interest rate.
00:07:51
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But I think ultimately, there needs to be a way to actually speed up the turnover on the housing market such that the developers would have a way to get the new capital and everything going.
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And for that, probably the central government intervention
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to put its skin in the game would be very critical to change the whole thing around.
00:08:16
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Usually, only when the government refers to the financial system, they would say it's of the systemic importance.
00:08:24
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So that's why I think the new mention of this term might mean something different.
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So a hidden message here when it comes to housing policy may be the prospect of more aggressive support measures coming through.
Unified National Market and Reform Comparisons
00:08:38
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Now, another area of focus in the communique and the resolution that came out is this idea of a unified national market.
00:08:48
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What's the hidden message there?
00:08:50
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Unified national market sounds like China is one market.
00:08:54
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Why do we emphasize a unified national market?
00:08:57
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Yeah, this is a great question because this is a very unconventional word, at least to Western audience.
00:09:05
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I think here it ties up to the leveling the competition field.
00:09:11
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And in particular, it talks about, you know, for the private sector, the government actually is thinking about enact a law to facilitate its development and in particular to give it
00:09:25
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the equal market access and also the IP protection, etc.
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So I think that's very important because before we don't have a law which basically say the state-owned and private-owned enterprises and foreign-owned, of course, should enjoy pretty much the same kind of rights.
00:09:42
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So in the future, except those with a natural monopoly about the people's livelihood as well as the national security,
00:09:52
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other areas should actually be open to, you know, different types of companies to compete.
00:09:58
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And maybe more importantly, the unified national market also means there will be ways to deal with local protectionism.
00:10:08
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Actually here, China,
00:10:10
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The competition authority, it's called Anti-Monopoly Bureau, is looking at the practice in European Union.
00:10:17
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In particular, European Commission is against the state aid for its member states.
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So China might actually do more in order to discourage or even prohibit the local subsidies and stimulus, which arguably have contributed to the current situation.
00:10:36
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So that's interesting.
00:10:37
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There's a lot in there.
00:10:38
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So a couple of points I want to pick up.
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One is, I suppose, the hidden message of a unified national market implicit there is this view that actually there's still internal borders within China, that it's not one big market that you have.
00:10:52
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Different provinces have different regulations, different discouragement for imports, for example, from other provinces.
00:10:59
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And that's something we see actually in the U.S., where the U.S. obviously also is a patchwork of different states with different rules.
00:11:05
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And there's a national government that tries to unify it.
00:11:08
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We see that in Europe, of course, where we have to weld together different nation states and reduce barriers.
00:11:13
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But you're saying in China as well, because it's a vast country, actually commerce domestically isn't entirely free in terms of restrictions.
00:11:23
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It's not quite as smooth an internal market as one would think.
00:11:26
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Yes, indeed.
00:11:27
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Actually, we have seen the local governments oftentimes could not only give subsidies, but also create some barrier for non-local companies to compete.
00:11:40
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So in terms of procurement or other kind of market entry.
00:11:44
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Another example is actually last year, one Chinese official told me if somebody in Tianjin wants to buy a secondhand car from Beijing, he couldn't do it because there are so many hurdles in terms of the transaction and registration in Tianjin.
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So I was quite surprised to find it out.
00:12:06
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So that's interesting.
00:12:07
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So it's not quite as smooth and obviously there's a lot to do.
00:12:09
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By the way, I'm reminded of India as well, where also, you know, there's an effort to create more of an internal market.
00:12:17
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So it's interesting that large countries generally face that same
Balancing Private and State-Owned Enterprises
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problem.
00:12:22
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Now, another hidden message in this idea of a unified national market, you said, was actually to level the playing field between private-owned enterprises and state-owned enterprises.
00:12:32
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And this goes to this idea of the market playing a decisive force or not.
00:12:38
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So in 2013, there was this big phrase, the market should play, the private market should play a decisive role in the economy.
00:12:47
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This was actually dropped in the initial communique of this plenum.
00:12:51
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I think we were the implication that maybe the state should play a bigger role.
00:12:55
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But then this term came back in 2013.
00:12:57
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the following resolution of the plan.
00:13:00
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So where do we stand?
00:13:01
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Does China's state now embrace the private sector for the next few years, or is the playing field tilting towards state-owned enterprises?
00:13:10
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I think the way I read it is that we are going to see for those fields which basically other than those related to national security or the natural monopoly sectors, the private sector probably has quite some role to play.
00:13:27
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And I think I take it very seriously, especially because China is enacting a law to facilitate the development of private sector.
00:13:37
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There are different kind of criticism or skepticism about whether a law would make the magic, but at least that's a much higher hurdle to cross.
00:13:48
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Yeah, and obviously there are always these Chinese terms that they like to use as two unswervings, which the current administration unveiled, which one unswerving is to unswervingly uphold the role of the private sector, but also to unswervingly uphold the guiding role of the government.
00:14:05
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So these are the two
00:14:06
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unswervings, these are principles that the Chinese government is pursuing.
00:14:10
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So it's a bit of both, really, that they're trying to institute, but it's certainly not coming purely at the expense of the private sector.
00:14:16
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I think that's one of the messages here.
00:14:19
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Now, lastly, one big topic is obviously consumption spending in China.
00:14:23
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It's been quite weak over the past year, disappointingly, coming out of the COVID-19 pandemic.
00:14:29
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Was there anything in there that suggests that they're really looking at ramping up consumption, you know, kind of unleashing that engine that remains hidden?
Hukou System Reforms and Social Welfare
00:14:39
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Was there hidden meaning that suggests more consumption-focused policies will come through?
00:14:44
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I think yes, because there's a specific mention of in the future, the provision of social welfare will be based on the permanent residence.
00:14:54
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I think we have been hearing the word of hukou reform for a long time.
00:14:59
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which basically it's a household registration system.
00:15:03
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So this is just to explain.
00:15:07
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If I'm born in a certain province and I want to move to another province, I actually need to have a permit to live in that other province, strictly speaking.
00:15:15
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And to have access to social security services in that other province.
00:15:20
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And that's the registration system prevents the kind of the smooth migration of people within the country.
00:15:27
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Obviously, in practice, people do move, but there are these lingering bureaucratic hurdles to do so.
00:15:33
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Yeah, indeed.
00:15:34
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So as a result, the migrant workers, for example, if they don't have the hukou in a city where they regularly living, they're not entitled to enjoy the same kind of social welfare.
00:15:47
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And as a result, the estimate shows that the living salaries, you know, excluding all those necessary benefits,
00:15:55
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is much lower among the migrant workers than their... And we're talking about hundreds of millions of migrant workers, right?
00:16:03
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300 million.
00:16:04
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300 million migrant workers, yeah.
00:16:05
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So actually they're making big progress along those lines because reform the household registration, make it easier to register, is subpar compared to in the future the social benefit will be based on
00:16:22
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where you're regularly living.
00:16:23
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So I think that can unleash the spending power from the new urban residents.
00:16:30
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So that's interesting, Jing.
00:16:30
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So in a nutshell, the third plenum has obviously very subtle messages in the text if you peruse it very closely.
Market Reaction to Reforms
00:16:39
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Now the market reaction has been a bit muted to say on the back of this.
00:16:45
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Investors were maybe a bit disappointed.
00:16:48
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Is there a sense that maybe investors are misreading this?
00:16:51
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Maybe there is more reform to come, more energy behind this document than perhaps a first casual reading might imply?
00:17:00
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I think overall, the third plenum is looking at medium to long-term reforms.
00:17:06
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But the market probably is more tilting towards a short term kind of measures.
00:17:12
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So there's a mismatch there.
00:17:14
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And for people who are looking for short term stimulus, I think, you know, probably it's a disappointment.
00:17:21
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I remember one client actually told me if we see, say, a five trillion stimulus package from this market,
00:17:28
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plenum and the market will actually cheer for that.
00:17:31
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Obviously, we don't have that.
00:17:33
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But if we look at the direction of where China is traveling, and if those reforms actually materialize, I think it might lay a more solid foundation for the future growth and also structural transition.
Conclusion and Future Reforms
00:17:47
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Well, and there you have it, ladies and gentlemen.
00:17:49
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It's about the hidden messages, really, in the communique from the third plenum.
00:17:53
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And there's probably more sort of meat on the bones of the reform process than maybe a casual reading of the communique suggests.
00:18:01
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So thank you very much, Jing.
00:18:03
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And we'll have you back and just to track the progress of these reforms in mainland China.
00:18:08
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Thank you.
00:18:08
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Thank you, Frank.
00:18:15
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And that's a wrap for this week, folks.
00:18:16
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Thanks again, as always, for joining us.
00:18:18
Speaker
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00:18:23
Speaker
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00:18:26
Speaker
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00:18:29
Speaker
And if you're in the region, do consider joining us for the 11th annual HSBC China Conference on the 2nd and 3rd of September in Shenzhen.
00:18:37
Speaker
For now, it's bye from us and talk to you again soon.
00:19:02
Speaker
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00:19:05
Speaker
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00:19:08
Speaker
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