All eyes are on Beijing's plans

What happens in China matters – economic reform at the Third Plenum could instigate a string of benefits for global companies leveraged to the Asian giant.

Markets across the globe will be focusing on China’s plans for structural reforms to invigorate private investment, directing the economy back to a sustainable growth path. Historically the Third Plenum has been used to set the tone for economic policy, providing government officials an opportunity to deal with private investment, which remains trivial.

Expectations are a new economic framework will be revealed at the conclusion of the Third Plenum; political reforms remain firmly off the agenda.

While it is anticipated that economic reforms will be announced, any reforms could be put on hold if China’s new leaders choose to focus on reaching a consensus and maintaining social stability, noting this is the start of a 10 year term. There is a perception reform will be easily accepted if there is a dominant consensus, which could take some years to achieve.

The problem for markets is that delaying economic reforms will likely not be viewed favourably as the belief is economic change is required sooner rather than later.

Beyond any economic structural changes, latest data out of China indicates the economy has stabilised. Exports rebounded to grow at 5.6 per cent year-on-year in October from a 0.3 per cent decline in September. A recovery in exports confirms the Chinese economy has stabilised – for now -- and is very much following the cyclical path of growth.  

The export market is however facing a considerably different future as consumption patterns of the US and Europe change. With exports directly supporting 30 million jobs, this corner of the economy is central to driving future growth and further confirms the need to boost domestic consumption and private investment.

The September quarter monetary policy report detailed a neutral monetary policy to support a more stable trajectory for economic growth. Monetary policy can only do so much. As China swims through the middle of its twelfth five-year plan, there is an intensifying need to rebalance the economy.

For the rest of China’s economy when it comes to economic growth, infrastructure investments will continue to contribute their fair share due to the extended duration of such projects. At the same time, the housing market is also heavily contributing to a stable economy.

Just how much does China matter? In purchasing power parity terms China’s 2012 GDP account for 14.9 per cent of global GDP. Over 30 years when China was grinding through the change to state-directed capitalism ago it was only a measly 2.2 per cent. Moving forward it will be increasingly difficult to take the lion share of global GDP without changes to the current economic model.