China's 'wall of money'

With most of the world focused on austerity and deleveraging since 2008 and the US Federal Reserve the only supplier of liquidity, next month’s meeting of the Chinese Communist Party is shaping up to be a big deal.

The third plenary of the 18th CCP Central Committee is expected to be the forum for China‘s new leadership to detail its plans for financial reform.

Specifically, expectations are growing that President Xi Jinping will announce the opening up of China’s capital account, allowing easier investment abroad by China’s wealthy, among a broad range of potential market reforms.

If it happens, global markets could be transformed. China’s national savings are $4.2 trillion, 50 per cent more than America’s, and the elites who own that money have been far keener to invest abroad than they have been allowed to so far.

In a report on the weekend, Diana Choyleva of Lombard Street Research called it China’s “wall of money”, which could “swamp global financial markets”.

“And it’s not going to go for Treasuries and other government bonds.

"Much more likely it will follow the children into US, UK and Australian real estate, private equity and eventually quoted stocks.”

Already the wealthy politicians and members of the Communist Party have been sending their children abroad to be educated and if they are allowed to invest overseas more easily, then they will be more willing to allow their power bases at home to diminish.

In order to bring about the domestic reforms that China needs, vested interests have to be broken down.

Financial reforms have been going on since 2010 and need to accelerate. Two years ago the Peoples’ Bank of China clearly laid out a program for capital market and interest liberalisation although the previous Party leadership was too timid to endorse and adopt it.

That’s expected to change with Xi Jinping, who has already been cracking down on corruption – code for rounding up his enemies and those blocking reform.

Some of the reforms are expected include: liberalising the corporate sector, including opening them up to foreign investors; opening up financial markets; opening up the Shanghai free trade zone; completing resource price liberalisation; relaxing the Hukou system of control on internal migration; and perhaps even abolishing the one-child policy.

Tom Miller of GK Research says: “After less than a year in power, Xi and his comrades have already shown they have far more guts than their lily-livered predecessors.

“Xi’s clear status as top dog means he should have the authority to push through a strong reform agenda. Premier Li Keqiang has hinted that the key theme of the upcoming plenum will be reforming the role of the state, specifically by streamlining government and shifting greater responsibility to the market.”

So with the dramas in Washington now concluded for the time being, the world’s attention will move to China, and the far less exciting, but potentially more significant, third plenum of the 18th committee.