China International Capital Corporation Limited released a report on November 11th, stating that the reform blueprint introduced at the Third Plenary Session of the 18th Central Committee of the Communist Party of China may bring about three impacts, including accelerating the bursting of the real estate bubble. The more successful the reform is, the earlier the real estate bubble will burst.

Reform has accelerated the bursting of the real estate bubble

The Third Plenary Session of the 18th Central Committee of the Communist Party of China marks the starting point of a new round of comprehensive reform and will point out the direction for China's economic reform in the next 5 to 10 years.

The report of China International Capital Corporation (CICC) points out that the reform plan announced at the Third Plenary Session of the 18th Central Committee of the Communist Party of China may cover areas of social management systems such as the fiscal system, financial sector, land, factor prices, transformation of government functions, income distribution, and household registration.

The focus of fiscal and taxation reform lies in reducing the proportion of turnover tax in the tax revenue and strengthening the taxation on factor income and property, with the aim of reversing the current large income gap.

Peng Wensheng, chief economist of China International Capital Corporation, said that the reform blueprint introduced at the Third Plenary Session of the 18th Central Committee of the Communist Party of China may bring about three impacts: enhancing the role of the market in allocating resources and promoting medium - and long-term supply capacity; Narrow the income gap, increase the consumption rate and lower the savings rate; Accelerate the bursting of the real estate bubble.

He said that in the short term, particular attention should be paid to the deepening of anti-corruption efforts and the institutionalization of mechanisms to curb investment expansion.

Cicc believes that the reform will accelerate the bursting of the real estate bubble. The economic and social foundation for the rapid rise in real estate prices over the past decade or so is the local government's monopoly on land supply, fiscal and taxation distortions, financial repression, the widening income gap and the increase in the savings rate caused by the imbalance of social security, as well as the growth model where monetary credit supports investment expansion.

This structural reform is precisely aimed at these distorting factors. Therefore, it is judged that the advancement and deepening of the reform will eliminate the economic foundation for the rapid increase in housing prices over the past decade or so.

The growth target for next year may be lowered to 7%

Cicc believes that the reform is beneficial in the long term but has short-term pain. On the one hand, measures such as reducing government intervention in the economy, breaking the monopoly of state-owned enterprises, and replacing business tax with value-added tax are conducive to stimulating the private investment sector. On the other hand, reforms also have mechanisms to curb the growth of short-term aggregate demand.

Cicc said that 2014 was a year of reform. Reform is a process of purifying the bad and promoting the good. In the short term, it may not have a positive impact on total demand. The biggest highlight is the improvement of the structure. Benefiting from the economy itself and policy factors, consumption will surpass investment to become the biggest driver of growth. It is expected that the economic growth target for 2014 will be lowered to 7%.

Peng Wensheng said that to control the financial risks of the trinity of real estate, shadow banking and local financing platforms, prudent supervision and monetary policy will be tightened, market interest rates will remain high, and investment growth will be suppressed. Due to the inertia of domestic demand expansion and the help of global recovery to exports, the GDP growth forecast for next year has been raised from 7.4% to 7.6%.