Markets this week spent a decent amount of time digesting a document that came out of the Third Plenary Session of the 18th Central Committee of the Communist Party of China. It was widely anticipated to initiate major changes in the country and it did not disappoint. The document carries an equally long name that is just being referred to in markets as “The Decision.” In it, the Chinese government outlines no less than 60 significant changes that it plans on pursuing over the next decade.

In addition to more headline-friendly moves like effectively ending the one-child policy and labor camps, the Decision notably addresses very deep structural issues in the financial, agricultural, legal and fiscal areas of government. But there is a difference between supporting reforms and successfully implementing them. The market demonstrated yet again that it forgets this difference when the Chinese yuan jumped on news that the People’s Bank of China was considering widening the band in which the currency floats and allowing for more volatility. The report contained nothing we had not heard before, and currency market quickly died down.

The current Chinese leadership should be commended for taking on such a massive project, but it also falls into that category of a policy change that was becoming more inevitable by the day. The fuel on which the Chinese economy had been running – pre-2008 consumption demand out of the U.S. and Europe – is a global economic system that just does not exist anymore and is not likely to return anytime soon.

China is being forced to switch from an economy based on building factories manufacturing shoes and dolls for export, into an economy based on manufacturing goods for consumption by its own middle class. This is more problematic than it seems, as it requires a huge structural shift to implement.

My View: New Chinese President Xi Jinping has earned a reputation so far of deft political and economic skill. So far he seems to be up for this mammoth task. We wish him the best.

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