China's Economic Overhaul: William Blair Analysts Weigh In

A recent report by William Blair focused on global growth under deflationary economic conditions. In the report, analysts took an in-depth look at the massive restructuring process underway in the largest emerging market economy in the world: China.

The modern Chinese economy looks nothing like the Chinese economy of decades ago. Initially, China’s growth was based on the complex interaction between government-operated, state-owned enterprises (SOE’s), local governments and massive government-run national banks.

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Today, 90 percent of China’s employment comes from privately owned and operated businesses. As the efforts to dismantle the SOEs and open up the flow of cash to private sectors continue, William Blair analysts see reform coming in China in the following three areas:

1. SOE Restructuring: With nearly 100,000 local SOEs in China, there will be massive amounts of asset sales, mergers, acquisitions and consolidation in upcoming years. Some SOEs, such as China Telecom Corporation Limited (ADR) CHA and CNOOC Ltd (ADR) CEO, have already released plans for mixed ownership or privatization.

2. Fiscal Reform: As funding from the vanishing SOEs dries up, 2015 marks the first time local Chinese governments will be allowed to issue debt. Analysts see this as a turning point.

The report stated: “This is the beginning of the municipal bond market in China, which we believe will also pave the way for greater transparency, and ultimately debt sustainability, in local government debt.”

3. Financial Liberalization: New opportunities for insurance companies and other financial services companies will be created in upcoming years.

China’s reform process is complex, and the details of how it plays out will have major implications in the financial world in 2015 and beyond.