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China’s economic reforms: What you need to know

Sunday, 17 Nov 2013 | 11:50 PM ET
China announces sweeping reforms
Sunday, 17 Nov 2013 | 5:21 PM ET
David Kuo, CEO, The Motley Fool Singapore shares his take on China's new wave of wide-ranging reforms.

China late on Friday unveiled details of the long-term economic reforms agreed to at this month's Third Plenum, a key meeting of the country's top leaders.

The 60-point reform plan is seen paving the way for sweeping changes in the world's second-biggest economy as it tries to steer away from investment-led growth to a consumption-driven economy.

Here's what you need to know about the main reforms.

1) One-child policy relaxed: The controversial policy introduced in 1979 has contributed to falling birth rates. Now the policy is to be eased to allow couples to have two children if one the parents is an only child. Baby-product related stocks such as Goodbaby International soared in Hong Kong on Monday following the easing of the one-child policy.

"The reason they (China's leaders) have to change the one-child policy is because China has aging population and everybody knows an aging population needs to be supported," David Kuo, CEO at The Motley Fool Singapore, told CNBC.

(Read more: Economics behind China relaxing its one-child policy)

2) Welfare-system reformed: China said it would relax its system of household registration, known as the hukou system. Under this system, migrants give up the public services they are entitled to when they move to urban areas. Analysts say changing this system is a key step towards liberalizing the labor market, allowing the free movement of labor and encouraging urbanization.

"The urbanization policy change with the relaxation of the hukou policy is, according to some China watchers, the biggest reform since 1958," said Evan Lucas, market strategist at trading firm IG, in a note. "The largest cities such as Beijing, Shanghai, Guangzhou and Shenzhen will still have strict rules applied to it, however [the changes] will mean a more mobile labor force and an increase of workers into factories struggling with the demand of work needed."

(Read more: Success of Chinese leader's plan may rest on rural regions)

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3) Greater rights for farmers: According to China's official Xinhua news agency farmers will be granted rights to "possess, use, benefit from and transfer their contracted land, as well as the right to use their land ownership as collateral or a guarantee."

At the moment, all land in China is owned by the government with farmers only permitted the right to work the soil in their area. Analysts say this change is important to encouraging urbanization and shifting China's economy to a consumer-driven one since it could enable farmers to cash in on the value of their land, invest in new ventures and move to the cities. It also has implications for the housing market, says Uwe Parpart, managing director, head of research at Reorient Financial Markets

"If you give the farmers the right to actually sell their land instead of having it appropriated by the local government, then you will create a situation where you get the right kind of housing that needs to be built as opposed to the kind of housing that nobody needs," Parpart told CNBC's Cash Flow. "Land reform is going to be part of a major push towards the right kind of housing in China."

(Read more: China's new home prices rise 9.6 % in October)

4) Stepping up financial reforms: These include setting up a deposit insurance system by early 2014, giving qualified private investors the go ahead to set up banks, loosening controls on the pricing of water, electricity and natural resources and revamping the system for Initial Public Offerings (IPOs).

Analysts say the insurance scheme would protect depositors as China is worried that some smaller lenders are at risk of going under as banks compete for deposits in a more open regime. China's central bank removed controls on lending rates earlier this year.

"They are moving towards a market bias and putting more emphasis on market. The implication is that the non-state sector will play a greater role," said Chi Lo, senior strategist for Greater China at BNP Paribas Investment Partners.

5) State-Owned Enterprises (SOEs): SOEs will be required to pay larger dividends to the government, with 30 percent of earnings from "state capital" to be paid back to the state and used for social security by 2020. Private firms, meanwhile, will be encouraged to play a greater role in the economy.

According to a report by Agence France-Presse, China's 113 large SOEs under direct government control typically pay five to 20 percent of their profits to the government in dividends.

Still, analysts say reform of the SOEs is one area where reform could be slow.

"Private equity will be allowed into SOEs however the communique from last Wednesday [after the end of the Third Plenum] clearly stated the intention of the new government that 'state run enterprise will always be the fabric of the social policies of the republic' and private equity will remain capped," said IG's Lucas.

—By CNBC.Com's Dhara Ranasinghe; Follow her on Twitter

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