Economic reforms from third plenary session

By Tung Chen-yuan 童振源  / 

Sat, Nov 23, 2013 - Page 8

At the third plenary session of the Chinese Communist Party’s (CCP) 18th Central Committee earlier this month, the party unveiled a long-awaited, ambitious plan — which had been 10 years in the making — for market reforms. It also set up a leadership group that would initiate and implement the plan, and achieve concrete results within seven years. At the same time, the party stated that future economic development should promote social justice, equality, growth, efficiency and sustainability, with market forces playing a decisive role, while the government plays the role of regulator.

The meeting focused on economic reform, but the party stressed that reform should be systemic, comprehensive and cooperative, and would cover five aspects: accelerated development of a market economy, democratic politics, cultural advancement, social harmony and an environmental culture. These reform targets are intended to stimulate labor, knowledge, technology, management and capital, so that development will be more evenly spread across the population.

The focus of economic reform is to make markets play a decisive role in resource allocation and gradually extend liberalization from the opening up of commodity markets in the past to include production factors. However, the CCP still insists that public ownership should make up the bulk of the economy. It is merely pushing for improved efficiency in state-owned enterprises, perfecting the modern enterprise system and avoiding a backlash from princelings and other powerful vested interests. This is where the reforms fall short.

The CCP hopes to establish a set of fair, open and transparent market regulations, perfect market mechanisms for determining prices, and set up a unified system for market opening and orderly competition. Above all, the party wants to establish a unified land market for urban and rural areas, develop sound financial markets and deepen high-tech system reform. In other words, it wants to create markets for production factors, such as land, capital, knowledge and technology, to avoid government intervention and influence peddling.

It was suggested at the meeting that the dual urban and rural systems was the main obstacle to uniting the two areas, and hopes were expressed that farmers’ wealth could be raised by letting workers lead farmers and urban areas lead rural areas. China is expected to gradually abolish the separate household registration systems for rural and urban areas to let agricultural workers enjoy the social welfare and guarantees that come with an urban household registration to promote urbanization, and facilitate the expansion of domestic demand and consumption. This is a goal that Chinese Premier Li Keqiang (李克強) has been pushing since he was appointed to the post. In addition, giving farmers the right to sell their land would allow them to leave rural areas and help solve the problem of rural development.

China’s state-owned banks still lead the financial system, although this will be gradually liberalized as interest rates, exchange rates and the capital account are liberalized. Interest rate liberalization will greatly improve banking efficiency, while at the same time prepare them for opening to the outside world. Exchange rate liberalization is an important way to guarantee the ability to implement macro controls and maintain control over currency policy, and it is also a premise to further liberalization of the capital account. A full opening of the capital account is a condition for making the Chinese yuan an international currency and turning China into a global financial center. This is the real purpose of establishing a free trade zone in Shanghai.

In terms of opening up, the CCP wants interaction and mutual stimulation between domestic and international deregulation, and orderly and free exchanges between international and domestic markets, hoping to use this international opening up to promote domestic reform. Specifically, China wants to lower the entry barrier for investment, speed up the establishment of free-trade zones and expand the opening up of the hinterland and border areas. China is clearly striving for more comprehensive liberalization and opening up, including international circulation and domestic deregulation of production factors. The free-trade zone in Shanghai is an important testing ground for the CCP if future deregulation is going to be even more comprehensive.

Social protest has continued in China in recent years and the funds spent on maintaining social order have surpassed the nation’s defense budget. Over the past month, both Beijing and Shanxi have experienced bombings, a clear sign that social order is deteriorating and protests are intensifying.

The third plenary session also called for the establishment of a national security council to compile information and resources relevant to maintaining order from the different ministries so the council could learn from them about non-traditional security challenges such as from food, energy and finance challenges. The council can also integrate the policies of 19 CCP leadership groups to create an overall national security strategy and respond to major crises.

After 34 years of rapid development, China’s economy is facing unprecedented challenges as it seeks to adjust its economic growth model. It can no longer rely on growth through investment and exports, but must change tack and focus on growth driven by domestic demand and consumption. At the Central Committee meeting, the CCP tried to respond to this challenge with its plans for marketization, urbanization, liberalization and globalization, and to establish a major reform goal that should be met within seven years. Whether China will succeed in these reforms will depend on the determination and ability of Chinese President Xi Jinping (習近平) and the premier. The world waits in anticipation.

Tung Chen-yuan is a distinguished professor in the Graduate Institute of Development Studies at National Chengchi University.

Translated by Perry Svensson