The Chinese Economy - Page 8

In the runup to China’s Third Plenum, the excitement among reform advocates is palpable. Likely to open in early November, the key Communist Party meeting is expected to launch sweeping changes to the Chinese economy, say economists, officials, and local media. There is a precedent after all: At the best-known Third Plenum in 1978, paramount leader Deng Xiaoping announced gaige kaifang, or “reform and opening up,” ending the autarchic period of the Cultural Revolution and earlier decades, and throwing open China’s economy to market forces.

“Thirty-five years after the Communist Party of China (CPC) lifted the country out of 10 years of chaos and started economic reform and opening up, analysts say that the Third Plenary Session of the 18th Central Committee of CPC has the potential to be a landmark event,” said the official Xinhua News Agency on Oct. 9. “It can chart out a comprehensive plan to propel the world’s second-largest economy on a more sustainable growth path.”

But what if the plenum doesn’t deliver? Given the lofty hopes, that is a real possibility. And it’s a prospect that some are starting to consider. “High expectations about reforms to rebalance growth are likely to be disappointed by the outcome of the November plenum,” write economists Louis Kuijs (formerly based in Beijing with the World Bank) and Tiffany Qiu at the Royal Bank of Scotland in Hong Kong, in an Oct. 9 note.

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So what is likely to come out of the party meeting? There will probably be few specifics about what shape individual policies may take. But there will be no dearth of broad statements by top leaders, including Party Secretary Xi Jinping and Premier Li Keqiang, laying out long-term goals for the country. Of course, that will include the now familiar refrain that China must transform its economy to one driven much more by consumption and services and less by investment. We will also hear that China intends to upgrade its industries to produce higher-value, technology-oriented products, while stepping away from its labor-intensive, energy-wasting, and polluting role as factory to the world—so serving less and less as a maker of shoes, toys, textiles, and cheap electronics.

Yet among the many reform hopes bruited about in recent months, some have a much better shot at getting a push forward at the plenum. “Surveying key reform areas, we expect reasonably concrete principles and directions on how to move forward in November, and measures in the coming two years, in areas where there is not much resistance and thus a mandate for reform, such as financial and monetary reform, pricing and taxation of raw resources and more government spending on health, education and social security,” write Kuijs and Qiu.

Others areas, however—many of which are widely seen as key to China achieving its move to a more sustainable development—have much less chance of really making progress. Prime example: dealing with the outsize role that powerful state enterprises play in the Chinese economy. “We expect little clarity on objectives in November, and not many measures in the coming 2 years, in areas where the political economy is an obstacle and that have not been emphasized by senior leaders, such as leveling the playing field between SOEs” and private enterprise, write the Royal Bank of Scotland economists.

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“The benefits preferential policies bring to state-owned companies every year are huge,” points out Sheng Hong, director of the Beijing-based market reform-oriented Unirule Institute of Economics. “Taking them away is very difficult.”

Then there is another category: reforms cited by the Chinese leadership and economists as very important but that are also deeply complicated to carry out, not to mention controversial. Official statements emanating from the Third Plenum will likely talk in general about the desirability of pushing household registration and land ownership reforms—both key to giving rural Chinese and migrant workers more consumption power—and may announce limited pilot programs in both, but don’t expect nationwide policy breakthroughs.

That’s because everyone from urban residents who don’t want to share limited educational and health-care resources to local governments hooked on land revenues are powerful opponents to change. “If an official wants to develop his city, then the land surrounding it can be forcibly taken from farmers at a very low price, and the farmers cleared off,” says Unirule’s Sheng. “We call it land finance. Every local government relies on it.”

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While slower progress on reforms won’t likely lead to economic collapse—despite what some China bears believe—foot-dragging nevertheless could create serious problems down the road. “China’s overall reform process could become skewed,” write Kuijs and Qiu. “If China maintains decent progress with necessary, politically easy ‘welfare state’ types of reforms, but cannot make progress with the politically difficult but essential growth and productivity-enhancing rebalancing reforms, the country could end up with a rebalanced but slower growing economy.”

Meanwhile, if China’s leaders don’t adopt reforms to make a more market-oriented economic and financial system, including by ending the serious favoritism shown to state-owned companies and allowing banks to make more commercially based lending decisions, risks could rise further. “If the reforms to adjust the economic structure and the domestic financial system cannot be implemented but the government presses ahead with capital account opening, the risks of financial instability would rise while misallocation of capital may actually also increase,” the RBS economists write.