A short, ambiguous message issued at the close of a high-level Chinese policy meet last week left China watchers fretting at the prospect of another 10 years of directionless economic reform. But before the workweek was out, the Communist Party answered back at those worries.
In a lengthy document issued late Friday, China’s leadership delivered what some analysts have called the most important policy statement on the country’s economic transition in more than a decade.
As leaders promised before the start of a four-day top-level meeting known as the Third Plenum, the plan covered a vast range of issues, from breaking apart state monopolies and liberalizing interest rates to freeing up rural land sales and allowing private investment in sectors still guarded by the state. It pinpointed 15 succinct areas of reform and 60 tasks to be carried out.
At the heart of the plan, China Economic Review points to three essential goals the party will seek to achieve over the next several years: Increasing the role of the market in the economy, better allocating capital to where it is truly needed and shifting wealth from the state into the pockets of consumers.
It’s likely the biggest single reform package issued by the Chinese Communist Party since a similar meeting in 1993, where, under the direction of party chief Jiang Zemin and premier Zhu Rongji, the government pushed through major changes to the tax system and began dismantling some state firms.
The reception from analysts since Friday has been warm, especially after a dull 500-word communiqué issued at the close of the plenary session disappointed Asian markets. That document, released on Tuesday, gave few new ideas on how the party would operate the country’s economic engine over the next 10 years. It even seemed to vindicate worries that the party elite would maintain the status quo of a market still dominated by inefficient state firms.
Friday’s document, labeled “Decisions on Several Important Issues Regarding Comprehensively Deepening Reform,” looks strikingly close to a “master plan” Chinese president and party chief Xi Jinping promised before the meeting. That will add to the growing tendency to compare him with Deng Xiaoping, the reformist leader who pulled China from economic and political despair in the late 1970s.
Now that Xi and the head of the government Li Keqiang have won over many skeptics on their political wherewithal for pushing through a clearly reformist agenda, the duo will face a monumental challenge during the following nine years in which they are expected to hold power: Actually seeing it through.
“The key is implementation, all the way down to the local level,” Standard Chartered said in a report.
This won’t be easy given how interdependent each proposed reform is on the next. A failure to perform in one area will send a ripple effect through China’s rebalancing process as a whole. Some reforms may even step on the toes of others.
Take for example one of the landmark developments mentioned in the plan: A partial change to the hukou system. This will require several other major changes to be put in place before this outdated residence system can be finally dissolved.
The hukou system divides Chinese citizens, and the social benefits they receive, into rural and urban. For more than two decades, rural citizens have been relatively free to move to cities, yet they have been excluded from the educational and health systems that urbanites have access to. These inflexible rules have clogged China’s urbanization efforts and created a yawning wealth gap in many cities.
The new plan would free up some movement from the countryside to smaller cities. In the future, farmers should get welfare benefits such as education for their children after they move to a small to medium conurbation. This, however, will require a massive shift in expenditures from rural areas to the cities where new migrants settle. Even without that pressure, city governments in China are already highly indebted. The success of any reform to China’s hukou system will hinge primarily on other proposed reforms on how local governments fund their operations.
That’s another part of the plan. For nearly two decades Chinese cities haven’t been allowed to borrow directly from banks. They’ve also been responsible for the lion’s share of development projects in the country and have since racked up what could be more than US$4 trillion in off-the-books debt. Xi’s master plan will seek to remedy this problem by letting local governments issue bonds to raise capital for development. Transparent sources of funding are critical in pumping cash into welfare systems.
Furthermore, those migrants will need to show up in cities with cash in hand if they are to buy homes and set up businesses. The “Decisions” document no doubt has an answer for that too. Restrictions on the sales of rural construction land could be lifted. This means that farmers may get better compensation for their land as they move to cities.
One possible scenario here is establishing rural land markets where villages and land developers conclude transactions directly. This would push out of the picture local governments that have traditionally procured the land at below market prices then sold to developers at a profit.
This is certainly good news for farmers who have long felt cheated by the current land compensation system. But local governments depend on land sales for up to 40% of their revenues. Taking away this revenue stream will hurt their ability to build roads and other infrastructure, especially at a time when more migrant workers will be coming to the city from the countryside.
Overall, the hukou is only a small part of China’s new reform blueprint that is now coming into view. Yet, the overlapping challenges within that part of reform demonstrate the level of difficulty Beijing faces in pushing through such major changes to a system that has scraped along for decades.
Many will congratulate Xi and Li for pushing through the plan against what was surely strong opposition from conservatives. But only strict – and delicate – implementation of this economic blueprint can earn the two a spot in history among reformers such as Deng Xiaoping.
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