Talking Point

A November to remember?

Economic reform is top of the agenda as elite meet for Plenum

CHINA-CONGRESS/

About to get together with 200 of their friends for a small but earth-shaking plenary session

Lyndon B Johnson once said of his political brethren on Capitol Hill: “Now I know the difference between a caucus and a cactus. In a cactus all the pricks are on the outside.”

The former American president was something of a master when it came to earthy asides, but his words will have rung true for House Speaker John Boehner this month, who found himself trying to marshall his unruly Republican colleagues as they played chicken with America’s credit standing.

As we reported in last week’s Talking Point, the Chinese watched events in Washington with a mixture of glee and disgust. But there has also been some serious ‘caucusing’ going on in Beijing too, albeit a good deal less public than the bickering in Congress. In November the public will get its first glimpse of Xi Jinping’s economic agenda as the innocuously named Third Party Plenum meets to discuss what could amount to some of the most significant changes to economic policy for well over a decade.

So what is the Third Plenum and what should we look out for?

The third meeting of what?

The Third Plenary Session next month is a meeting of the leadership of the Chinese Communist Party comprising the Politburo’s seven-member Standing Committee, plus the 200 or so members of the Central Committee below it, that were selected at last November’s Party Congress.

Gatherings of this type are normally held annually during the Politburo’s five-year cycle and run for about four days. Traditionally the first two plenums in the cycle relate to the selection of the key Party and state leaders (Xi Jinping was named as General Secretary of the Party and chairman of the Central Military Commission last November, for instance, while he and Li Keqiang were both approved for the top jobs of state president and premier in the second plenary meeting in February).

But then the third session turns to policy, offering a first chance to put forward a formal direction for the country over the years ahead.

Once the Party has indicated its priorities, the government is tasked with coming up with the details and putting the plans into action.

We can expect some significant decisions?

There won’t be an exhaustive blueprint or a timeline for implementing it. But the Plenum is important in highlighting the key themes likely to filter down into more concrete government action in future.

The Third Plenum also has historical pedigree as far as economic reform is concerned. Almost all of the coverage in the media of next month’s meeting has mentioned two key sessions of the past: the 1978 meeting at which Deng Xiaoping enshrined the “reform and opening up” era, and the 1993 session, generally seen as the starting point for the launch of the ‘socialist market economy’ under Zhu Rongji, China’s hugely influential premier of the late 1990s.

In both cases the plenary meetings had huge implications for the development of the economy, so the suggestion that this year’s session might be considered in the same grouping could be a significant indicator in its own right.

Indeed, the last time that the Third Plenum was delayed from October to November was in 1993, inviting further comparison with the Zhu years. Admittedly, some China-watchers dispute this, suggesting the delay is related to wanting to get the awkwardness of the Bo Xilai trial out of the way first. But others are more hopeful that the unusual timing could stem from the complexity of preparing the reform package, as well as the need to consult more widely than usual on how best to implement it.

So China might be on the verge of some major economic changes?

The leadership seems to be making an effort to suggest continuity with reform initiatives of the past. This extends beyond references to the key meetings of 1978 and 1993, with Wang Xiangwei wondering in the South China Morning Post this week if there is similar intent behind the eulogising of Xi Zhongxun (Xi Jinping’s father), following a series of events held to commemorate the birth of the former vice premier who died in 2002.

One motive is demonstrating current president Xi’s lineage back to one of the early leaders of the People’s Republic, he says. But Wang also picks up on the emphasis being given to Xi senior’s stint as Party boss of Guangdong, and his battle to ensure economic reforms were launched there in 1978.

Xi senior chose to retire to Shenzhen (the pioneering special economic zone) too, which is sometimes taken as a sign of his reformist leanings. Notably, his son visited the same city last December, a move viewed as a symbolic first trip after being inaugurated as Party boss (see WiC176).

Truth be told, Xi’s policy instincts have been hard to make out since he took office. He has preferred to talk rather vaguely about the ‘Chinese Dream’ (see WiC192) and the longer-term goal of delivering a “moderately prosperous society”. At the same time Xi has burnished his reputation with the public by leading a campaign against waste and extravagance in officialdom, as well as appearing to support a series of investigations into senior-level officials suspected of corruption.

Generally that has gone down well. But the rhetoric has also been laced with a message about the need for further economic change. The Chinese Dream is achievable only with “comprehensive and deepening reform and opening up”, Xi has warned, while the statement accompanying the announcement of the delayed Third Plenum emphasised that “there is no way out for China to stop or even reverse the process”.

Li Keqiang told last month’s World Economic Forum in Dalian something similar: that “China is now at such a crucial stage that without structural transformation and upgrading, we will not be able to sustain economic growth.”

Is Xi Jinping a reformer?

A plus point for those calling for change: Xi has experience as a market reformer from his time in places like Fujian, Zhejiang and Shanghai, writes Cheng Li from the Brookings Institution. This could serve him well in boosting the private sector and liberalising the financial system – two causes the previous administration did not advance.

Xi and his number two Li Keqiang are also supported by an impressive team of technocrats, including Zhou Xiaochuan, the longest-serving governor at the People’s Bank of China and an experienced economic reformer in his own right. Another key figure is Liu He, the new deputy director of the National Development and Reform Commission. Liu was involved in the publication of a World Bank report last year that pushed for the reform of state-owned monopolies (see WiC140 for how it became part of the economic debate) and he has overseen the drafting of the report that Xi will deliver at the Plenum.

The contrary argument is that Xi’s team has spent a year talking about reforming the economy but has failed to deliver any real change to speak of. While it’s true that there haven’t been groundbreaking announcements, that in itself could be due to the rhythm of Chinese politics outlined above: i.e. that Xi and Premier Li, who heads up the economy portfolio, have been waiting for their moment. On the other hand, despite the supposedly new thrust of ‘Likonomics’ (see WiC204), the suspicion is that the old ways of thinking persist. For instance, critics claim that some of the stronger GDP growth announced last week (7.8% for the last quarter versus 7.5% for the previous one) was purchased with policy mainstays like a burst in government spending and a further expansion in credit.

Does China even have a choice?

Here the argument is that after a ‘lost decade’ in which Hu Jintao and Wen Jiabao tried relatively little in the way of reform, China’s development model is running out of road. Hence Xi and Li have little choice but to take a new direction

The discussion links back to the World Bank report last year and its warning that the Chinese could be caught in the ‘middle income’ trap because they lack the economic tools to transition to a more developed economic status similar to Japan and South Korea.

The theme was addressed again in the Financial Times last week by Huang Yukon, a senior associate at the Carnegie Endowment and a former country director for the World Bank in China.

“Should we assume that all is well in the Middle Kingdom?” Huang asked, when discussing the latest GDP data. “Not really. China’s massive 2008 stimulus programme pushed the economy off its former growth path. This deviation is partly a cyclical problem. But China also faces a structural issue in transitioning from middle to high-income status. No economy can grow at 10% a year all the way to high-income levels so a decline to the 7-8% range is inevitable, as it was for the previous Asian Tigers. Their success, however, was predicated on being able to ratchet up productivity so that they could continue to grow at a fairly rapid rate even as investment levels declined.”

Huang’s warning is that without a new direction from next month’s Plenum, China won’t be able to climb much higher up the economic ladder.

So which areas will get most focus at the Plenum?

A research piece from HSBC offers a roadmap of the types of measures that will be required to rebalance China’s economy. Theoretically all of these could be addressed at the Plenum.

The study – which was headed by Qu Hongbin, HSBC’s chief economist for Greater China – focuses on reforms in six key areas. One of the most important, reckons Qu, is to free the private sector from state meddling (and there are indications policy is already moving in that direction with the need for official approvals in 221 business areas having been either relaxed or cancelled in the last six months, Qu says).

HSBC also adds there are five other critical areas: rethinking funding for local governments (i.e fiscal reforms that make them less reliant on land sales, and more on new types of tax and municipal bonds); accelerating financial reform, including further liberalising interest rates and looser cross-border controls on the renminbi; pushing towards market-oriented pricing for resources and power; relaxing the household registration system (the hukou) to allow 260 million rural migrants to settle permanently in the cities in which they work; and opening up sectors like energy, finance and telecoms to more international investment, thus improving the ability of Chinese companies to compete overseas.

“Some measures will involve short-term pain but if the major reforms are implemented, this should help sustain annual growth of 7-8% in the coming years by unleashing private sector demand for investment and consumption,” the report concludes.

Nonetheless, HSBC also acknowledges that some of the thorniest challenges are likely to be put to one side. One example is the effort to reduce the influence of the state-owned enterprises, where the agenda is unlikely to be as confrontational as Zhu Rongji’s in the late 1990s, when thousands of SOEs were closed or sold, and more than 40 million workers laid-off.

That’s because in the 1990s the state sector was basically bankrupt and action was essential. Today, it’s different. Last year, the hundred or so leading firms overseen by state-holding supremo Sasac generated Rmb1.3 trillion ($213.7 billion) in profits and are said to have produced at least 40% of Chinese GDP, according to various estimates.

There’s also the sense that the rapid growth of the Chinese economy has created powerful new fiefdoms more inclined to resist Beijing’s directives – and that’s not just bosses at the giant state companies but also the decisionmakers at provincial, city and other local government levels who have carved out their own commercial empires.

That’s made the strongman style of government practiced by Deng, and even Zhu to some degree, less applicable today.

Instead Xi looks likely to focus on making progress at the margins or by using more indirect means. Even Zhu recognised this as a tactical approach, using China’s accession to the World Trade Organisation in 2001 as a policy lever for shaping its commercial competitiveness, and helping it to become the world’s largest trading nation. In issue 152, Eswar Prasad, a professor at Cornell University and formerly the head of the IMF’s China Division, suggested something similar to WiC about Beijing’s hopes for internationalising the renminbi, claiming that the push to promote the currency overseas also has the “collateral benefit” of overcoming vested interests at home and drives reform.

Can China change?

Twenty years ago, Zhu made trade a key focus for reform. Will it, as Prasad suggests, be the currency this time round? One thing most analysts agree on is the desired outcome: a China that less wastefully allocates capital and which is driven by consumer demand and a thriving private sector.

Zhu was famously tenacious (he once told the press that he was readying coffins for his enemies, and saving one for himself – just in case he lost).

Xi’s team still needs to convince some of the public that it has the stomach for the battle ahead. “I’ve met a lot of people who do not have high expectations for the Third Plenum,” warned one netizen this week. “They believe that the way that the system is set up makes it unlikely to tap the privileges of the interest groups. If you are elected by these people, how can you have the nerve to move their cheese?”

Another commentator on weibo focused on the more specific measures needed to remedy cases of unfair privilege, one being the introduction of a property registration system (see WiC182 for more on why a database has been delayed; one allegation is that too many public servants would be revealed as owning property beyond their paygrades).

“To rebuild social justice, we have got to contain privilege at source,” the netizen suggested. “What people most want from the session [the Plenum] is to introduce new regulations showing the property of public officials. We need a clear timetable for opening up information on their personal assets and making sure it can’t be hidden.”

Elsewhere work is already underway in a number of areas in which the need for reform has been highlighted. Take changes in the financial sector, where WiC has covered themes including more competition in banking with the discussion of new licences, an explicit warning from the central bank to overleveraged lenders to reduce their credit exposure, and the launch of a pilot zone in which some of the rules on cross-border lending may be relaxed. The meeting next month could formalise some of these trends, as well as signpost how other policies are being prioritised.

Of course, the reform effort could also turn out to be contentious, especially for those who benefit from the current system. Somewhat surprisingly the specific dates for the Plenum have yet to be confirmed. One interpretation is that Xi and Li are working extra hard to secure internal support for a reform agenda.

This is no easy task. As the Republicans so ably demonstrated earlier this month, a single party can hold a lot of diverse opinions – and not all are to the liking of their leader.


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