Born of necessity

Harold Wilson won’t make a list of Britain’s greatest prime ministers but he has bestowed one of its better-remembered political observations: that a week is a long time in politics.

Famous that the remark is, no one is sure when Wilson first said it – although probably during a currency crisis in 1964. Asked about it towards the end of his career, even Wilson couldn’t recall.

More than 80 years earlier, another UK political heavyweight called Joseph Chamberlain was recorded as saying something similar: “In politics, there is no use in looking beyond the next fortnight.”

Neither time interval has traditionally held much relevance for Chinese politicians. After all, China’s leaders get chosen 10 years in advance and the key decisions they take on the economy’s direction are embedded in five-year plans.

But last week China seemed to have its very own Wilsonian moment, although in this case it was three days that suddenly seemed a long time in political terms.

This followed the close of the Third Plenum last week. Lauded in advance as the most significant policy forum since Deng Xiaoping’s plenum in 1978, expectations were dashed when the event’s communiqué was released last Tuesday evening. Disappointingly brief (see WiC’s comments last week), it left most onlookers feeling distinctly underwhelmed. Commentators were soon speculating that Xi Jinping’s credentials for leading China into a bold new era must have been overblown. Markets in Hong Kong and Shanghai sold off aggressively too.

But by Friday night the ennui was transforming into something approaching euphoria. That was after the unexpectedly early release of a much fuller document outlining Xi’s plans.

The 60 page report – entitled ‘Decision on Several Important Issues Regarding Comprehensively Deepening Reform’ – outlined a host of major initiatives. Digested over the weekend, they proved the catalyst for a further market rebound on Monday. Analysts also returned to the scene to pick over what had just happened. Most agreed on one thing: this was a departure from the government’s customary method of releasing information. In contravention of the usual timetables, the Friday evening announcement seemed to have been rushed out. What was going on?

Botched news management or a masterstroke?

The outside world never gets to hear what is said at a Chinese plenum, a closed door meeting of 370 or so of the country’s most powerful people. Instead the information about what they’ve decided normally dribbles out in a no-drama fashion. Traditionally, the deliberations are first cascaded down through the senior political ranks. The idea is that Party members get a chance to absorb the main messages before the public starts to hear about them through excerpts carefully coordinated for release in the state media.

But last week’s missive arrived much more quickly, with barely enough time for even the most dedicated of apparatchiks to memorise the key messages.

That led to speculation that Xi had thrown out the traditional playbook after seeing the negative response to the initial communiqué, as well as the reaction from the stock markets.

The Hong Kong press was first to make the claim that Beijing was reacting to events rather than dictating them. “Disclosure was brought forward due to the overwhelming criticism and the stock market plummeting for several days. More positive press was needed,” suggested the Apple Daily – citing ‘informed sources’.

The Oriental Daily News held a similar view, reporting that the fuller document was released soon after an unofficial version began circulating online. Perhaps this had forced the leadership to act, it thought, although it wondered too whether the leak could have been authorised.

“Public opinion may have forced Beijing’s hand, which led to disclosure earlier than expected,” it speculated.

The wider conclusion? That Xi was savvy enough to grasp that the old ways of doing things were no longer working. The withering reaction to the communiqué made plain that if he wanted to be seen as serious about pursuing a decisive reform agenda, he needed to look similarly decisive in announcing it.

Certainly Xi seems to be staking his political reputation on driving through the plenum’s proposals. Unusually, he penned an accompanying note on what was agreed at the meeting and he also made it known that he was a chief drafter of the blueprint (making him the highest ranking Party official to take up the role for years, Beijing Youth Daily has pointed out).

Comparisons have also been drawn with the most famous Third Plenum of all – the meeting in late 1978 in which Deng Xiaoping is said to have launched the Chinese economy on its path into the modern era.

Then again, some debunk the parallels, if only because Xi’s plenum looks to have grappled with reform far more directly. That’s according to research from Frederick Teiwes and Warren Sun – two Australia-based academics cited in an article by Chris Buckley in the New York Times – who say Deng’s plenum didn’t carry a message nearly as emphatic as its legend suggests. Mentions of “market” or “reform” were fleeting and it wasn’t until after Deng had established himself as paramount leader that the plenum was looked back on as a turning point.

Teiwes and Sun even claim that it wasn’t until six years later that the slogan most frequently associated with Deng-era economics – “reform and opening up” – began to be commonly used.

Despite this, much of the current commentary says Xi is trying to emulate events from 1978 by governing in the ‘strongman’ style normally associated with Deng. At the very least, Xi wants to break away from the policy paralysis of his predecessor Hu Jintao by leading in a more powerful and visionary way, says Arthur Kroeber, the Beijing-based managing director of Gavekal Dragonomics. In this respect his first year in office was spent softening up some of his opponents and cementing his own position, in part via a campaign against senior level corruption at state-owned enterprises.

“Xi’s promptness in dispatching his foes is impressive. In contrast, both of his predecessors waited until their third full year in office to take out crucial enemies on corruption charges,” Kroeber suggests.

He adds: “The message is obvious: Xi is large and in charge, and if you get on the wrong side of him or his policies you will not be saved by the patronage of another senior leader or a big state company.”

How about the reforms themselves? How substantive are they?

“The boldest package of policies seen in decades,” reckoned Qu Hongbin, HSBC’s Chief Economist for Greater China, in a research piece termed ‘China’s turning point’.

It looks like a fair assessment: in a single document Xi has put together a more radical policy agenda than Hu Jintao was able to articulate over an entire period in office.

Despite this, most of the areas identified for overhaul were anticipated long before the plenum (see WiC210 for the six main themes forecast by HSBC). As predicted, much of the focus is about enabling a ‘decisive’ role for the market in the Chinese economy, although state ownership will continue to play a ‘leading role’ as well. There is also mention of a number of themes covered by WiC, including new ideas for how rural land can be bought and sold (see WiC215), new levels of access for foreign investors (see WiC211) and confirmation that private investors will get new rights to set up banks (see WiC206 and 216 for two more recent commentaries).

Despite the excitement, few of the individual announcements last Friday were thunderbolts. But putting them down in black-and-white has had a striking impact. The reform agenda now has much more solidity, especially with Xi’s backing now beyond dispute.

Were there many unexpected items?

There were some “upside surprises”, according to HSBC’s Qu. In some cases that was because more detail was released than anticipated (state enterprises will now have to contribute 30% of their dividends to government spending on social security, for instance). Other surprises were more of the procedural ilk – such as the creation of a new committee to champion the reform process. But a third group of measures were a little more surprising if only because analysts hadn’t forecast they’d be up for discussion at the plenum.

Top of the list – at least symbolically – was the proposal to ease the one-child policy, an announcement which got wide media coverage, especially internationally.

The new measure – which will allow couples to have two children if one parent is also a single child – wasn’t entirely unexpected (in issue 205 we referred to rumblings about potential changes amid the wider context of China’s greying population). But the impact is likely to be more limited than for some of the other proposals. For a start, the ban on second children isn’t as complete as often assumed. Couples can already have a second child if both spouses are only children, while rural families are allowed to have an additional child if their first is a girl.

Equally, even with 16 million couples newly free to have a second baby, there isn’t much expectation of a sudden flood of newborns. After more than a generation of policy controls, many Chinese no longer want larger families, while growing affluence also serves as a brake on the birthrate. Even in Shanghai, the city with the nation’s lowest birth rate, the demographers aren’t predicting a baby boom. He Yafu, an expert interviewed by the Financial Times last weekend, says that only 8% of couples with the right to have a second child in the city currently do so, while many others aren’t starting families at all. “The fertility rate in Shanghai is under 1.0,” He said. “That means that many couples don’t even want one child.”

Further softening of the rules looks unlikely too. That emerged the day after the plan was released when Wang Pei’an, a senior official at the National Health and Family Planning Commission, took a stern line in an interview with Xinhua. Headlined “Birth Policy Changes Are No Big Deal” it made clear that the “basic state policy of family planning will be adhered to over a long period of time”. Taking the next step and allowing every urban couple to have two children would create “quite a serious concentration of births that would impose very heavy pressure on basic public services,” Wang warned.

Changes to the hukou are going to be significant, though?

Another area flagged for reform in advance of Friday’s announcement was the hukou, the household registration system originally designed to prevent mass migration into China’s cities from other parts of the country.

Sure enough, the hukou was prominent on the reform agenda and the measures being proposed are potentially monumental, promising equal access for migrant workers to urban public services like education and medical care.

However, progress is going to be cautious, with changes applied first in small and mid-sized cities but not in China’s leading conurbations. For some, more urgency is required. Hua Sheng, a prominent economist was one of those calling for more substantive change. “Why are we still talking about this for so many years?” he complained. “Land doesn’t modernise a country, people do. The hukou is the key bottleneck for urbanisation”

Preparing for a post-hukou world also offers an excellent example of the interconnectedness of the reformers’ challenge. Success at changing the hukou rules will mean more people moving permanently from the countryside to cities.

But for the great migration to work, other changes are needed. Rural folk will want to arrive in cities with money in their pockets, which is more difficult if they can’t sell the land or homes that they are leaving behind.

And once they are settled in their new homes, migrants will become more of a financial burden to local governments already tasked with paying for 80% of public spending on just 40% of tax revenue, according to the China 2030 report published last year by the World Bank and the State Council’s Development Research Centre.

Hence the reform agenda also focuses on enabling rural land sales, as well as finding new sources of local government finance, like more transfer payments from central government, bond sales at local level, and speeding up legislation on a new property tax.

Now it’s a question of implementation?

Next month the two Work Conferences will convene in Beijing, starting to add more detail on how some of the measures will take shape. Even so, HSBC thinks it will take time to see fuller results (“1-3 years rather than 1-3 months”). More cautious still is the 60-page ‘Decision’ document itself. It reckoned on achieving outcomes that are “decisive” (a favourite word at the moment) by 2020.

What’s clearer is that it will be a multi-speed process. Some of the more complex or contentious changes (shelving the hukou or limiting the power of the SOEs) is going to take longer to implement than less controversial ideas like deregulating energy prices.

Beijing will also move much more slowly in the areas seen as riskiest for social stability, as well as those that could impinge more immediately on the political status quo.

The sense is that Xi and his premier Li Keqiang are also expecting a fight, following a series of warnings about how ‘vested interests’ are going to resist many of the measures being proposed.

Li was on confrontational form on the same theme earlier this month, insisting that local governments won’t be allowed to “play tricks or conduct reform as a mere formality”.

But at least now that a fuller agenda for change is taking shape, the battle lines can be more clearly drawn.

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