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Some hope for reform from China’s Third Plenum

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In Brief

China’s party leadership just announced the country’s reform agenda that will guide government policymaking and implementation for the next decade. Like previous such plenum documents, the announcements outline only broad priorities.


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Although the proposed reforms were billed as comprehensive and unprecedented, they are neither. But they could lead to further reforms down the track.  Indeed, the priorities they indicate could signal a potentially significant change in the approach and direction of future economic policies.

This can be seen by one of the messages of the plenum document: that markets — not government — should play the decisive role in allocating resources. Taken at face value, this new direction could potentially affect all aspects of the economy through its impact on product, labour, financial and land markets. But the same line also says that the government should have ‘fuller rein’. And unfortunately, the plenum’s message is diluted by the absence of any mention of financial, labour or land market reforms. And when state enterprises are mentioned, the document says they will continue to play a dominant role in the economy, leaving unaddressed the obvious concern that state enterprises tend to tilt the playing field against non-state firms.

The plenum document also calls for a decisive shift in the government’s role toward new priorities. These new priorities include environmental protection, innovation and social justice.  Social justice receives unusual emphasis and covers reform of the judicial system and protection of human rights, greater emphasis on rural–urban synergies and property rights for famers, and delivery of public goods and services that promote social fairness, more equal income distribution, and greater equality of opportunity.

Finally, it is encouraging that the plenum gave due attention to strengthening the fiscal foundations of the state. Many of China’s problems stem from weak public financial management and an over-reliance on the financial sector as an instrument of fiscal policy. Any reforms seriously undertaken — including of banks and state enterprises — will require substantial fiscal resources. The proposed reforms in public financial management appear to address the right issues: improvements in budget management, revenue mobilisation and, most importantly, ensuring that local governments have adequate public resources to meet their expenditure responsibilities.

The plenum document is equally notable for what it does not say. It is silent on proposed reforms of state enterprises and the financial sector, urbanisation, the operation of land and labour markets (including reforms of the ‘hukou’ system), the opening of the capital account, exchange rate management, and the internationalisation of the renminbi.

Taken as a whole, then, the reform priorities put forward by the plenum have important gaps. Yet if the important message on the role of markets is taken seriously, it constitutes a serious, if cautiously crafted, agenda for the future. This could have a profound effect on all aspects of the economy going forward. China’s leadership has given a strong indication of the direction in which they would like to take the economy over the next decade. But the devil is always in the details and those expecting specifics will have to wait. The complexity of the challenge requires moving forward carefully with design and implementation. The leadership has entrusted this to a high-level committee. The committee’s first task will be to translate the plenum’s priorities into concrete policies that are appropriately sequenced and phased. It is when they will emerge with their recommendations that we will have a better idea of what the government actually intends to do.

The third plenum document did not live up to its hype. But if the government is serious on implementing this enormously importantly message on the decisive role of markets — then this may well prove to be a pivotal moment in China’s history. Only time will tell.

Vikram Nehru is a Senior Associate and Bakrie Chair in Southeast Asian Studies at the Carnegie Endowment for International Peace.

3 responses to “Some hope for reform from China’s Third Plenum”

  1. Two quick observations: first, it never ceases to amaze me how little is known of the intentions of the government in China despite the considerable resources devoted to understanding precisely this aspect. Second, despite the “serious” nature of acts of omission and commission of the government, China continues to grow strongly, lifting ever larger numbers of its population out of poverty and into the consuming middle class. They are obviously doing some important things right!

  2. Well written and crisp. If we view the document from a Chinese point of view, and not just the Western view, we may get more insight into what it says. It seems to say cautious move toward a more open market system, without giving up control or the ability to intervene as and when. It would be interesting to know to what extent previous such plenum documents were followed, and whether they were mere statements without intent or did they actually lead to changes as envisaged in them.

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