Written by Linda Yueh.
Will 2013 be another 1978 or at least 1993 for China? Third Plenums held in those years resulted in significant overhauls of economic policy. The Third Plenum refers to the third time that the new leaders of China lead a plenary session of the Central Committee. The current one is being billed as being as significant as the one in December 1978 that marked the start of market-oriented reforms in China over 3 decades ago under Deng Xiaoping. Change of a similarly dramatic nature is unlikely, but there are high expectations that the new Chinese leaders will launch reforms that are as notable as those made in 1993, which dismantled a large part of the state-owned sector. State-owned enterprises fell from over 10 million to fewer than 300,000 in the mid 1990s.
The Third Plenum is typically a platform for the announcement of significant reforms, coming about a year into the term of the new president and premier, who have secured their positions sufficiently to unveil plans for their decade in power.
The Third Plenum of the 18th CPC Central Committee, which will take place in Beijing from Nov 9-12, will likely draw from the so-called ‘383 plan’ that has been circulated by Chinese government think tanks and aims to transform the Chinese economy by 2020.
The 383 plan involves 3 reforms to open up the market, transform government, and reform enterprises to boost innovation.
The 8 key areas to tackle include: cut administrative approvals, promote competition, land reform, open up banking including liberalising interest rates and the exchange rate, reform the fiscal system including setting up basic social security, reform state-owned enterprises, promote innovation including green technology, and open up the services sector.
Within these, the plan identifies 3 major breakthroughs to be achieved: lower market barriers to attract investors and boost competition, set up a basic social security package, and allow collectively-owned land to be traded.
This is a tall order, but these three aims figure prominently among the reforms that are needed for China to grow in a more sustainable and stable fashion.
First, increasing competition can raise productivity, which is what is needed for China to grow. But, that does require reforming the remaining state-owned enterprises which have entrenched themselves in significant sectors of the economy, such as banking and telecommunications.
Second, social security for its people will help to re-balance the economy through supporting the poorest and also the growing middle class. It’s what’s needed as China seeks rely more on domestic demand and thus the consumption of its own people to grow its economy.
Land reform will be a key part of that as well. The 383 plan refers to giving equal rights to rural and urban residents to trade collectively-owned land. It means that land is still owned by the state or local government, but those who have long leaseholds on the land will be able to trade and thus reap the benefits of land values that right now accrue largely to the government. Land confiscation is the source of significant complaints across rural China. And, it seems, although it’s been much debated, privatisation of land looks to be off the table.
Also, although one of the reforms is to liberalise interest rates and the exchange rate, opening up the capital account – that is, allow more short-term capital to flow across borders – isn’t a priority. This has been another bone of contention. Greater opening of China’s financial markets is likely to happen, but how much and how far remains to be seen. The initial progress in Shanghai’s Free Trade Zone that has been touted by the Chinese premier Li Keqiang as the experimental zone for such reforms has been less than stellar so far.
There are also numerous concerns such as the amount of debt in China’s economy, addressing corruption, and reforming the rule of law which all need attention. So, it’s a long list of reforms that are needed.
If none of these reforms seem as radical as turning away from central planning or dismantling state-owned enterprises, it shouldn’t be too surprising as those were once-in-a-blue moon moments. But, sometimes a lot of reforms rather an eye-catching one or two can have a bigger and longer lasting impact.
Time will tell whether this Third Plenum marks a turning point that will define the next three decades of China’s economic development. However, it should provide an indication of the reform path that the world’s second largest economy will embark on under Xi Jinping and Li Keqiang, with all the concomitant implications for the rest of the world seeking stability and growth in its largest economies.
Linda Yueh is Fellow in Economics at Oxford University, Adjunct Professor of Economics at London Business School and Chief Business Correspondent at the BBC. A version of this post appeared on the BBC website on Nov 4.