China’s Third Plenum: Of Golden Equilibrium and Retreat of the State

Written by Wen-Ti Sung.

China’s ruling Chinese Communist Party (CCP) is set to host its all-important Third Plenum of the 18th Central Committee between November 9th and 12th. Expectations are high as observers await the Chinese leadership headed by President Xi Jinping and Premier Li Keqiang to articulate the first comprehensive statement of their vision for China’s future.

Usually taking place around one year into each leadership cycle, the Third Plenum has often been each leadership’s defining moment. In 1978, the Eleventh Party Congress’ Third Plenum ushered in China’s ‘Reform and Opening’ era. In 1984, the Twelfth Party Congress’ Third Plenum passed a major resolution over China’s economic reforms, and made the market a legitimate supplement to China’s planned economy. In 1993, the Fourteenth Party Congress’ Third Plenum formally established the concept of ‘socialist market economy’, and insulated China’s market economics from further political debates once and for all. In 2003, the Sixteenth Party Congress’ Third Plenum established a framework for modernizing China’s property ownership system.

This year, the Xi-Li leadership is set to present a significant economic reform package. Indeed, Xi and Li themselves have been instrumental in elevating the expectations to perhaps unrealistic levels. In October, for example, Xi and Li stated at APEC and other high profile events that China’s reforms have entered into ‘deep-water zone’ (shenshuiqu) and it is time to engage in ‘full-frontal assault’ (gongjian) against the vested interests. That is to say, Deng Xiaoping’s gradualist approach of ‘crossing the river by feeling the stones’ can no longer suffice – the waters is now too deep and the low-hanging fruits have already been harvested. China now has no option but to undertake bold wholesale reforms. Xi further added to the hype on November 2nd, when he stated that the upcoming Third Plenum will approve a ‘comprehensive reform package’ (zonghe gaige fangan) that provides an overall framework (zhongti bushu) for deepening reforms (shenhua gaige).

So just what kind of reforms does the Xi-Li leadership have in mind? While many wish lists have been proposed in leadership speeches and think tank reports, a common theme has been a resolve to reduce the government’s role in the economy. This is manifested in two main forms: First, they will crack-down on state-owned enterprises’ (SOE) oligopolies to make room for private and foreign capital; second, they will significantly reduce government investments to make way for a more consumption-based economic model. Premier Li has been the face of both initiatives, but he seems to have won broad support from other key actors in the party’s collective leadership.

First, on the SOEs, in October, Premier Li allegedly distributed to his cabinet a long report penned by the All-China Federation of Industry and Commerce, a potent business lobby group, and he ordered all cabinet ministries to submit roadmaps for implementing economic liberalization initiatives suggested by the report. Soon this initiative would be echoed by the Development Research Center, the State Council’s preeminent think tank, which published ‘Plan 383’, a comprehensive blueprint for economic reform. The ‘Plan 383’ report has been submitted to the Communist Party’s Central Committee for discussion and approval at the Third Plenum. Among other things, the report calls for major SOE reforms, increasing competition and efficiency in China’s basic industries (first and foremost the SOE-dominated resource sectors), and liberalization and opening up of the financial and services sectors.

President Xi gave effective political clearance to this initiative earlier in July, when he outlined six major challenges to deepening reforms (sometimes nicknamed ‘Xi’s Six Points’), which also called for greater resource allocation efficiency, economic openness, and unleashing society’s ‘creative energy’, among others.

To demonstrate his seriousness to those with vested interests, in March 2013, Premier Li publicly singled out the five principal SOEs in China’s energy and telecommunications sectors, as he urged them to “make major changes and major reforms, or else be held responsible for the major problems that would follow”. In September, partly in light of perceived resistance, the Chinese leadership launched an anti-corruption investigation of five present and former executive officers of the China National Petroleum Corporation, the most recognizable face of Chinese SOEs and the perennial largest company in China until recent months.

Moreover, Li’s crack-down on SOE oligopolies and crony capitalism may have found an unlikely tactical ally in former President Jiang Zemin, who remains an important figure among the party’s old guards. As Cheng Li of the Brookings Institution argued, Jiang has been a primary driving force behind the establishment of the Shanghai Pilot Free Trade Area, the capstone project for Premier Li’s economic liberalization agenda.

Second, Li’s other major initiative is to reduce government’s role in the economy, so as to encourage the transition from an investment-based to a consumption-oriented economic growth model. On this front, Premier Li has demonstrated his resolve through a number of high-profile speeches this year. Since July, he has repeatedly warned against further money printing or infusion of liquidity, as he sought to discourage state-owned banks from reckless lending and increasing risks for China’s already troubled financial system. He also promised not to offer any new short-term fiscal stimulus to the Chinese economy. Moreover, Li also went so far as to openly revised China’s average annual economic growth targets to 7 or 7.5 percent for ensuing years, as he argued that China’s economy needs to find a ‘golden equilibrium’ between growth rate and sustainability.

Politically, Li’s initiative to rein in government-stimulus-enabled economic growth mania seems to be well-supported among the party’s collective leadership. For example, in early November, a Politburo Small Leading Group issued an unprecedented directive that criticizes the existing government human resources practice of using GDP growth as the primary performance indicator for promoting officials.

At this point, it may be too soon to tell what the implication of the Xi-Li leadership’s initiatives will be. While they will certainly be important items for discussion at the upcoming Third Plenum, it remains to be seen whether they can push them through the 200-member strong Central Committee. Even if supportive resolutions were passed, it is not inconceivable that the initiatives will be neutralized by local resistance and implementational challenges. But if initiatives were to succeed, we may expect meaningful retrenchment of the Chinese state’s role in the economy, a more open Chinese economy that grows at more sustainable rates, and a renminbi that will become better-positioned to internationalize.

Wen-Ti Sung is an Asian Studies Fellow at the East-West Center in Washington and a PhD candidate at the Australian National University.

Categories: Politics, Third PlenumTags: , , , , ,

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