Yukon Huang: How to make “comprehensively, deepening reform” in China

Was the outcome of the Third Plenum “unprecedented”, as one member of the standing committee expressed beforehand? Or at least “comprehensively deepening reforms”, as characterised officially? After four days of silence when the only indication that something important was happening was the increased security, the final communique offers both encouragement and uncertainty.
The communique was comprehensive in the tradition of previous statements. Present were both the obligatory homage to the past leadership is there (“the magnificent banner of Socialism with Chinese characteristics”, “Deng Xiaoping Theory”, “the important Three Represents thought”) and the affirmation of the dominant role of the Party. It also managed to mention all the issues without offending any constituency: “establishment of an innovative economy, governing the country according to the law and accelerate the perfection of cultural management.”
This was to be expected. The uncertainties revolved around two issues: how the plenum would deal with the role of the state and how the leadership would demonstrate its intentions to act.
On the first, the communique managed to tread a fine line. It clearly stated that the market would play a decisive role (in contrast to a “basic” role) in allocating resources, and the government would play a better role. Implicit here is that the government will move to eliminate major price distortions and curb the government’s interventions in the allocation of resources which are seen as having exacerbated inefficiencies. But the statement also reaffirms that “public ownership” is at the “core” of the economic system, signaling limits to the private sector’s role.
On the second, the decision to establish a central leading group to drive the reform agenda recognises that the reforms are now more complicated than before, embracing multiple sectors. The current compartmentalisation of responsibilities among the members of the Standing Committee and State Council has made it nearly impossible to address reforms involving multiple interests. The proposed committee could break this log-jam.
The Third Plenum did provide a “comprehensive framework for deepening reforms” but as expected no detailed action plan. The “what” was never that important since there is little disagreement on the menu of needed reforms. The continuing debate will be about how to do it, when to do it and by how much.
The few specifics are in areas where there are agencies with the orientation and capacity to carry out reforms at the national level, as in the financial and fiscal systems. For most issues, however, where more tailored approaches are warranted given the diversity of the regions, reforms will be driven locally with less predictable outcomes.
Years from now, this Plenum might be judged as “unprecedented” if it turns out that the state really does allow the market to play a more decisive role and the new team really is able reform, fundamentally, the major economic institutions.
But for markets, there are more immediate concerns about whether the leadership has a strategy for reversing the rapid debt build-up and developing a more sustainable basis for growth. They will want to see more concrete actions to break the unhealthy links between local authorities and the banks that they effectively control. With the state playing both the lender and creditor, this relationship has been a recipe for the excesses exemplified by the the surplus capacity of China’s so-called “ghost towns”.
Markets also want to see the private sector playing a bigger role in developing higher-value services: financial, media, telecommunications, education and health. The leadership is likely to shake up the protected positions of the state enterprises and allow private interests to take up an increasing share, but full privatisation remains an unlikely option.
For the average person concerned about growing inequities, corruption and pollution, there is support for the rule of law and at least one tangible action in the establishment of a restructured state security system. This could offer a more holistic and sensitive approach to addressing social tensions than in the past but it could also turn out to be a means for more heavy-handed treatment.
Although the link is not often recognised, a better-managed urbanisation process can address both social concerns and support growth. Urbanisation is not just about allowing more people to move into the cities. It is also about unifying and reforming rural and urban land markets, as noted in the communique, so that farmers can sell their use-rights to collectively owned plots at a fair price. Urbanisation is also about granting migrant workers full access to social services, which promotes equality and also stimulates consumption.
China’s future lies as much in maintaining political stability as in sustaining rapid growth. Many of the actions cited in the communique could feed into the wider changes needed to curb corruption and promote the sense of a more just society. Fiscal reforms and reduced dependence on banks will improve transparency and promote accountability. Rolling back the power of the state enterprises and streamlining government procedures will restrain opportunities for rent seeking. Promotion of a services-oriented economy will reduce dependence on energy-intensive industries and help mitigate environmental degradation. Urbanisation will strengthen the voice of the middle class and put pressure on liberalising the flow of information, as well as promote a more independent jury. In sum, this will all give substance to what President Xi has implied in his as yet undefined “China Dream”, to which he gave such prominence in this Plenum.

Yukon Huang is a Senior Associate at the Carnegie Endowment and a former World Bank Country Director for China.

Fonte: FT