Third Plenum reforms vague, but carry a hidden bite

November 18, 2013 by Ken Davies

It would be a mistake to dismiss the Chinese Communist Party’s latest programme of reforms as empty hype, even though the communiqué issued at the end of the Third Plenary Session of the 18th Central Committee was vague and added little to previous policy promises.

The most important concrete change announced so far is the concentration of power in the hands of Xi Jinping and a new Central Reform Leading Group to “design and co-ordinate” the reform, ie over-ride bureaucratic obstruction.

In its Decision on Major Issues Concerning Comprehensively Deepening Reforms adopted at the Plenum, the Central Committee announced several rather limited reform initiatives, phrased to indicate that more radical changes are on the way. Sixty detailed targets in 15 policy areas, half of them dealing with economic restructuring, are soon to be unveiled.

Nobody expected this third wave of reforms to be as sweeping as the reform and opening up announced by Deng Xiaoping at the end of 1978 or Deng’s second initiative after his southern tour in early 1992. Major institutions of the old command economy, including collective farming and state ownership of all industry, are gone and the foundations of a sound institutional framework for business, including economic laws and regulatory authorities, have been built.

These changes were not easy, but they went with the grain of public opinion. Opposition was ideological rather than interest-based. The challenge now is to overcome entrenched interest groups, including local Communist Party officials and heads of state-owned enterprises.

The new reform programme proclaims a long list of high-level objectives, many of which would not look out of place in the manifesto of a political party in a developed democracy. For example, making market rules that are “fair, open and transparent” or widening “investment access”.

But the communiqué and the Decision both include a commitment to maintaining the “socialist market economy” while deepening all-round reform. China’s leaders have warned in recent years that Communist Party rule is in question if rampant corruption persists. It is also in question if economic growth collapses following the long boom that is now ending. The implicit aim of reform is to sustain the growth that has allowed the Party to rule China long after its legitimacy has collapsed.

After the media fanfare, there is bound to be disappointment that the Plenum produced a policy document that stops short of fully addressing the key challenges for economic policy. It is almost certain, however, that more detailed – perhaps more radical – measures are to follow.

The hardest nut to crack in the 1990s was the state-owned enterprise system. The then premier Zhu Rongji took an axe to it, resulting in massive closures and millions of redundancies. Competitive pressures – especially after China joined the WTO in 2001 – have strengthened state-owned enterprises, which also benefited from government stimulus after 2008. Radical reformers would like to privatise them, but no such drastic step is yet in prospect. Instead, there are proposals to increase regulation of state-owned enterprises and make them contribute more to public services and government funds.

State-owned enterprise leaders may not welcome such changes. Nor will they like the proposal in the Decision to “increase the proportion of market-oriented recruitment” (ie reduce the number of top posts allocated to Party members regardless of qualifications), “reasonably determine and strictly regulate SOE executives’ wage levels, and position benefits, consumption and business spending”.

It had been hoped that farmers would obtain some guarantee of continued land occupancy after the expiry of their leases. What they are promised in the Decision is that “the homestead system in rural areas will be improved, and farmers’ usufruct rights of homestead will be ensured”, without explaining how. On land seizures, the Decision says that farmers “should receive a fair share of the profits from land-value appreciation”. Again, the proof of the pudding will be in the eating.

The hundreds of millions of migrant workers who staff China’s factories and building sites are promised “the same pay for the same job”, with basic urban public services made available to all permanent residents (including the migrants, classified as “rural residents”). Reform of the hukou (household registration) system will be accelerated to help farmers become urban residents. Disappointingly, there is no mention of abolishing the hukou system, which China’s leaders promised as far back as the 1980s. It looks like it will be kept, for now, to help control migration to big cities.

The one-child policy is not yet to be abolished, but couples will now be able to have a second child if one of the parents is an only child (previously, both had to be only children). This change is driven both by public opinion and by the rapid ageing of Chinese society. Moving to abolition would be a logical next step.

Many proposals are not radical, but could have radical effects if sufficiently pursued. For example, more law enforcement resources are to be allocated to food production, medicine production and environmental protection. With poisoned water, air and soil, however, ensuring clean food will require a lot of extra policing.

In the crucial area of establishing the rule of law — vitally important not only for the Chinese public but also for foreign investors — the reform proposals cry out for further elaboration. The Communist Party seeks to “ensure independence and fairness in courts and prosecuting bodies” by managing courts better and separating the jurisdiction of courts from administrative divisions. It will “let the judicial system be more transparent” by “recording and keeping all court files”. Much more will need to be done to stop local Party officials from telling judges what verdicts to make.

The Shanghai Pilot Free Trade Zone, announced in July, will be a hothouse for testing the reform policies, and more such zones will be set up. The Shanghai Zone has already floated the abolition of the catalogues for guiding foreign investment and replacing them with a “negative list” of sectors in which there are national security, ecological safety or other publicly-stated concerns, with investment in all other sectors open to foreign investors without prior approval. There will be much haggling over the contents of the closed list, which will be much larger than foreign investors would like and will no doubt shrink gradually in future years. Implementing this reform in the whole country will occur if it is successful in Shanghai.

Human rights groups may focus on the potentially dangerous arrogation of greater central power to Xi Jinping (though they will like the abolition of labour camps and the reduced application of the death penalty), while foreign investors will take comfort that the Party leadership looks strong enough to force through reforms long urged by domestic economists and international bodies. They can take heart from the fact that these reforms are essential for régime survival, a strong motive for them to be implemented. Will they be? Only time will tell. Watch this space.

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