Breaking Down China's Reform Plan

December 2, 2013 Topic: Politics Region: China

Breaking Down China's Reform Plan

Baby steps or revolution?

China’s much-anticipated Third Plenum of the Eighteenth Central Committee concluded on November 12, 2013. The initial communique underwhelmed China watchers worldwide. Even Chinese citizens were left scratching their heads about what the difficult-to-decipher and propaganda-laden document really signaled. But then, a few days later, a far more detailed “Decision on Major Issues Concerning Comprehensively Deepening Reforms” was released by Party Central. The Decision, twenty-two thousand characters long in Chinese, allegedly identified more than three hundred specific reform measures in sixty separate categories. The media roll-out reported that the document had been in preparation for seven months, had involved a multitude of institutional and individual input, and had been led by paramount leader Xi Jinping himself. President Xi not only personally presided over the drafting process and the plenum itself, but he also delivered a lengthy “Explanation” that summarizes the lengthy decision and instructs party cadre on how to interpret it.

So is all the hype that has been heaped on the Decision warranted? What is the world to make of it? Is it the blueprint for China’s future that many—most notably the Chinese government itself—claim it to be? What exactly does it call for? How does the Decision envision the country developing over the next few decades? Above all, can it be implemented?

The Decision and the Explanation are an odd mixture of ambition and caution. The reformist rhetoric is indeed encouraging, as China definitely needs a bold new vision and leadership at this juncture in its development, but the vague wording and lack of specificity in the released documents suggest a lack of determination, irresolution of certain issues, deep debates behind the scenes, and anticipated bureaucratic resistance.

Nonetheless, two elements are noteworthy. First, the magnitude of the effort is recognition by the leadership that China faces unprecedented challenges that must be grappled with. This is hardly a new realization, as the last Hu Jintao-Wen Jiabao government made many pronouncements that the macro growth model needed adjustment and the World Bank’s China 2030 report (co-written with the State Council and issued earlier this year) spelled out the changes that needed to be made in considerable detail. Thus this is hardly a new revelation. But what is new is the systematic and comprehensive approach reflected in the Third Plenum documents. Previously, the government had only offered piecemeal and incremental proposals. So, the Plenum is the first serious attempt by the Chinese government to grapple with the full and complex agenda of issues.

Second, the Decision and Explanation are—in places—refreshingly candid and objective about the high number and seriousness of the problems facing the party-state. Recognizing and acknowledging problems in a direct fashion is the first, and most important, step towards effectively addressing them. To wit:

At present, extensive and profound changes have occurred in the internal and external environments. China's development faces a series of outstanding contradictions and challenges. There are still many more difficulties and problems waiting for us in the future. For example, the lack of balance, coordination, and sustainability in development is still outstanding. The capability of scientific and technological innovation is not strong. The industrial structure is not reasonable and the development mode is still extensive. The development gap between urban and rural areas and between regions is still large, and so are income disparities. Social problems have increased markedly. There are many problems affecting people's immediate interests in education, employment, social security, healthcare, housing, the ecological environment, food and drug safety, workplace safety, public security, law enforcement, and administration of justice. Some people still lead hard lives. The problems of going through formalities, bureaucratism, hedonism, and extravagant practice are outstanding. Some sectors are prone to corruption and other misconduct, and the fight against corruption remains a serious challenge for us. The key to solving these problems lies in deepening reform.

Such sober admissions are refreshing and a clarion call to deal with them. But unfortunately, such candor in admitting the challenges is not matched by specificity in how to deal with them. While not as laden with mind-numbing propaganda as the Plenum Communique, the Decision and Explanation are nonetheless quite vague overall and obscure the issues more than they clarify them. This is not to say that there are not some places where specific proposals are offered; e.g., loosening of the one-child policy, abolition of the “reform through labor” system, an enhanced role for the market in determining resource allocation, making government budgets more transparent, more fully funding public welfare expenditures, granting rural farmers greater property rights, and creating some new bureaucratic mechanisms such as the State Security Committee, the Leading Group on Comprehensive Deepening of Economic Reform, and hints about a super environmental agency, so that there is “a single department in charge of regulating and controlling all land space usage within the country’s territory and to uniformly carry out protection and restoration of the mountains, waters, forests, fields, and lakes.”

But to this observer, these are the only real specific proposals made in the lengthy Decision. The remainder is filled with vague allusions, hints and opaque language. Take, for example, legal reform. The Decision speaks of “promoting unified management of personnel, finances, and properties at local courts and procuratorates below the provincial level, exploring the establishment of a judicial jurisdictional system that is appropriately separated from the administrative division, perfecting the judicial power operating mechanism…” What does this mean in practice? Such opacity is mirrored over and over in various issue areas. Another example is the role of mixed ownership in the economy—“whereby the capital of the state, collectives, and non-public sectors of the economy is combined through interlocking shareholding…” What does this mean? Multiple other examples exist. Consider government structural reforms: “We must speed up the classified reform of institutions….optimize the organizational structure of the government…active and steady steps should be taken to implement the big-ministry system…we must optimize administrative zoning…” Concerning urban reform, the Decision holds that: “Perfect the healthy development of the urbanization structural mechanism, adhere to the path of new-style urbanization with Chinese characteristics…and boost the cities’ comprehensive load-bearing capability.” Readers of the Decision and cadres across the country are forgiven if they are confused by this kind of pabulum.

The real “winner” of the Decision and proposed reforms is, probably predictably, the party-state. In section after section, it is clear that there is no intention to weaken or loosen the controls or power of the party-state. While lip service is paid to developing “consultative [socialist] democracy,” there is no evidence of a loosening of the party’s grip on power. Quite to the contrary—the crackdown on internet dissent, NGOs, and other political activism of the past year will be intensified. The Decision also backs away from the one key area where it is most needed: state-owned enterprise (SOE) reform. Although it does hint at the allowing market forces to determine the prices of energy inputs such as water, oil, natural gas, electricity, transport and telecommunications—all sectors monopolized by SOEs—there was no discussion of privatization or breaking up these state-capitalist corporate behemoths. If anything, the Decision indicates that they are to be made stronger and more “efficient”—suggesting that the Chinese are still enamored with the South Korean chaebol model. At the same time, the Decision suggests that the SOEs should contribute 30 percent of their profits to the state in order to help fund social-welfare expenditures. The Decision similarly dodged the issue of the lack of international competitiveness of its multinational corporations, simply calling for more “external investment.”

Another potential reform that was not embraced was the potential abolition of the hukou residency system. The Decision made it clear that the system was to stay, although it does call to “speed up reform” in this sector. The residency system and lack of a true labor market is one of the key problems afflicting economic efficiency and burdening municipal governments.

The document discusses the importance of innovation in the next stage of China’s economic development, but it is frustratingly unclear on how this is to be achieved. It correctly speaks of the “market oriented mechanisms for technology innovation,” but it says nothing about the underlying constraints on innovation—namely the educational system, the political system, and a conservative culture that does not reward risk-taking. China’s only real hope to avoid being stuck in the “middle income trap” is if it can innovate its way out through innovation as other newly industrialized countries have done. But this ultimately requires dismantling political authoritarianism and cultural conservatism.

More encouraging is the section on financial-sector reform. Some experiments in private banking are endorsed, while it is encouragingly said that: “We must expand the opening of the financial industry to domestic and foreign investors and permit private capital….” It also hints that banks may enjoy greater authority to set their own interest and lending rates, and to make loan decisions based increasingly on economic—rather than political—criteria. China’s nascent securities market is also to be further “developed and standardized.” There were also some intriguing hints concerning reform of the taxation system. This would be welcome, as it is directly linked to the problem of inadequate revenue sharing and transfer payments between the central and sub-central governments. At present, China practices a “unified” taxation system whereby all provinces, municipalities and localities must collect taxes but must submit the revenue to the central government which, in turn, is to redistribute a fixed percentage to them. The problem is that the fixed percentage is far from adequate to provide a wide range of social welfare to the population. It is estimated that subcentral governments only receive 40 percent of the cost of providing these “public goods,” while the localities must come up with the lion’s share (60 percent) of their cost. The novel suggestion that SOEs should now kick in more to address this chronic shortfall (noted above) may help, but will still not be enough.