Third Plenum statement shows how serious the leadership is about reform in china

From the statement issued after the Third Plenum of the Communist Party of China's Central Committee that finished on Nov 12, it is clear that the meeting has the potential to make history.

There are at least four breakthroughs in the statements that are expected to change the course of China's economic growth.

First, "big market, small government" will serve as the centerpiece of economic reform.

That will be the direction China's reform endeavors are expected to pursue in the coming decade.

The statement said: "The core issue is to straighten out the relationship between government and the market, allowing the market to play a decisive role in allocating resources and improving the government's role."

The role of the market is for the first time defined as "decisive". Earlier, it was described as "basic".

This is a clear signal that authorities are determined to let the free market play a bigger role in the economy.

Judging from what the new leadership has done since it took charge, it is serious about curbing the role of government.

Second, in line with the philosophy of "big market, small government", the statement elevates the role of the private sector.

Despite repeating that public ownership plays an important role, for the first time there is a declaration that both public and non-public sectors are "important components of the socialist market economy and significant bases for economic and social development".

This was a strong endorsement for the private economy, and it is expected that private businesses will be given bigger market access, and state monopolies will be checked to some degree.

Third, the rural-urban divide has been singled out as a problem that the Party needs to tackle.

The statement calls for a unified trading market for land for construction, ensure equal exchanges of (production) elements and balance the distribution of public resources.

This implies that authorities may touch on the reform of hukou, the household registration system, and land transfer system, a move that is expected to pave the way for sound urbanization and free, fair flow of resources between rural and urban areas.

As growth in urban areas slows, promoting urban-rural integration will give fresh impetus to economic growth over the coming decade.

Fourth, the statement vows to further open up by "widening investment access, accelerating the building of free trade zones and expanding the opening up of inland and border regions".

Considering the new leadership has quickened the pace of striking free trade and investment deals on both bilateral and multilateral fronts, with the latest negotiations to be launched on a bilateral investment treaty with the European Union, it is clear that it wants to promote internal reforms by promoting integration with the global economy.

The promise of setting up more free trade zones after the launch of the pilot zone in Shanghai in September underlines the leadership's desire for further opening-up.

The launch of the Shanghai zone is the third round of opening-up initiatives, after the establishment of Shenzhen Special Economic Zone in 1980 and China's entry to the World Trade Organization in 2001. The focus of the Shanghai free trade zone is the opening-up to foreign capital, especially in services. The existing approval system for foreign investment will be replaced by the negative-list system, and foreign investors will obtain pre-entry national treatment in the Shanghai free trade zone. The zone will serve as a testing ground for China's multilateral trade negotiations such as the Trans-Pacific Partnership.

The plenary session communique charts a clear path for development. But since the statement is largely an abstract, we do need to wait for another week to see whether detailed plans really touch tough issues such as state monopolies, financial reform, easing investment and curbing government powers. What is most important, of course, is to see the guidelines translated into reality in the coming years.

But since policymakers have shown their determination to press ahead with reform, they must have at least three things in mind.

First, GDP growth is not a priority any more. Although it is believed that China does need a certain amount of growth to ensure employment and social stability, it must be understood that the country, after withstanding the tests brought on by the 2008-09 financial crisis, is more willing to accept slower growth. The trade sector, in particular, has honed its skills in dealing with shrinking orders and economic slowdown.

Given that China's job market remained resilient during the economic slowdown this year, top policymakers should revise down GDP growth forecasts to 7 percent next year, from this year's 7.5 percent. By doing so, they can send out a strong signal that economic quality instead of quantity is what the country needs most urgently.

The soft landing from 7.5 percent to 7 percent will not take a heavy toll on jobs if measures to reform and boost the service sectors gather pace.

Generally, the country can provide enough jobs for its huge but shrinking labor force. But the real problem is structural in that it features insufficient service-sector jobs for its increasingly better-educated workforce, as seen in the difficulty for fresh university graduates to find jobs this year. In this sense, it is not overall GDP growth that matters to the jobs market. Instead, how fast the government is going to develop the service sector, by, among other things, cutting red tape, widening access to foreign and private investors and facilitating funding, will determine the future of the job market.

Second, breaking up state monopolies in major industries is a pressing matter.

In this there is likely to be stiff resistance from interest groups, but this hard nut must be cracked because monopolies hinder efficiency and creativity, widen the wealth gap and distort distribution of social and economic resources.

Successful reforms in this regard will raise productivity growth, helping sustain China's relatively high growth (6-8 percent) in the medium-term in the face of slower investment growth and unsupportive demographic trends, and promote more inclusive growth.

To achieve this, the government's desire to ease entry barriers for private investors and allow private capital to invest in several state-dominated sectors such as the railways, utilities, medical and telecom industries must be translated into action.

And more needs to be done in reforming the financial system such as allowing private banks to be set up without limits.

Third, policymakers must refrain from stimulus measures. Practice has proven that investment and liquidity-centered stimulus creates more problems than it solves.

The authors are Shanghai-based financial analysts. The views do not necessarily reflect those of China Daily.

(China Daily European Weekly 11/15/2013 page10)