Hopes of Market Reforms in China Tempered by Political Realities

OCTOBER 28, 2013, 4:10 AM

Hopes of Market Reforms in China Tempered by Political Realities


China’s leaders head toward a major policy-setting conference next month bearing heady expectations that they have encouraged, and a proposal from a prominent government research organization has magnified speculation that they will embrace bold pro-market overhauls. The grinding realities of politics, however, are likely to force proponents of such overhauls to settle for more modest changes, experts said.The head of the Chinese Communist Party, Xi Jinping, has repeatedly said a Central Committee conference next month will inaugurate far-reaching economic changes. Other senior officials have also encouraged ambitious hopes for the third full gathering, or plenum, of the current Central Committee, a body with just more than 200 central and local officials as full members. The government has said the meeting will take place in November, but has not given a precise date.

China’s leaders widely acknowledge that unless they overhaul policies, the national economy will not be able to maintain the growth needed to satisfy citizens’ expectations of better jobs, incomes and opportunities. They also say that the government’s long-standing recipe for growth — relying on high levels of investment in heavy industry and infrastructure — must make way for a more equitable economy and stronger social safety net so that ordinary farmers and workers feel more confident about spending.

“The plenum will mainly be about considering how to comprehensively deepen reform,” Yu Zhengsheng, a member of the Standing Committee, the seven-member innermost circle of party power, said at a meeting over the weekend, according to state media reports. “This round of reforms will be unprecedented in its broad scope and intensity.”

But party leaders have not given details about what they have in mind. In the absence of clear explanations from them, investors, diplomats, journalists and less senior officials parse leaders’ comments, state media reports and government think tank studies for clues about what changes may be coming. Among the raised expectations, one particular proposal, known as Plan 383, from a government research center, has created a hubbub of excitement from the media and investors in recent days.

That plan comes from the State Council Development Research Center, which advises senior officials, and Chinese newspaper reports have said Liu He, an official who advises Mr. Xi and other leaders on economic policy, initiated preparations for the proposal. Mr. Liu is also helping oversee preparations for the Central Committee conference. Here, it seems to some, is a bold plan for pro-market liberalization and limiting government power of the kind that many economists say China needs.

Plan 383 lays out three broad ideas for overhauls, eight specific areas for change and three approaches for coordinating the changes.

“The objective of this new round of reform is to build a socialist market economy that is energetic, innovation-oriented, inclusive and orderly and protected by rule of law,” says a summary of the plan. It was first made public this month, but has generated widespread attention from investors and the Chinese financial press since last week, when the Development Research Center issued it through its own newspaper.

“The reasonable scope of the government’s role changes along with changes in the economic stage of growth,” the summary says.

The policy changes proposed by the report are also strikingly forthright and specific, especially in a political system whose lifeblood is opaque slogans.

The proposed changes include much greater government transparency, reining in monopolies by state-owned companies, encouraging private investment in the energy and power sectors, and land reforms allowing farmers to lease out their land more easily and earn more when their land is taken for commercial development. Under the plan, China’s financial sector would also get a jolt of liberalization.

“Promote interest rate liberalization, force financial institutions to raise their competitiveness and capacity for innovation, and lay the foundation for convertibility of the renminbi capital account,” it says.

Achieving capital account convertibility would knock away one of the main state controls on transactions using China’s renminbi currency, making it easier for money to move in and out of the country.

But the public excitement, reflected in intense Chinese media coverage and commentary, must be set against the constraints of Chinese politics, several analysts said. China’s leaders are likely to adopt a much more cautious and limited program. And in any case, the Central Committee conference next month will probably give only broad outlines of that program, not a definitive blueprint.

Zhang Jianjing, the chief editor of China Reform magazine, which first published the plan, said the proposal offered a window into currents of official thinking, but should not be read as a government blueprint. He said he was surprised by the public excitement about the plan, one of many that researchers have offered to officials.

“My view is that it should not be over-read,” Mr. Zhang said in a telephone interview from Beijing. “In fact, it’s one of many studies that have been done. It doesn’t represent a draft of the Third Plenum report.”

“It does have some reference value, because at least it represents the Development Research Center, and that’s a think tank directly under the State Council,” Mr. Zhang added. The State Council is China’s equivalent of the central government cabinet. “I’m sure its research is important, but this is not at all a Communist Party document.”

Many of the proposals in the Development Research Center plan and similar ones that have circulated in recent months all involve reining in state control over the arteries of economic life: capital, land, the movement of people, and energy and natural resources. For China’s leaders, dedicated to preserving one-party rule, those are politically contentious choices that they are likely to either shy away from or accept only in diluted form, said Wu Wei, a former government official who was heavily involved in the market overhauls that China pursued in the 1980s.

“Without political reforms, it will be impossible to push through these reforms,” Mr. Wu said in a telephone interview from Beijing. “The great majority of them will be pushed back by entrenched interests.”

China Business News, a Chinese-language newspaper, quoted an unnamed government adviser as saying that Plan 383 is just one of many research reports submitted to officials preparing for the Central Committee meeting next month. Qiu Xiaohua, a Chinese economist who once ran the National Bureau of Statistics, told the paper that investors should cool their excitement with a dose of political realism.

“On the one hand, this shows the powerful expectations that the market has for reform,” Mr. Qiu said. “But on the other hand, it shows that the market is impulsive and doesn’t understand Chinese political realities.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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