China’s Bold Reform Plans Don’t Mean Much Yet

China’s Bold Reform Plans Don’t Mean Much Yet

The world appeared to change on Nov. 15, the day bold and epochal reforms were unveiled that promised to overhaul one of the world’s biggest economies. Analysts, investors and historians alike rejoiced at the audacity of the plan. That was Japan. On Nov. 15, 2012, Shinzo Abe, then one month away from becoming prime minister, pledged “unlimited” stimulus and the kind of supply-side policies for which investors had long been clamoring. A year later, the buzz is gone, and not a single structural reform has been implemented. Abe’s record should give pause to those now rushing to praise Xi Jinping for a Chinese reform document that is as vague as it appears bold.Granted, the comparison between Japan and China is an imperfect one. The two countries have vastly different political systems and levels of per capita income, not to mention different challenges to overcome. But they’ve followed similar development paths, with China now facing the same dilemma Japan did in the 1970s — how to lessen a dependence on exports and excessive investment and promote consumption-led growth. More important, both leaders face tremendously powerful vested interests that are intent on thwarting their most critical reforms.

Finger Snapping

In the West, there’s a sense that Xi can snap his fingers and have the Communist Party — indeed, all of China’s 1.3 billion people — fall in line. Yet the world once thought the same thing of Japanese leaders from Kakuei Tanaka to Yasuhiro Nakasone to Junichiro Koizumi. Japan was long praised for its consensus-driven society and political system, where gray-haired party elders would issue decrees and obedient, self-sacrificing citizens would bow and do their duty for the motherland. In fact, a network of entrenched bureaucrats, businessmen and local interest groups was developing all that time into a powerful force against change — one that has stymied Abe thus far.

Xi may face even stronger resistance. Credit where it’s due: The 60-point plan released late Friday is more audacious than even many China bulls expected. In the 12 months since he took over the Communist Party, Xi has announced more economic reforms than predecessor Hu Jintao did in 10 years. Xi is clearly positioning himself as China’s most powerful leader in decades. Hence talk of a Deng Xiaoping moment.

Deng put China on a new course toward prosperity in 1978. Now Xi wants to move the country up the value chain. In the interim, though, the power of vested interests has expanded drastically. Politics is proving to be a bit too lucrative for China’s own good as untold numbers of millionaires and even billionaires get minted among the Communist Party’s upper echelons. The desire for change understandably shrinks as overseas bank accounts swell. Few of the epochal changes Xi proposes will work without the cooperation of these reluctant cadres.

“Now it’s going to be the hard and complicated slog of implementation,” says Stephen Green, head of Greater China research at Standard Chartered Plc in Hong Kong.

Abe’s journey from economic rock star to question mark offers some pointers to Xi. First, be specific about not just what you want to do but also how you’re going to do it and when. Beware grand plans that rely copiously on verbs like “deepen,” “perfect” and “strengthen” without offering specifics or timetables. Xi wants to increase the accountability of state-owned enterprises. Great, but tell us how. Government audits? More independent directors? Demanding greater disclosure about their operations, holdings or carbon footprint? And when exactly will all this happen?

Shadow Banking

The Communist Party intends to liberalize the financial system. Terrific, but does that mean a more independent central bank to set interest rates? Freer yuan trading? What about reining in the shadow-banking system shackling China with untold billions of dollars of nonperforming loans?

Bottom line, Xiconomics so far is looking all too much like Abenomics. Dramatic statements and gestures to build support among the news media, foreign investors and the broader public are easy. But unleashing the necessary animal spirits requires bold action sooner rather than later.

The best thing Xi could do to enliven the economy is clamp down hard on corruption. He’s already begun, most dramatically by taking down rival Bo Xilai: The Chongqing politician is now serving a life sentence in prison for bribery and abuse of power. If Xi really wants to scare party officials straight, Xi would allow anti-corruption investigators to go after an ally as well.

Xi should order random lifestyle checks on top party officials to see who owns too many houses on Hainan Island or apartments in Paris. He might consider establishing an independent anti-corruption agency with subpoena powers. Also, leaders need to do more to change the incentives for promotions, making them more about merit, less about connections or factions.

As Abenomics is proving, this initial burst of enthusiasm will carry Xi only so far. If the Chinese president hasn’t thought long and hard about how to implement his grand vision — which means, in part, how to navigate around China Inc. — he’d better start today.

(William Pesek is a Bloomberg View columnist.)

To contact the writer of this article: William Pesek in Tokyo at wpesek@bloomberg.net.

Updated: Monday November 18, 2013 MYT 10:46:48 AM

A new China in the making?

BEIJING: China has pledged to make the most sweeping changes to the economy and the country’s social fabric in nearly three decades with a 60-point reform plan that may start showing results within weeks. Some financial and fiscal reforms are likely to be the first out of the blocks, analysts said. But the more wrenching changes such as land reform, reining in the power of state-behemoths, and a more universal social welfare system may take years as theCommunist Party leaders balance reorganising the economy with a need to maintain stability.

“It’s clear that they understand what reforms are needed. They will probably start with reforms that could offer the highest returns with the lowest costs,” said Lu Zhengwei, chief economist at Industrial Bank in Shanghai.

China unwrapped its boldest reforms since Deng Xiaoping set the country on a course of opening up to the world in the 1970s and 1980s. The Communist Partypledged to let the market play a “decisive” role in the economy and outlined changes designed to unleash new sources of growth that it said would yield results by 2020.

After three decades of breakneck expansion, the economy is showing signs of spluttering under the weight of industrial overcapacity and piles of debt.

Chinese leaders have made clear that reforms will be carried out in a more concerted way by setting up a high-level group to lead them, but analysts believe they will move first with some less controversial reforms, such as interest rate and price deregulation on utilities and natural resources.

“They are likely to start with some easier ones or reforms that have already been kicked off,” said Chen Letian, an economist at Rising Securities in Beijing.

The central bank is likely to unveil a long-awaited deposit insurance system by the end of this year or early in 2014 to pave the way for freeing up bank deposit rates, which are now subject to administrative caps, analysts say.

The insurance scheme would protect depositors as Beijing is concerned some smaller lenders could go under as banks compete for deposits in a more open regime. Earlier this year, the central bank removed controls on lending rates.

They expect qualified private investors will get the green-light in the coming months to set up banks to compete with big state lenders that currently dominate.

The government will further loosen its controls on prices of water, electricity and natural resources, in line with the pledge to let the market play a “decisive” role, with changes sooner rather than later.

Fiscal reform is likely to gain some urgency as a lack of constraint on the finances of heavily indebted local governments will make interest rate reform less effective. A bigger slice of tax revenues would reduce their need to borrow heavily or to sell land to raise revenues.

The leadership pledged to push fiscal reform to improve budget management and let the central government assume more spending obligations.

SOME REFORMS MAY LAG

But some changes will require much more preparation and may not show any signs of happening for months or years, analysts say.

Reform to allow farmers to sell their land more freely is still being tested in parts of the country, so the government appears a long way off from deciding exactly how the new idea will work in practice.

Policymakers also want to make sure that urban areas can absorb the hundreds of millions of rural migrants they want to move to cities to help promote a consumer-led economy.

That means social welfare systems, from healthcare to education, have to be strong enough to cope with the influx of people and importantly that jobs are available in the cities.

Policymakers worry a sudden rise of landless and jobless migrants could upset the national stability central to the Communist Party’s justification for one-party rule.

“The pre-condition for reforms is that economic growth will be steady and social stability will be maintained,” said Xu Gao, chief economist at Everbright Securities in Beijing.

A relaxation of the household registration system, or hukou, which currently means that migrants leave behind the public services they are entitled to as resident of their home villages, will only gradually be expanded from smaller cities to bigger ones, analysts say.
A more universal system is seen as critical if Beijing is to encourage more migration to urban areas.

But Beijing is attempting to overturn a social system in place since 1958, so change will take probably some years, they say.

Reforming state-owned companies will also take years, analysts say. The Communist Party signalled it was in no rush to break up the monopolies that dominate many sectors of the Chinese economy.

Instead, it appears to be targeting a slow squeeze on these companies, which analysts say probably reflects a more practical approach given the political power of the big state firms and the ministries that back them.

The Communist Party has raised the amount of profit the state-owned enterprises have to set aside for dividend payouts, will allow private firms to enter some protected business sectors and will allow markets to play a greater role in pricing assets, suggesting these bloated companies will have to become more efficient over time to cope with market forces.

The government has previously tried to open up sectors currently monopolised by state firms – such as oil and gas, banking, telecommunications, electricity, and transportation – to private investors, but with little success.

The reforms pledge to quicken the process of making the yuan fully convertible, but some government economists caution against high expectation amid fears among some policymakers that allowing the currency to move freely too quickly could expose the economy to volatile capital flows, such as the ones blamed on the US Federal Reserve’s economic stimulus programme.

The central bank has pledged to make the yuan “basically convertible” by 2015 but it has not given a clear definition of what that means.

Still, Beijing can not be too cautious, said Zhu Baoliang, chief economist at State Information Centre, a top government think-tank in Beijing.

“They may have to quicken reforms in all fronts, otherwise they may not achieve the tasks by 2020,” Zhu said.

THORNIEST ISSUE

The team leading reform is likely to be more powerful than the State Commission for Restructuring the Economy, which was responsible for drawing up a reform blueprint that led to the shutdown of thousands of inefficient state-owned firms and the loss of millions of jobs in the 1990s.

A top party official could head the team, they said. Some speculate that Premier Li Keqiang could take charge, while others pointed to Han Zheng, Shanghai’s party chief.

Eventually, Beijing may have to deal with the thorniest issue.

“Over the longer term, both central and local governments will have to downsized and they will no longer need so many people,” said Xu at CCIEE – Reuters.

China’s Shift Toward Real Reform

Politics in Beijing could become more unified, inclusive and accountable.

SCOTT KENNEDY

Nov. 18, 2013 11:40 a.m. ET

Last week’s decision by the Chinese Communist Party’s Third Plenum to pursue an economic reform agenda signals a fundamental turning point in the relationship between state and society. It also should settle a long-running debate by China watchers on what drives Chinese politics, factionalism or ideas.

From Friday’s decision we know that there are reformers and that they hold sway over conservatives. The composition of the reformist camp is not fixed, but Xi Jinping and Li Keqiang are their leaders.

The willingness to embrace a progressive economic and social policy agenda reflects the evolving background of China’s leadership. In 1993, more than 80% of Politburo members were engineers; today only 40% are, with the rest trained in economics, history, law and literature. They are younger, from the coast, and have more international experience than their predecessors. The age of technocrats is over.

Predictions of the Third Plenum’s outcome based on personal factional ties proved wrong or irrelevant. Many believed that former leader Jiang Zemin and, to a lesser extent, Hu Jintao, stuffed the current leadership with their cronies and that this would prevent an economic reform breakthrough. Instead the leadership has embraced a risky strategy of reform with the sense that without doing so the party, not just themselves, would be doomed.

A veteran from Chinese industry told me last week he was certain no big changes were coming because the leaders “wouldn’t dare cut off their own arm” and bring SOEs to heel. Doing so would hurt the party and their individual fortunes. The next morning another long-time observer replied that the leadership had no choice because the arm was cancerous. The leadership didn’t cut out SOEs, but chemotherapy is on the way.

According to another hypothesis of China watchers, the exercise of power has become institutionalized. Whereas Deng was supreme leader despite only being a vice premier, Messrs. Xi and Li could not rule the country without officially occupying the top spots in the Party, government, and military. This also explains why it was necessary to create new organizations—the Leading Small Group on Comprehensively Deepening Economic Reform and the National Security Commission—so they could control and coordinate both foreign and domestic policies.

Yet institutions still do not stand on their own in China. Xi and Li remade the bureaucratic landscape like farmers carving rice paddies out of a Guizhou mountainside. At the same time, the Party and state are so intertwined that one still can’t imagine a government agency challenging this decision. In the blink of an eye, the super-powerful National Development and Reform Commission has been cut down to size. Once the new bodies have outlived their usefulness, the leadership can quickly jettison them too.

Aside from the window last week’s decision opened into elite politics, the reforms also offer the possibility of transforming Chinese politics writ large. Democracy is not in the cards, but everyday politics will be remade.

A core operating principle of China’s policy process since the late 1970s has been particularism, with privileges distributed to select beneficiaries. Standards and policies vary by province, sector and individual. Last week’s decision instead aims to institute a principle of unification, reducing regional barriers and policy differences, treating rural and urban residents according to a common standard, reducing the privileges of SOEs relative to those of domestic private and foreign companies, and moving toward a unified system of laws and courts.

Picking winners and losers has been fundamental to industrial policy, but it is also a key source of rampant corruption that is damaging the economy and eating at the fabric of society. As a result, the discretion that many officials now have will narrow substantially.

In addition, for the past three decades China has been a country by, of and for industry. Profits and raw economic growth have been the barometer of success. Companies can still expect a welcoming environment, but they will increasingly share the stage with their employees, retirees, homeowners, the sick, families, and anyone who breathes. The new currency of political success in China will be overall human welfare.

Finally, the party has put forward a platform that portends the rise of other sources of authority over which it does not exercise direct control. The most important will be decentralized markets, but other mechanisms could play a growing role, including NGOs and the media.

Mr. Kennedy is director of the Research Center for Chinese Politics and Business at Indiana University.

Updated: Monday November 18, 2013 MYT 12:01:32 PM

Analysts think China reforms the most significant since Deng’s

HONG KONG/BEIJING: Investors rewarded Beijing on Monday for a bold and wide-ranging reform plan, boosting stocks led by consumer goods shares seen as direct beneficiaries of the promised easing of China’s long-standing one-child policy and efforts to boost consumption.

The initial outline published at the end of a four-day conclave of China’s top leadership disappointed markets with its lack of detail and its ambiguity. But a more elaborate account released on Friday won praise for its ambition and scope.

Leaked documents already sparked buying of mainland stocks and markets on Friday and that rally picked up on Monday.

“The full-version report addressed many uncertainties and questions … and the comprehensiveness and depth of reform measures exceeded market expectations,” said Haibin Zhu, chief China economist with JPMorgan.

China’s CSI300 index of leading Shanghai and Shenzhen A-share listings rose 1.25% by 0200 GMT after it clocked its biggest percentage gain in two months on Friday, while the Shanghai Composite gained 1.1%.

Hong-Kong’s index of mainland China stocks climbed more than 3% to reach a six-month high.

The easing of the one-child policy boosted shares of stroller maker and distributor Goodbaby International by more than 7%. Dairy products maker Mengniu Dairy was up nearly 6%.

Non-banking financial stocks also rose, while the overall market gains were tempered by sinking property stocks, both in response to a record rise in house prices, which raised expectations that the government might seek to cool the market, and plans to accelerate the introduction of a property tax.

Besides pledges to give markets a decisive role in key areas of the economy, such as pricing of resources and the financial system, the plan also included steps to boost China’s urban population. Beijing sees helping hundreds of millions of rural dwellers migrate to the cities as key for more sustained development for the world’s second-largest economy – its advance up the value chain and wealth creation.

Analysts and commentators suggested the plans are the most significant since Deng Xiaoping’s reforms in the late 1970s and the early 1980s that opened up the country to the outside world and set it on course to become the world’s factory floor.

“The government will withdraw from its intervention in the market,” said Ding Yifan, deputy head of the Institute of World Development, a government-linked think tank, in describing the new approach in an interview with official news agency Xinhua.

He said that while state-owned enterprises would remain the backbone of China’s economy they would be exposed to more competition and less protected than in the past.

“We will try to make them compete on an equal footing, which means the government will not continue to provide some fiscal or financial advantage to state-owned enterprises.”

President Xi Jinping and Premier Li Keqiang, appointed in March, also announced several breakthroughs in social policy. Besides relaxing the one-child policy, they also pledged to unify rural and urban social security systems and to abolish controversial labour camps.

The 60-point plan eased concerns that Xi would need months, if not years, to take full charge of China’s vast party and government bureaucracy.

But the sheer ambition of the plans and the new focus on letting market forces play a greater role bring new challenges and risks, economists say.

Beijing got a taste of that in June, when a money market squeeze engineered by the central bank to rein in overly risky lending practices, sparked a brief spell of panic and a financial market rout that spread well beyond China’s borders.

Economists also point out that while some reforms can take shape within weeks or months, others will take years because of their sheer complexity, the number of interest groups affected and the need to balance the sweeping changes with the desire to ensure stability, which remains the watchword for successive Beijing administrations.

“The pre-condition for reforms is that economic growth will be steady and social stability will be maintained,” said Xu Gao, chief economist at Everbright Securities in Beijing.

Xi and his team gave themselves until 2020 to achieve “decisive” results – a tacit acknowledgement of the risks involved in Beijing’s balancing act between letting market forces eventually take over and preserving financial and social stability and the Communist Party’s political monopoly.

The experience of the past decade is also a reason why many economists and international observers view Beijing’s bold reform plans with guarded optimism.

Just like Xi and Li, the previous leadership promised to overhaul China’s economy and kick its addiction to rapid, investment and credit-fuelled growth, but left it saddled with more debt, industrial overcapacity, pollution and financial strains – Reuters