Reforms likely launched at Chinese leadership meeting, experts say

Observers expect major announcements at the Communist Party's third plenary session in Beijing in November

PUBLISHED : Monday, 02 September, 2013, 12:00am
UPDATED : Monday, 02 September, 2013, 4:28am

Communist Party leaders will be playing for high stakes in November when the party's 18th Central Committee convenes its third plenary session in Beijing, with some observers anticipating a watershed in China's economic development.

Any breakthroughs in fiscal and financial reform or the urbanisation push will have a impact on China's long-term growth, analysts say, and boost the standing of a new leadership struggling to forge a consensus among the political elite's different factions.

Hopes are high that the meeting will be revolutionary for the economy, like the party's most famous "third plenum" - in 1978 - when Deng Xiaoping announced the opening of China's market to foreign and private investors that introduced a new dynamism to what had been a heavily regulated economy.

But observers say the challenges facing the new leadership, led by President Xi Jinping and Premier Li Keqiang, are unprecedented - tougher than those faced by their predecessors, from Deng to former premier Zhu Rongji, the economic tsar who undertook reforms in the late 1990s.

At the meeting, to be held a year after the installation of the party's new leadership, policymakers are expected to discuss economic reform plans including an overhaul of the household registration system, the liberalisation of interest rates and reforms to better allocate fiscal revenues and limit local governments' excessive borrowing.

Beijing is also expected to reduce government intervention in the market and strengthen anti-corruption policies.

Gary Liu, executive deputy director of the Lujiazui Institute of International Finance at the China Europe International Business School, said that in Deng's era, starting in the late 1970s, consensus on reforms had been easier to achieve among the top leadership because the nation had just shaken off the turmoil of the Cultural Revolution.

Now, he said, the new leaders were facing much stronger opposition.

"The vested interest groups have a lot of say in policymaking," Liu said. "Reforms are set to be challenging. Premier Li, with the right reform perspectives, must show leadership and take decisive action while facing objections from certain officials."

Third plenums have always had a unique and often revolutionary position in the party's history, because the session is the first major occasion for a new generation of leaders to gather and set out economic and political roadmaps.

At the third plenum of the 11th Central Committee, the leadership, under Deng, made the decision to open up the market and abandon the planned economy.

Researchers have compared Li's dedication to reform to that of Zhu, known for his reforms more than a decade ago that restructured unprofitable state-owned enterprises, trimmed the size of government and revamped the fiscal system.

Stephen Roach, a veteran China-watcher and former Morgan Stanley Asia chairman now teaching at Yale University, praised Zhu's for his strength in implementing reforms but also noted that Zhu had created many of the imbalances that Li was now having to deal with, such as excessive resource consumption, energy-intensive growth, environmental degradation and macroeconomic imbalances.

"Premier Li must now face up to the much tougher strategic imperatives of a consumer-led rebalancing," Roach said. "Reforms entail some form of a 'growth sacrifice' - promoting a slowdown in traditional areas of growth in order to unmask and incentivise new areas."

The government has pledged to boost domestic demand and cut over-reliance on exports, targeting annual economic growth of about 7 per cent in the years ahead.

The economy has recently been plagued by external headwinds, domestic industrial overcapacity and rising labour costs, dragging gross domestic product growth down to 7.8 per cent, a 13-year low, last year. The pace of growth eased further, to an annual rate of 7.6 per cent, in the first half of this year.

Li, who holds a PhD in economics from Peking University, has already won applause for the market-oriented approach to managing the economy he has adopted since becoming premier in March.

Despite two quarters of slowing economic growth, he has refrained from resorting to stimulus measures, instead focusing more on structural moves, such as cutting taxes for small enterprises and encouraging investment in underdeveloped regions. He also removed the ceiling for lending rates in a largely symbolic move to give banks more flexibility in pricing loans.

Some observers say Li appears to have encountered obstacles in certain "deep water" areas of economic reform.

For example, an urbanisation plan that will affect local governments because it involves changes in household registration and land ownership has been delayed repeatedly, according to people familiar with the situation. And sources said Li had to fight open opposition from financial regulators in his bid to push through a landmark plan for a free-trade zone in Shanghai, which was approved by the State Council last month.

Chi Fulin, head of the China Institute for Reform and Development, a Hainan-based think tank, said it was hard to forecast the outcome of November's meeting.

"China has come to a critical point in its economic transformation," he said. "Grasping the time for reform is like a race - if you move too slowly, it might evolve into a crisis."