The hopes and challenges on reform path

While expectations are high on Beijing's leaders to tackle a wide range of issues, it takes time for them to come up with detailed action plans

PUBLISHED : Monday, 28 October, 2013, 4:32am
UPDATED : Monday, 28 October, 2013, 6:23am

Dalian Software Park vice-president Michael Ye is expecting a lot from the leaders of the Communist Party when they hold a key meeting next month to lay out what business, investors and analysts anticipate to be the blueprint for a coming decade of structural reform.

In particular, Ye wants a reform plan that levels the playing field for private-sector firms like his to compete with state-backed businesses that enjoy lower borrowing costs and easier access to land.

He's been battling the system for 15 years, travelling constantly between the mainland's major cities to lobby local governments to operate and manage business parks local officials say they want but are unwilling to offer the same terms to the private sector to build as they would to state owned enterprises (SOEs).

"We have a lot of things to expect," Ye told the South China Morning Post. He's not yet sure whether the third plenum of the party's 18th Central Committee will be able to deliver on those expectations by bringing down barriers that hinder competition or simply push forward platitudes about the need to do so.

Liam Casey, chief executive of PCH International, hopes Beijing will open up the domestic market to more foreign players.

Easing controls on the exchange rate and interest rate systems would also help free up the market, said Casey, an Irish businessman who has been doing business in China since 1996.

His company, with its China headquarters based in Shenzhen, works with international and Chinese hi-tech brands on manufacturing and distribution in and out of the mainland.

"I believe the Shanghai free-trade zone is a step in that direction," Casey said.

With the mainland's gross domestic product growth having slowed to 7.8 per cent in the third quarter from a peak of 14.2 per cent in 2007, Beijing knows the economy can no longer rely on exports and state-dominated investment to drive expansion.

The crucial task is to create more domestic consumption through urbanisation of migrant workers and development of the services sector.

The leadership headed by President Xi Jinping will also need to tackle a widening wealth gap, a source of social turbulence, largely caused by state monopolies' distortion of resource distribution.

Analysts believe that achieving all that requires reforms so fundamental - from land ownership rights to tax policy, the power of local governments and social security spending - that at best the third plenum will only deliver guidelines that sketch out what needs to be done. It could be several years before the detailed plans emerge.

Royal Bank of Scotland chief China economist Louis Kuijs said party leaders were likely to shy away from setting clear principles and directions of reform in areas where the political economy was an obstacle. That included levelling the playing field between state-owned enterprises and other companies, he said.

"Policymaking tends to be consensus-driven, with different ministries, agencies and interest groups all having to sign off on reforms," he said.

The plenum might talk about reforms dealing with SOEs, the land system and an overhaul of the revenue and spending model of local governments, but detailed policies were unlikely to emerge, researchers said.

Local governments now share half of the mainland's fiscal revenues but are responsible for 85 per cent of the spending, according to analysis by Credit Suisse.

Such a system has forced city and provincial authorities to borrow high levels of debt and rely on land sales to finance their infrastructure investments in order to drive up local economic output.

Bank of America Merrill Lynch estimates that the mainland's total debt-GDP ratio is about 185 per cent. While the number is not exceptionally high, local government borrowings, believed to involve lots of irregularities, dominate public debt.

Beijing has pledged to expand a property tax trial and an experiment to allow local governments to issue bonds directly to increase their revenues. But UBS Securities' Wang Tao said any breakthroughs in those areas at the plenum would be a big surprise.

Observers have also looked carefully at senior party leaders' public speeches for any small clues about their dedication towards certain reforms.

Xi's visit to the central city of Wuhan in July was believed as one such indicator.

Apart from stressing the need for innovation and industrial upgrades, he also visited a rural property rights exchange and urged officials to study land ownership transfer in the countryside to safeguard farmers' incomes.

His remarks boosted hopes that Beijing might offer some direction or make some small progress on the transfer of rural property rights, although most observers believe major changes are unlikely in the near term.

Casey, who has witnessed development in Shenzhen, a pilot area for experimental economic reforms kicked off by Deng Xiaoping in the 1980s, said people needed to be more patient in expecting major reforms.

"Managing a country as big as China is an enormous task and a huge responsibility for any leadership team," he said. "The world needs to be patient with them and give them space to do the job."

Issues such as financial reforms, streamlining of government departments and some parts of the urbanisation plan were likely to be addressed in more detailed action plans at the party meeting, people who have heard about internal discussions said.

The People's Bank of China said on October 16 that it might allow banks to issue negotiable certificates of deposit on the interbank market when conditions were ripe, as part of efforts to liberalise interest rates.

A proposal from the State Council's Development Research Centre submitted for the party meeting called on the government to reduce administrative controls on the scale of bank lending, land quotas and industrial capacity, according to a report by the Caixin media group.

It also proposed that policymakers boost the yuan's global status, making it a regional reserve currency within 10 years, the report said.

The plenum might also produce a clear statement on pushing ahead with urbanisation, an official close to the discussions said, after the top leadership recently rejected an original investment-focused plan submitted by the National Development and Reform Commission.

"The new plan will be focused on urbanising migrant workers, including reforming the household registration, or hukou, system and the related social security issues," the official said. But he added that implementation of the plan would be gradual.

Additional reporting by Zhang Hong