The Power Shift

Don't bank on speedy economic reforms after the 18th Party Congress

PUBLISHED : Thursday, 01 November, 2012, 4:26pm
UPDATED : Monday, 05 November, 2012, 5:53pm

A Chinese proverb says: Haste does not bring success (欲速则不达) .

This also applies to the Chinese approach to reform: Hold your breath, and don’t make the mistake of expecting overnight change (even though China-watchers keep warning that there's no time to waste).

In the near term, Beijing is expected to continue to focus on growth, though it is unlikely to repeat the massive stimulus package that it produced after the initial global financial crisis in 2009.

In the long run, China has a lot on its plate: rebalancing the growth model to favour consumption over exports; correcting income inequality; cutting state-owned enterprises’ monopolies; encouraging private investors to enter lucrative sectors like banking; introducing a market-based interest rate system that better reflects the underlying risks; improving urban and rural social security networks – the list is almost endless.

Xi Jinping and Li Keqiang probably have the ambition to launch bold reforms to sustain growth over the next decade, but for the short term they’re likely to be busy consolidating power and maintaining political stability.

Tackling the complicated and delicate web of vested interests between state business sectors and government agencies, involves careful footwork. Haste is not an option – or the reform plans may be stillborn.

Look at the long-delayed income distribution reform, for example.

The plan that aims to give poorer people and less privileged companies a slightly more level playing field to benefit from the economic boom has been amended six times in eight years and has yet to be finalised. Researchers said opposition from the state sector, which obviously has a huge vested interest and much to lose from the reform, has been a major stumbling block.

There’s hope the plan will be eventually rolled out after its seventh revision this year. But experts involved in the talks aren’t overly optimistic about how effective it will be after it’s diluted by state sector interests. They’re also not holding their breath over the way it will be implemented.

There are technical factors to consider also.

Leaders’ discussions have to adhere to a set schedule at Communist Party plenary session.

Based on past experience, the earliest time for any plans to tackle major economic problems will probably be next autumn, when the the 18th Central Committee holds its third plenary session.

The most famous “third plenary session” in the Party’s history was the one that took place in 1978 at the 11th Congress.

The event has become a milestone by establishing reformist Deng Xiaoping as the core of the leadership after the Great Cultural Revolution turmoil. Deng designed and pushed China’s market opening policies, generating decades of surging economic growth.

The upcoming Party Congress, due to start on November 8, will focus more on political transition as usual. HSBC researchers say part of the Congress’ main agenda will be to “cement the preceding General Secretary’s political status in the party’s history”.

Wen Jiabao will remain as Premier after he steps down from the Politburo standing committee until taken over by Li Keqiang in March.

Old and new government leaders will jointly oversee the Central Economic Work Conference in early December, which will set the policy tone for 2013.

Neither Wen nor Li would be willing to change policy direction significantly, unless pushed by something that could potentially shake stability, such as a sudden worsening in global financial markets, or massive instability in China’s jobs market.

Some observers believe the 2013 growth target may be lowered from 7.5 per cent this year to 7 per cent, leaving breathing space for the new leadership to launch structural reforms.

Other academics are more sceptical. They expect Li may wish to keep the growth momentum in the first year of his term to avoid shaking market confidence, though he will direct more investment into industry upgrades and the services sector and into innovation generally.

Policy visibility will gradually improve.

When and how to further liberalise the state-dominated market and correct imbalances in the economy will exert a deep influence on the future of China as well as the rest of the world.

That requires not only economic vision from leaders, but political will.

One thing is for sure: it takes time.