China's third plenum

Evening the odds between state and market

Winston Mok examines some of the problems China is likely to target following the third plenum, including state interference in the market, barriers to mobility and local government excesses

PUBLISHED : Friday, 15 November, 2013, 8:56pm
UPDATED : Saturday, 16 November, 2013, 7:30am

Even before the third plenum of the Communist Party, there was much public discussion about a greater role for the market against the continued dominance of the state in China's economy. According to the plenum communiqué, the market will be given a "decisive" role in the economy, although the state sector will remain dominant.

The statement was long on broad principles but short on specific policy initiatives. If we look closely, however, it is possible to see China's emerging policy direction.

First, the market will play a leading role in resource allocation, with less state interference: financial reforms can be expected for greater market-based lending; more private banks may be formed and foreign companies could be allowed to play a bigger role in the service sector; trade barriers across regions will be dismantled.

Second, the state will steer away from being an active player in economic activities to being a provider of public goods and a regulator. Until now, many local governments have functioned primarily as regional development corporations. In future, they will assume a broader social management role. Local cadres' performance will be measured more broadly than the focus now on gross domestic product figures.

In an environment of massive internal migration, the central government could also play a bigger role in funding and co-ordinating social services. Next, local governments will face new constraints against their unbridled power to pursue economic interests. Their single-minded pursuit of growth, sometimes even using unlawful practices, will be checked by a stronger judiciary less susceptible to their influences. Reforms in municipal finances will reduce reliance on land revenue, which has been a key cause of social conflict.

Fourth, private enterprises will be given a more even playing field and allowed to enter sectors previously dominated by the state. They may gain better access to financing with less discrimination.

State-owned enterprises will continue to play an important role in the economy, perhaps with fewer unfair advantages, and with improved governance and management. The most important improvement, to be tested in implementation, will be if private enterprises can operate with less state meddling, under the firm protection of the law.

Finally, people will be able to move more freely, with fewer barriers. The urban-rural divide has been one of China's greatest inequalities, but restrictions on social entitlements fixed at birth will be relaxed over time. Farmers may be given greater land rights. Greater labour mobility, not only among migrant workers, but for urban professionals, will lead to higher productivity and more efficient use of land resources.

A key goal of the reforms is greater equity and justice, with the broad population getting a fairer share of the fruits of growth. To that end, local governments will be held in check through stronger supervision by Beijing and a stronger centralised judiciary. The legislature may also play a greater role, such as in budgetary processes.

Under the firm hand of the party, there will be greater rule of law, and more checks and balances but with "Chinese characteristics".

In a nutshell, Beijing is deepening its replication of the Singapore model. In the past three decades, China has grown through opening up to foreign investment and building superb infrastructure. But a more service-oriented government will embrace greater rule of law. Like Singapore, it may allow more academic freedom, essential for innovation, while keeping a tight rein on the media. But adapting a model for a city-state to the vastly more complex environment of China, with its layers of regional government and which is undergoing rapid social transformation, presents daunting challenges.

These include whether China's state-owned enterprises can be run as efficiently and professionally as, say, Singapore Airlines or DBS Bank under a Temasek-type governance; if China can develop a high-quality workforce through educational excellence and industry-oriented training at all levels; and, whether China is able to provide adequate social welfare, not just in education and health care, but in quality social housing, for its huge population.

What came out of the third plenum is a framework using broad brushstrokes. The key is implementation: the details will be defined and their implementation co-ordinated by a central leading group. The road map for the reform programme, which may take years to fully take effect, will emerge in the coming weeks and months. How the leading group manages the momentum for change, in order to overcome resistance from vested interests, will decide the success of reforms.

As much as the leadership has taken steps to consolidate power in the year prior to the third plenum, it may need to marshal effectively the allied forces of the media and civil society, as well as an empowered judiciary and legislature, to push forward with the changes.

Winston Mok is a private investor, a former private equity investor and McKinsey consultant. An MIT alumnus, he studied under three Nobel laureates in economics