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China Economy

China is revving up its economic reform drive again, as Liu He pledged in Davos

Deng Yuwen says there are many reasons China must recommit itself to its reform and opening up policy, not least because further reforms would help it meet its own development goals, and avoid a trade war with the US and Europe

PUBLISHED : Wednesday, 31 January, 2018, 6:00pm
UPDATED : Wednesday, 31 January, 2018, 7:41pm

President Xi Jinping’s top economic aide Liu He, a Politburo member of the Chinese Communist Party who is widely expected to be named a vice-premier in March, told global elites at the World Economic Forum this month that a more extensive package of market-opening measures will be introduced to mark the 40th anniversary of China’s reform drive. And some of these reforms will go beyond “the expectations of the international community”, he said.

Liu’s speech in Davos could be seen as an effort to reassure the international community.

In an article published before the 19th party congress last year, I outlined the three trends we could expect of China’s development in the next five years. One was that Beijing’s grip on the economy would start to ease and the pace of economic reform would pick up. Liu’s speech has proven this prediction right.

What Liu said was nothing new; he merely elaborated on the Chinese economic blueprint that was unveiled at the 19th party congress. But given Liu’s position, global investors and analysts were right to pay attention.

Liu said China’s economic policy in the next few years would be centred around “one key necessity, a main task and three critical battles”. The key necessity involves shifting the economy from a phase of rapid growth to one of high-quality development, and all of Beijing’s macroeconomic, structural and social policies would be designed to support this transition. The three critical battles are: preventing and resolving major financial risks; making targeted efforts to reduce poverty; and controlling pollution.

On economic reform, Liu said it would be deepened to allow the market to play a decisive role in allocating resources, protect private property, especially intellectual property, and give full play to the role of entrepreneurs. This would encourage competition, curb monopolies and improve the macroeconomic regulatory regime.

China would also continue to open up, align itself with the global rules of trade, increase market access, expand the services sector, especially the financial sector, and create a welcoming environment for investors.

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Why is China stepping up its reform and opening up on the 40th anniversary of this policy’s introduction? One reason is China must do so to meet the first of Xi’s two “centenary goals” – to build a moderately prosperous society by 2021 to mark the 100th anniversary of the founding of the Communist Party. The goal cannot be reached without reducing poverty. This is why poverty reduction is one of the three major tasks for the coming years.

Furthermore, with China today facing an L-shaped growth trajectory, reforms are vital to keep the economy going forward.

It’s likely that the external environment has also played a part in China’s pledge to introduce reform measures that exceed expectations. In recent years, the United States and Europe have been highly critical of what they say are China’s protectionist policies. US President Donald Trump has threatened to launch a trade war with China over America’s trade deficit.

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Meanwhile, the White House is reportedly considering a “reciprocal investment regime” that would restrict Chinese investment in the US to the extent that China is restricting American investments in its market. If such a regime does materialise, the EU and Japan might follow suit, which would make it difficult for Chinese companies to enter European and US markets.

China became a capital-exporting country a few years ago, and mainland companies expanding overseas benefit from the mature markets and well-established legal systems in the US and Europe. That is why a move to enforce reciprocity would be a barrier for Chinese firms seeking access to foreign markets.

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In addition, Trump’s tax overhaul, which could set off a round of tax cuts in other major economies, also poses a challenge for China.

Under these circumstances, China has no choice but to deepen its reform and opening up. Unless it is prepared to fight a trade war or see Chinese businesses barred from other markets, China has to open up its less competitive sectors that it has been protecting under the pretext of “national security” and other concerns.

We can assume Liu’s speech reflects Xi’s thinking. In his New Year address, Xi said reform and opening up should be advanced at a faster pace this year.

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There are other reasons why Xi wants to speed up reform and opening up in the next few years. Five years of a vigorous anti-corruption drive and a campaign to clean up the Communist Party have nevertheless created new hurdles for China’s reform agenda. Objectively, the crackdown has succeeded in building a cleaner government, but it has also encouraged a “wait and see” attitude among government officials. Many have little incentive to push forward bold reforms for fear of inadvertently violating a rule. This is why the push to reform and open up has reached a stalemate.

There are signs that the reform drive has already been rebooted

The intensity and approach of the anti-corruption drive must be adjusted; the fight against graft must be normalised, so that it does not undermine officials’ initiatives to introduce change.

Besides, after such an extensive anti-graft campaign, Xi has basically eliminated his opposition in the party. So he should have more time and space now to contemplate how to tackle the deep-rooted problems in the reform drive.

There are signs that the reform drive has already been rebooted.

For example, late last year, Chinese courts announced the retrials of three criminal cases relating to property rights, putting in action the government’s intention to better protect private property and restore business confidence.

Also late last year, the authorities rolled out a new measure that gives foreign firms a tax exemption if they reinvest their profits.

Recently, the State Council’s State-owned Assets Supervision and Administration Commission confirmed that its power to appoint and dismiss the heads of state-owned companies would be delegated to the companies’ boards.

Beijing is also likely to unveil more reform measures after the “two sessions” legislative meetings in March.

The international community should cheer the market-opening measures that may come. However, they should know that such measures would be restricted to the economic sphere, touching on the social sphere at most.

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Expect little easing to happen in politics. Perhaps there may be some small improvements in certain areas, but on matters concerning major principles and sensitive issues, the government’s grip may even tighten.

A more optimistic forecast is that China’s reform drive would return to what it was during the Jiang Zemin and Hu Jintao eras. Instead of tacking left in both politics and economics, as things stand currently, Xi would turn right on economics while remaining left on politics. If that is true, however, serious imbalances may once again emerge.

Deng Yuwen is a researcher at the Charhar Institute think tank. This is translated from Chinese