China's leaders are likely to disappoint those hoping for sweeping economic reforms at the third plenum of the Communist Party's 18th Central Committee. Luckily, the Chinese economy is sufficiently robust that growth will not be derailed by a failure to tackle a series of intractable problems. Not for now at least. Where there is little resistance to change - for example, on financial and monetary reform - we could see real progress. Broad agreement within policymaking circles means we may also see the plenum endorse higher state spending on health, education and social security. But the gathering is unlikely to deliver a mandate on other issues China must tackle to rebalance its economy. And, even where it does address problems, the plenum only sets objectives and direction. It is the government's job to implement these guidelines. Expectations for economic reform ran high when a new party leadership was appointed almost a year ago. Many analysts expected President Xi Jinping and Premier Li Keqiang to usher in major reforms to direct the economy onto a different growth track. However, it is far from clear whether China's leadership can forge a consensus on major reforms in some politically difficult areas. The chances of a breakthrough are not helped by a decision-making system that requires a galaxy of ministries, agencies and interest groups to sign off on reforms. China's economy isn't set for a hard landing, or worse. But the danger is that, if politically tricky yet crucial reforms are ducked, its overall reform programme could veer away from essential measures to raise productivity and efficiency. The technocrats may succeed in rebalancing the economy, but it may be placed on an unnecessarily slow track, and one with higher risks to China's financial stability. So what policies are likely to emerge from the plenum? Broadly speaking, the government is aiming to rebalance the pattern of growth more towards domestic demand, consumption and services and the upgrade of its industrial structure. Specifically, we should see action on the pricing of resources like land, energy, water and electricity to remove what had effectively become industrial subsidies. The plenum should support administrative measures to eliminate outdated capacity across a range of industries and encourage new sources of domestic demand in areas such as information services, care for the elderly and green technology. Decent progress on simplifying government regulation may also emerge. However, in other areas, progress is likely to be limited. The burden of taxation is likely to remain on labour rather than capital. And the advantages enjoyed by state-owned enterprises will largely remain intact. China needs state-owned enterprises to pay higher dividends that can be channelled into the central government budget, to level the playing field between them and other companies. It should seek to do that by removing barriers to entry, fostering truly independent regulators and making clear the separate roles of state and market. It is in financial and monetary policy where we may see more progress; expect the leadership to encourage greater competition within the domestic financial system, a monetary policy with a greater emphasis on interest rates, more flexibility in exchange rates and a more open capital account. Policymakers should be careful though. Some senior officials have suggested they want to start opening up the capital account before entry barriers in the domestic financial system have been lowered and the exchange rate has been made flexible. International experience has shown that this raises the risk of financial instability. China cannot rebalance its pattern of growth until the millions of migrants who arrive in the cities every year have better access to services and housing and are active consumers and workers. Nevertheless, while the plenum will pay attention to improving the nature of urbanisation, there is little chance of major reform of the hukou system, China's controversial residency system. Nor are we likely to see a substantial change to rules governing the conversion of rural land for urban use. To fix the fiscal system, China needs a wholesale reform of relations between central and local government. It should introduce stable sources of income for local authorities, do better at redistributing wealth from rich and poor areas, and give local authorities greater incentives to provide public services to migrants. Yet these are thorny issues and I would be surprised if the plenum makes any big moves in this regard. China's more modest road map of reforms is not necessarily a major problem in the short to medium term. However, a failure to embark on a more ambitious reform process casts a shadow over China's longer-term prospects. Louis Kuijs is chief China economist at RBS and a former IMF and World Bank economist
