China's mysterious Third Plenum

[Ray]

China's mysterious Third Plenum


China's mysterious Third Plenum has ended much as it started:

With a brief word from the official Chinese media that the meeting had begun and now a short communique announcing its conclusion.

Among the few phrases in the short communique, the key ones are "comprehensively deepening reform" and "crossing the river by feeling stones".

The reference to "comprehensive" reforms fits with the billing in the Chinese state media that this meeting of the top Chinese Communist Party officials will result in significant reforms under the new president and premier during their decade in power.

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The devil will be in the details as to how these reforms will be implemented. And those are lacking"

The details of their economic policies are scant from the communique. In the coming weeks and months, the official media may divulge more at the whim of the Chinese leaders.

So far, allowing the market to play a "decisive" role in the economy has emerged as a message in the state media.

This sums up the aims of the Chinese leaders which is to introduce more market forces into the economy. It would be key to achieving the "breakthrough" reforms that were discussed in the "383" plan that was circulated by the government's top think tank beforehand, which I wrote about this before.

Not easy
The three "breakthrough" reforms involved reforming capital markets, labour in the form of improving social welfare, and land.

Basically, the factors of production all need reform and much of it requires raising productivity in order to support growth.

Now, that's no easy task for any economy, much less one where powerful state-owned enterprises dominate the financial sector and key parts of the economy.

So, the devil will be in the details as to how these reforms will be implemented. And those are lacking.

But, the invocation of the phrase, "crossing the river by feeling stones" is a deliberate echo of the 1978 Third Plenum which ushered in the reform era.

The story goes that the phrase is attributed to Deng Xiaoping. When he was asked how he planned to introduce market forces into the centrally planned economy and achieve his reform aims under such difficult circumstances, he reportedly said that it's by "crossing the river by feeling stones".

In other words, step by step in a pragmatic manner is how big reforms are ultimately achieved in China.

Spirit
It's worth bearing in mind that China's economic reforms under Mr Deng were considered gradual and not radical. It's in contrast to the radical dismantling of the command economy that much of the former Soviet Union undertook.

But, in retrospect, the 1978 reforms were transformative.

By invoking the spirit of Mr Deng's reforms, President Xi Jinping and Premier Li Keqiang are perhaps signalling that, in time, their multi-pronged reforms will be similarly transformative as China faces the next era of growth.

But, for now, we are likely to mostly hear disappointment over the lack of transparency of the economic policies of the world's second biggest economy which has implications for the rest of the world.

BBC News - China's mysterious Third Plenum

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What do "comprehensively deepening reform" and "crossing the river by feeling stones" signify?

If the river is deep, then feeling for stones may cause one to drown and if the current is fast, being swept away!

If China allows a free for all 'market' driven economy, then the CCP will lose it stranglehold and that would be the last thing that the CCP will brook.

Interesting times ahead for China.

 

[Ray]

Will 2013 be another 1978 or at least another 1993 for China?

Those were the two significant overhauls of economic policy which occurred during previous Third Plenums.

The Third Plenum refers to the third time that the new leaders of China lead a plenary session of the Central Committee.

The current one is being billed as being as just as significant as the one in December 1978 that marked the start of market-oriented reforms in China over three decades ago under Deng Xiaoping.

That's unlikely, but expectations are high that the new Chinese leaders will launch reforms that are as notable as those from 1993, which dismantled a large part of the state-owned sector. State-owned enterprises fell from over 10 million to fewer than 300,000 in the mid-1990s.

The 383 plan
The Third Plenum is typically when significant reforms are announced. It's usually about a year into the term of China's new president and premier, so they have secured their positions sufficiently to unveil their plans for their decade in power.

This plenum, taking place from 9-12 November, will likely draw on a "383 plan", circulated by Chinese government think tanks, which aims to transform the Chinese economy by 2020.

The 383 plan involves firstly a trio of reforms to open up the market, transform government, and reform enterprises to boost innovation.

Then, the eight key areas to tackle include: cutting administrative approvals, promoting competition, land reform, opening up banking including the liberalisation of interest rates and the exchange rate, reforming the fiscal system including setting up basic social security, reforming state-owned enterprises, promoting innovation including green technology, and opening up the services sector.

Within these, the plan identifies three major breakthroughs to be achieved: lower market barriers to attract investors and boost competition, setting up a basic social security package, and allowing collectively-owned land to be traded.

This is a tall order, but these three aims figure prominently among the reforms that are needed for China to grow in a more sustainable and stable fashion.

First, increasing competition can raise productivity, which is what is needed for China to grow. But, that does require reforming the remaining state-owned enterprises which have entrenched themselves in significant sectors of the economy, such as banking and telecommunications.

Land reform
Second, social security for its people will help to re-balance China's economy through supporting the poorest and also the growing middle class. It's what's needed as China seeks to rely more on domestic demand and thus the consumption of its own people to grow its economy.

Land reform will be a key part of that as well. The 383 plan refers to giving equal rights to rural and urban residents to trade collectively-owned land.

It means that land is still owned by the state or local government, but those who have long leaseholds on the land will be able to trade and thus reap the benefits of land values that right now accrue largely to the government.

Land confiscation is the source of significant complaints across rural China. And, it seems, although it's been much debated, privatisation of land looks to be off the table.

Also, although one of the reforms is to liberalise interest rates and the exchange rate, opening up the capital account - that is, allowing more short-term capital to flow across borders - it isn't a priority.

This has been another bone of contention. Greater opening of China's financial markets is likely to happen, but how much and how far remains to be seen.

The initial progress in Shanghai's Free Trade Zone - touted by the Chinese premier Li Keqiang as the experimental zone for such reforms - has been less than stellar so far.

There are also numerous concerns such as the amount of debt in China's economy, corruption, and reforming the rule of law, all of which need attention. So, it's a long list of reforms that are needed.

If none of these reforms seem as radical as turning away from central planning or dismantling state-owned enterprises, it should be remembered that those were once-in-a-blue-moon moments.

But, sometimes a lot of reforms rather than an eye-catching one or two can have a bigger and longer-lasting impact.

What is clear is that the path to be taken by the world's second largest economy will be closely watched as it will have implications for the rest of the world seeking stability and growth in its largest economies.



BBC News - Will China's Third Plenum be an economic turning point?

 

[Ray]

China points to social welfare reforms needed for urbanization drive

BEIJING/HONG KONG - Among the issues China's top leaders tackled this week as they hammered out their policy roadmap, some may determine whether children attending the likes of the Pengying school in Beijing fulfill their dreams.

Thanks to China's system of internal passports, or hukou, parents in search of better jobs in the capital, or other urban areas, leave behind the public services they were entitled to as residents of their home villages - their pension, healthcare insurance and free public schooling.

That means that if they want to educate their children they have to find an unlicensed school, such as Pengying, which charges an annual fee of 1,400 yuan (US$228), most of a month's earnings for some migrant families.

At the school, desks are rusty, smoggy air seeps in through broken windows and the acrid smell of broken plumbing fills the hallways. Students learn the basics despite such conditions, but importantly may not sit for the official exams required to attend local universities.

"There is no choice," said Mrs. Wang, the mother of another of Pengying's students who declined to provide her given name. She brought her 8-year-old to Beijing from southwest Sichuan province, more than 1,000 kilometers (625 miles) away, and started a catering business. "There is no future either if you stay at home," she said.

Easing the hukou system would undoubtedly make life easier for the more than 200 million people who have moved into China's cities from smaller towns and villages and the roughly 110 million more people China expects to move from the countryside into cities in the next seven years.

Beijing wants this mass migration to be the backbone of an urbanization drive to combat rapidly rising factory wages and to help wean the economy from a dependence on manufactured exports by promoting urban consumer consumption.

At the Communist Party's Central Committee's third plenary session, which ended on Tuesday, the country's leaders pointed to reforms that analysts have said could set in motion changes in how social services are paid for, ultimately leading to a nationwide social safety net seen as critical if the urbanization drive is to work.

A report from the official Xinhua news agency on the closed-door meeting said the leaders promised a "more fair and sustainable social security system" and deeper reform of medical and health systems.

It also agreed to "step up efforts to improve social welfare and deepen institutional reforms to realize social justice for all."

BENEFITS

The ideas are broad, so it is not clear exactly what China's leaders may have in mind. That will only emerge in coming months or possibly years.

But analysts say unifying China's patchwork of social services would let citizens seek opportunities wherever they might find them and produce broader benefits for the economy.

Portable healthcare, pensions and education could revive China's weakening productivity gains and reduce the propensity of China's citizens to save for a rainy day rather than spend.

It could also quell growing discontent over widening income inequality and a disparity of opportunity, a source of great anxiety for a leadership that prizes social stability over almost all else.

"If the central government pays for this, you can build up a national standard, so people can move," said Peng Wensheng, chief economist at China International Capital in Beijing. "Mobility means a better use of skills, a more efficient use of skills."

Shifting the financial burden of such social services to the national government would eliminate a mismatch between tax income and spending, whereby local governments collect just over half of national tax revenue but bear 80 percent of public spending costs.

Doing that, economists say, would remove much of the rationale among local governments for a massive borrowing binge that has pushed local government debt to Detroit-like levels.

Credit Suisse estimates local government debt could exceed 16 trillion yuan (US$2.6 trillion), or as the IMF estimates, equivalent to roughly 30 percent of China's economic output.

"Fiscal reform is bureaucratic," said Vincent Chan, head of equity research at Credit Suisse in Hong Kong. "That's easier to bargain."

Costs for provincial governments have risen dramatically as China's one-child policy accelerated the costs of an ageing society. Rapid urbanization meant costs for pensions, healthcare and other social services jumped as healthy wage-earners fled to more affluent provinces and the population of new citizens declined.

As a result, most provincial governments saw demands on their spending surge. Beijing's solution has been to transfer a lump sum to help cover the costs, a massive annual transaction.

For anything else, like investing in key infrastructure or projects designed to boost growth and the business tax revenue upon which they rely, local governments go around the law to either sell land or borrow.

It is no secret the government aims to change this: Premier Li Keqiang stressed the need to tackle social safety nets and urbanization after taking office in March and the next month spoke on the dangers of local government debt.

Although the central committee's pronouncements on fiscal reform were equally vague on Tuesday, they appeared to edge towards greater balance between the provinces and Beijing, talking of establishing a modern fiscal system that lets "both the central and local governments play active roles."


Reforms in the 1990s ended free healthcare, although the government has managed to push medical insurance to 95 percent of the population in the past several years.

Still, spending on healthcare has fallen only slightly, according to the World Bank, to 8.2 percent of household income from 8.7 percent. And roughly 99 percent of the insured cost of medical care is borne by local governments, according to Credit Suisse.

Creating a national healthcare insurance system could turn China into one of the world's largest pharmaceutical buyers, economists say, helping drive costs down and increasing the quality of care.

Province-level pensions are also chronically underfunded, as they have been collecting from workers (about 8 percent of their wages) and their employers (20 percent of employee wages) only since 1997.

Worse, workers can only draw from the employer-funded part of their pensions if they work for 15 years in a single province. That not only discourages people from moving to take up better jobs elsewhere, it encourages workers to save on their own and worsens the pressure on public funding.

"It limits the overall incentive to participate in pension systems," said Helen Qiao, an economist at Morgan Stanley in Hong Kong.

Compared to those issues, funding China's nine years of compulsory primary-school education seems an easy task.

Education is the single largest government expense in China, according to Credit Suisse, larger even than outlays on defense. Yet local governments shoulder roughly 95 percent of that cost.

But those costs hide the expense to migrants who have to pay for their children to attend unlicensed schools like Pengying.

Many cities have committed to finding spaces in schools for migrant children, but the problem remains so widespread that the Rural Education Action Program, a group of researchers from Stanford University, the Chinese Academy of Social Sciences and Northwest Socioeconomic Development Research Center, determined there were 230 migrant schools in Beijing alone educating roughly 70 percent of migrant children.

The number of children being schooled outside the education system has sparked calls for the government to let them take university entrance exams outside their home base.

"It's OK if they don't give us money, but they can at least treat us as equals," said Pengying's headmistress, who would only provide her surname, Zhao. "These children are all children of China. Why should they be treated differently?"

China points to social welfare reforms needed for urbanization drive - The China Post

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Very revealing about inequalities and problems.