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December 24, 2013

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Reform plan a quantum leap for a better life

This November, the Third Plenum of the 18th CPC Central Committee culminated in a sweeping 60-point blueprint for economic, social and legal reforms.

The blueprint turned out to be “far more detailed, far more ambitious, far more unreservedly pro-market reform than many outsiders expected,” says Avery Goldstein, director of the Center for the Study of Contemporary China at the University of Pennsylvania.

Adds Pieter Bottelier, senior adjunct professor of China studies at Johns Hopkins University: “This is by far the most ambitious, comprehensive reform plan that I’ve ever seen.

Highlights of the reform package include the loosening of China’s family planning policy, the end of labor camps, a declaration that the market plays a “decisive function in resource allocation,” financial and fiscal reform, greater land rights for farmers, the reform of the hukou household registration system, and changes to the judicial system.

The changes are designed to transition to an economy less dependent on massive government investment and more driven by consumption, innovation and market forces, while improving social justice and quality of life. “It’s a quantum change, if all of this is going to be implemented in the next five to 10 years,” notes Bottelier.

No time to waste

“So many things in the economy are approaching breaking points,” notes Marshall Meyer, a Wharton professor of management. “I’m absolutely confident Beijing understands the precarious combination of investment-driven growth, indebtedness, and declining GDP growth, productivity and corporate profitability. Starting in 2009, when China started injecting money into the economy in the wake of the global financial crisis, almost all those lines are going downhill.”

In its rush to modernize, China succeeded in pulling 680 million people out of poverty between 1980 and 2010, providing double-digit economic growth rates while becoming an export engine and factory to the world.

But now that economic growth and productivity are slowing, fissures created by the fast growth years are becoming more visible. Particularly after the global financial crisis in 2008-2009, China has increasingly fueled growth through government investment, which has propped up frothy local real estate markets and large, often inefficient state-owned enterprises (SOEs).

With rising wages, an aging population, declining productivity and an increasingly bloated and inefficient state-owned enterprise sector, China needs a new economic model to achieve the Chinese dream and to avoid the so-called “middle-income trap.”

The term refers to a scenario in which fast-growing developing nations get stuck in a rut of slow growth, unable to compete with lower-wage countries and innovation-led economies, leaving them in what the World Bank defines as the middle-income range (having a per capita gross national income of US$1,026 to US$12,475).

Other East Asian economies, such as Japan and Republic of Korea, beat this trap by replacing investment as a source of growth with domestic consumption and exports.

In China, the need is even more acute — with investment running above 50 percent of GDP as compared to a 35 percent peak in the other countries and regions during their development phases, according to an October report by David Dollar, senior fellow at the John L. Thornton China Center at the Brookings Institution in Washington, DC, and former US Treasury Department emissary to China and World Bank China country director.

In a November 2012 paper, the International Monetary Fund concluded that China needs to lower its investment by 10 percentage points of GDP to ensure its most productive use.

Reform state-owned monopolies

The Third Plenum report contains few direct measures for SOEs, besides a new requirement for them to hand over 30 percent of their dividends to the state.

But, says Bottelier: “If you read between the lines, SOE reform is pervasive.”

For example, giving the market a “decisive,” rather than a “fundamental,” role in resource allocation as “the major theoretical principle” of the plan is aimed at reducing monopoly power, he notes.

Xinhua, the country’s official press agency, also reports that the government will issue more SOE reforms early next year.

Meyer says that allowing private investors in SOE ownership “could lead to representation of private interests on SOE governing boards.” So, “without sacrificing the principle of state ownership, this is a way of bringing private market discipline to bear,” he states.

Dollar adds that the proposal to “open up oligopolized sectors to foreign and other investors may be the single most important change to create a competitive environment where SOEs have to become more efficient, as their super-profits are competed away.”

Rural-urban divide

Many experts point to plans to close the rural-urban gap as some of the most important and perhaps most immediate reforms to undertake. The measures include granting farmers greater land rights and loosening the hukou or household registration system, which dictates permanent geographic residency for citizens and the social services they receive.

Hukou and land reform can provide the spur for needed fiscal reform, according to Bottelier. “Urban China is a bifurcated society. Of the 700 million Chinese who live in cities, 400 million have urban hukou, but some 300 million are without permanent urban hukou and have no access to schools, hospitals and pensions,” he says. “Migrants save every penny, because they have no access to the social safety net. If you successfully reform the hukou system, you create enormous pressure to drive fiscal reform,” so localities can support social services for all.

Moreover, giving farmers property rights also helps stem rampant corruption in which some local officials confiscate land for sale in inflated real estate markets, adds Dollar.

Adapted from Knowledge@Wharton. http://knowledge.wharton.upenn.edu. To read the original version, please visit: http://knowledge.wharton.upenn.edu/article/road-chinese-dream-xi-jinpings-third-plenum-reform-plan/

 




 

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