What determines the successful implementation of the coming economic reform?

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The recent Third Plenary Session of the 18th Chinese Communist Party Central Committee introduced several ‘unprecedented’ reforms.  Among all the reforms, economic reform is a highlight as it had been laid down as the key for overall reform and the re-defining of the role of market economy from its previous ‘basic’ position to ‘decisive’ in China’s development in the future has been written in the final report of the Plenum. This is an exciting general principal of the overall economic reform which aims to rebalance the roles played by the government and the market in the economy, especially in terms of resource allocation. Then detailed plans like the continuous opening-up of inland cities, transformation of governmental roles to ‘Service-based’ in the economic matters, the establishment of modern fiscal plans in state-owned enterprises (SOEs), freedom of trading rural lands for farmers, principle of using a ‘negative list’ in certain Free Trade Zones and access to some financial services like banks to private investors have also been listed down in the final report.

However, though private enterprises have been encouraged according to the plenum, the dominance of public ownership (state-owned in fact) economy has been emphasised again in the final report, making the implementation of the above mentioned goal of decisive market economy questionable.

This problem leads us to another intriguing issue besides the content of this report from the recent plenary meeting, which is whether the economic reform programs laid down by the Chinese leadership can be implemented. In the rest of this essay, I am going to discuss this issue from two perspectives, the inherent problem in the final report itself that affects the successful implementation of the economic reform, and the practical issues in reality that impedes the implementation.

I am rather pessimistic implementation from the start as the ambiguity of the report of the third plenum itself makes the actual implementation of the proposed reforms disputable.  As mentioned above, the final report emphasizes the ‘decisive role’ of the market economy in China’ future development on one side, while insists on the dominance of public ownership sector on the other side. Some may argue that this co-existence of state-owned enterprises (public ownership) and market economy can be achieved through the strategic retreat of state-owned enterprises in certain domains like education, transportation and healthcare and its unchallenged position in other important security domains like military defence. However, that means it will still be very hard for private enterprises to penetrate into some other important sectors like finance, telecommunications and energy as the government needs to guarantee the dominant position of state-owned enterprises, making the promise of establishing a proper market economy empty words. Thus, the full implementation of the new economic reform seems flawed from the published report.

Moreover,  it is an open secret that currently the competency of the Chinese SOEs  almost rely entirely on government backed resource allocation and their monopolies in respective domains like energy and telecommunications. Without these privileges, it is estimated that around 95% of the current SOEs will go bankrupt if they compete fairly with other companies in the market.  Thus, it raises the concern that the current proposed reform of opening several ‘privileged industries’ may be forced to back down when survival of SOEs in these industries are threatened, providing the fact that almost all senior executives in Chinese state-owned enterprises are also holding administrative posts in local government. The ideal dream of the dominance of state-owned enterprises in a proper market economy is indeed bleak. 

Apart from the self-contradictory issue in the report, there are also some practical issues that will have severe impacts on the implementation of the economic reforms if they are not handled properly.

Firstly, the implementation of the economic reforms laid down will be decided by the outcome of consensus achieved within the Chinese Communist Party itself. A lack of timetable for economic reforms in the current report had already showed us that everything is not firm. Instead of a clear cut timetable, the progress of the economic reforms will be supervised and actually determined by a central leading team for ‘comprehensively deepening reform’, which should include representatives from different opinion groups among the party. This reminds us of the case of Shanghai Free Trade Zone which happened weeks before the start of the Third Plenum Meeting. The Free Trade Zone used to make everyone involved so exciting as it was viewed as a large step taken by Beijing to further liberalise its economic policies, however, the tide suddenly changed direction and things started to cool down due to divergence in Zhongnanhai . As a result, not even a vice premier was present to start the Free Trade Zone Program. The final ‘negative list’ for the Shanghai Free Trade Zone announced covered so many clauses that disappointed most enthusiastic investors.  As Internal split in the collective leadership in the Politburo led to the disappointment of the Shanghai Free Trade Zone, it is also possible for it to render the new economic reforms aborted again, through the hand of this central leading team for’ comprehensively deepening reform’.

Secondly, strong resistance from entrenched interest groups comprising of local bureaucrats, high ranking managers and directors from state-owned enterprises and their respective affiliates may also make the implementation of economic reforms unfeasible.  After more than 35 years of opening-up since 1978, a lot of people have become rich first, as Deng Xiaoping predicted. However, what Deng was wrong is that these groups of rich people may not only refuse to help the poor now, but also impede further reforms in order to benefit more from the current situation. In terms of the current economic reforms, proposals like modern fiscal reforms in state-owned enterprises, retreat of state-owned enterprises from some profitable industries and smaller governmental roles in local economic development will definitely harm a lot of entrenched interest groups.  It is unbelievable for us to deem these interested groups surrender to the central government voluntarily; instead, a head-to-head strife is widely expected.  Thus, the success of the implementation of these reforms will also be influenced by power bargaining and wrestling between the central government and the local entrenched interested groups in different places of the country.

Furthermore, outcome of the implementation also depends on the quality of the group executing the reform.  A corrupt group of bureaucrats pushing for reforms will not do any good for the country, instead, they will only make matters worse, and the validity of this consideration had already been proven by Song Dynasty reformer, Wang Anshi, more than one thousand years ago. Unfortunately, if we assess the current group of Chinese bureaucrats, we will hardly deem them as satisfactory executors of this coming reform. In fact, this batch of bureaucrats has successfully completed the infamous job of consolidating classes in Chinese society, as the current young bureaucrats are mainly sons, daughters or other relatives of previous bureaucrats. They had also refreshed the record of corrupt level when the value of embezzlement had been increased to tens of billions Yuan in recent years. More importantly, their collective move to reject proposed reform of publicising their personal assets in recent decades fails to convince us to their qualification to bear the burden of the economic reforms.

Lastly, soaring local government debt poses additional challenge for this coming economic reform. According to Bloomberg, local government debt had soared to 17.9 trillion at the end of June 2013. That accounts for neat 40% of China’s annual GDP.  Though the level of debt is still far from the brink of collapse, it may dampen Beijing’s effort to push for economic reforms to limit local governmental intervention in economy, as this kind of intervention provides huge amount of revenue for local government, especially in terms of property, even though we all understand that a sound market economy should be free from this kind of excessive intervention. As local government may default on these debts once their source of revenue is given back to the market, it is largely concerned Zhongnanhai may eventually back down the implementation of the reforms in order to maintain the highest priority – stability.

To sum up, factors listed in this essay to assess the successful implementation of the economic reform largely hinges on CCP’s resolution to push for reform. Self-contradictory problem in the final report and divergence among the collective leadership are evident tests on this resolution.  Decades of centralised power in Zhongnanhai still render current vested interested groups and bureaucratic groups uncompetitive facing state power currently, if the government is determined to break them for the success of the reform. Local government debt is a relatively minor problem in this case given its controllable level and China’s huge amount of foreign reserves. Positive light has been shed in recent days as hard fists have been shown on corrupt bureaucrats, and hopefully this move is continued. 

References: 

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