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UPDATED: November 18, 2013 NO. 47 NOVEMBER 21, 2013
Greater Depths
China's definitive reform agenda prioritizes combating income inequality and highlighting the market's role
By Zhou Xiaoyan

Another highlight of the third plenary session was that a bigger role was promised to the market at a time when the Chinese economy begins to show signs of slowing down after over three decades of breakneck expansion.

For some time after 1949, the idea of a market had been associated with capitalism. Even after reform and opening up in 1978, the country had struggled to define the market and some dogmatists still questioned whether socialism could accommodate a market economy. It was not until the 14th CPC National Congress held in 1992, that a socialist market economy became consensus. The Party agreed that the market, under state macroeconomic control, should be the "basic" means of allocating resources.

The Third Plenary Session of the 18th CPC Central Committee had a change of attitude toward the market, saying that it has a "decisive" role in allocating resources.

Experts say it is not only a change in wording, but more importantly, a breakthrough in China's market reform and highlights the importance of market power.

Xie Chuntao, a professor from the Party School of the CPC Central Committee, said a new definition of market showed the Party's in-depth understanding of what the market economy is and what role the government should play.

Xie commented that the market has played an increasing role in the domestic economy over the past two decades.

"The government did a good job but sometimes just intervened too much, which has led to high administrative costs, low efficiency and corruption," he said. "I think the leadership understands what the problems are."

The core of economic reform is a proper relationship between government and the market, according to the communiqué. The Party also pledged to open up the market to private and foreign investment with deregulation being tested in free trade zones. This is in line with an array of reform measures carried out by the new Chinese leaders since taking office.

The new Central Government formed in March has been pushing forward an institutional reform to cut red tape and delegate power to lower levels. So far, it has abolished or transferred 221 administrative approval items to local governments.

Market reforms are under way as well. In July, China's central bank canceled the floor on lending rates. The Shanghai Pilot Free Trade Zone was launched in September as a testing ground for financial reforms, including the convertibility of the yuan and the deregulation of interest rates.

Decisions made at the Party plenary session also paved the way for China's long-anticipated new urbanization process, according to analysts. The hukou system ties entitlement to public services—such as pensions, healthcare insurance and free public schooling—to home towns. Restrictions on farmers from selling their land also impede urbanization.

China's urban land is owned by the state, while rural land is collectively owned by farmers. Rural land is divided into two types—arable land, which is used for growing crops, and rural construction land, which is used for rural housing, infrastructure and factories. Farmers lack property rights over the collectively owned land, thus they are denied gains from soaring land prices and are often forced into selling rural land.

The communiqué stated that China will quicken efforts to give farmers more property rights and establish a unified urban and rural land sales market.

Yi Peng, Director of the Urbanization Research Center under the International Finance Forum, an independent global think tank with headquarters in Beijing, said this will give farmers more benefits from the increase of land prices and housing prices, which can to a large extent narrow the income gap between rural and urban residents.


Some netizens said that Party plenary session communiqués are short on details and on implementation timelines.

"The CPC Central Committee plenary session is only responsible for mapping out reform's orientation," said Wang Jianhui, Deputy Director of the Research Academy of the Beijing-based Capital Securities. "A slate of follow-up policies is expected to be released in the coming two years."

Zhao Xijun, a professor of finance at the Renmin University of China in Beijing, said the implementation of reform measures is what matters.

Zhao said China has now entered "deep-water reform," with no experience to learn from and no errors allowed.

"China has to muster unprecedented courage and determination to formulate specific reform measures and a clear timeline."

As the reform is bound to encroach on vested interest groups, the country is likely to face stiff resistance from those who benefit from the status quo, including state-owned enterprises (SOEs), some government officials and some companies in the financial and real estate sectors.

Even President Xi admitted during the plenary session that the comprehensive deepening reform is bound to be thwarted by outdated mindsets and vested interest groups.

"SOEs are responsible for 60 percent of China's investment, but only produce 20 percent of the GDP. Their staff, which only accounts for 5 percent of the total workforce, will do everything they can to compromise the reform," Wu Xihu, a professor from Peking University, wrote on his Sina Weibo page, a twitter-like micro-blogging service.

Chang Xiuze, a professor from the Macro Economic Research Institute of the National Development and Reform Commission, said the key issue confronting the proposed central leading team for reform would be coordinating different interest groups.

"The authority of the team should be strengthened. In the past, some good reform measures were carried out poorly. Therefore, the focus of the team's efforts in the future should be harnessing those interest groups to make sure reform measures are smoothly carried out."

Email us at: zhouxiaoyan@bjreview.com

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