13 December 2018

Bet on China’s reform ‘decision’

Is there anyone betting on structural reform breakthrough? Yes, Beijing is. While the economic reform initiatives that it proposed after the Third Plenum are just old wine in a new bottle, there are a couple of completely new resolutions that could make or break China’s structural changes. But these important elements have received little attention. The key question is how can Beijing push them through effectively in the face of inherent resistance to changes? Delivering the reform breakthrough to help achieve the “China Dream” is indeed the bet President Xi Jinping is taking for the country’s future.

Among the 60 reform objectives spelled out in the “Decision” document (Full title: “Decision on major issues concerning comprehensively deepening reforms”) after the Third Plenum in November last year, those on economic reforms are nothing new. Most of them, such as private sector development, protecting intellectual property rights, cutting red tape and promoting market forces, can be found in the resolution of the Third Plenum in 1993. However, they have not been effectively implemented.

To announce a reform blueprint in the “Decision” is one thing, but to implement the reform objectives effectively is quite another when faced with inertia and resistance to change. However, there are some hints of a breakthrough in the aims of the “Decision”, which holds the key to deciding the pace and depth of China’s structural reforms in the coming decade.

The potential game-changer this time lies in the two intended legal reforms which, if implemented properly, could go a long way to address the root problems of the lack of governance and rule of law that have plagued the Chinese system. They may also act as the prelude to political reform later.

First, the “Decision” seeks to strengthen judicial independence, separating law from administrative jurisdictions at the local government levels. The purpose is to free the local courts from local government control and, thereby, to destroy a large part of the rent-seeking mechanism. Second, the “Decision” wants governments’ commitment to respect and protect human rights, prohibit interrogation and the extraction of confessions by torture, and to scrap re-education labor camps.

These are wholly new resolutions. But as past reform efforts have been ineffective, how will these tougher changes be implemented? China’s future reforms indeed depend on whether President Xi’s move to centralize and strengthen his control over the Communist Party to fight vested interests and maximize his ability to impose structural changes will pay off.

A leaner, centralized leadership may make a difference this time. The system under the former decentralized, bureaucratic leadership’s “harmonious society” model has proven insufficient. Exports struggled as labor cost rose. Investment returns fell steadily as the focus changed from income-generating projects, such as infrastructure, to less productive projects, such as shopping malls and luxury property development. State-owned-enterprise (SOE) productivity plummeted (Chart 1), revealing the problem of a bloated state sector – whose employment expanded from 40 million to 70 million under the previous leadership – crowding out the private sector. Last but not least, local government funding through land-grabs was reaching its limits.

Xi has cut the number of top leaders in the Standing Committee of the Politburo from nine to seven. He has ousted some powerful left-wing voices (Bo Xilai and most recently Zhou Yongkang), relegated some extreme right-wingers (Li Yuanchao and Wang Yang) to the second tier, and waged an anti-corruption campaign. He has also set up both a senior group to enforce structural reforms and bureaucratic compliance and a national security commission to coordinate foreign policy.

The President is betting on his ability to rein in the extremist forces and improve policy coordination to facilitate his power consolidation so as to push for deeper changes. This is a tall order. Meritocracy is the foundation of China’s political system, but it has been eroded by a political culture of cynicism, cronyism and sycophancy. Building a mechanism to pick the right bureaucrats is the most challenging yet basic task for implementing the action plan for future reforms amid the inherent conflict of interests and moral hazard. Xi will have to lead a “long march” in the coming years, but he still deserves the benefit of the doubt so far.

– Contact HKEJ at [email protected]



Senior economist of BNP Paribas Investment Partners (Asia) Ltd. and author of “China’s Impossible Trinity – The Structural Challenges to the Chinese Dream”

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