China’s party leadership just announced the country’s reform agenda that will guide government policymaking and implementation for the next decade. Like previous such plenum documents, the announcements outline only broad priorities. If Beijing is serious in implementing the third plenum document’s central message on the decisive role of markets, then this may well prove to be a pivotal moment in China’s history.

Although the proposed reforms were billed as comprehensive and unprecedented, they are neither.  Yet the priorities they indicate signal a potentially significant change in the approach and direction of future economic policies.

At the very core of the new agenda is the recognition that the role of government in the economy should change.  The plenum has called for the transformation of the government itself and the way it relates to markets, to the private sector and to society at large.

Part of that transformation is reflected in the clearest message of the plenum document ‘namely, that markets ‘not government’ should play the decisive role in allocating resources.

Taken at face value, this new direction could potentially affect all aspects of the economy through its impact on product, labor, financial, and land markets.
Unfortunately, the plenum’s message is diluted by the absence of any mention of financial, labor or land market reforms.  And when state enterprises are mentioned, the document says they will continue to play a dominant role in the economy, leaving unaddressed the obvious concern that state enterprises tend to tilt the playing field against non-state firms.


1. One-Child Policy Reform
China’s family planning regulation was enacted in 1979 and mandated that urban couples may only have one child, while allowing two children to couples in rural areas or belonging to ethnic minorities. The move served to alleviate pressure from overwhelming population growth.

Under the newest change to the policy, urban couples will be allowed to have two children. Aside from putting a stop to the policy like forced abortions, the shift should ease the erosion of China’s competitive advantage due to the decline in the labour force, avoid a plummet in the population overall, and aid the country’s transition to a consumption-driven economy.

2. Labour Camp Abolished
China will abolish the labour camp system first put in place in 1957. These camps serve as a form of re-education for criminals through manual labour. Community correctional policies may now be expanded to replace labour camps.

3. Land Reforms
The restriction on transferring usage rights of rural land that is classified as ‘for construction’ has been lifted, which will benefit both poor rural households and make the process of urbanization smoother.

Under the reform, the windfall increase in land value would profit the original land-owners. But because local governments will lose that revenue, this reform will take some time.

4. Market Reforms
The communique’ gave top billing to the ‘decisive’ role markets will be allowed to play in resource allocation. The prices of water, oil, natural gas, electricity, transport and telecommunications will become more market-determined, which should open up sectors previously dominated by state-owned enterprises to private and foreign firms. Policymakers will also retreat from micro-level intervention, allowing for freer markets.

These reforms should put the minds of foreign companies and investors somewhat at ease ‘they are essentially levelling the playing field for the private sector.

5. Financial Reforms
Financial markets will be freed up, continuing reforms that were already launched prior to the Third Plenum. Interest rate and capital account liberalization will be accelerated, a system of deposit insurance will be set up, and private banks will be allowed for the first time. China’s mechanism for setting the exchange rate and its fledgling bankruptcy system will also be improved.

6. Social Welfare Reforms
Reform of the household registration system, called hukou in Chinese, will speed up. In third-tier towns and small cities, registration restrictions will be lifted completely while restrictions in medium-sized cities will be gradually relaxed. Being able to obtain hukou will allow rural residents moving to qualifying cities for work.

The plenum document also calls for a decisive shift in the government’s role toward new priorities, including environmental protection, innovation and social justice.

Social justice receives unusual emphasis and covers reform of the judicial system and protection of human rights, greater emphasis on rural-urban synergies and property rights for farmers, and delivery of public goods and services that promote social fairness, more equal income distribution and greater equality of opportunity.

Finally, it is encouraging that the plenum gave due attention to strengthening the fiscal foundations of the state. Many of China’s problems stem from weak public financial management and an over-reliance on the financial sector as an instrument of fiscal policy.

Any reforms seriously undertaken ‘including of banks and state enterprises’ will require substantial fiscal resources.

The proposed reforms in public financial management appear to address the right issues’ improvements in budget management, revenue mobilization, and most importantly, ensuring that local governments have adequate public resources to meet their expenditure responsibilities.

The plenum document is equally notable for what it does not say.  It is silent on proposed reforms of state enterprises and the financial sector, urbanization, the operation of land and labor markets (including reforms of the hukou system), the opening of the capital account, exchange rate management and the internationalization of the renminbi (of which the yuan is the base unit).

Taken as a whole, then, the reform priorities put forward by the plenum have important gaps.  Yet it constitutes a serious, if cautiously crafted, agenda for the future.

The single, most important message on the role of markets could have a profound effect on all aspects of the economy going forward. China’s leadership has given a strong indication of the direction in which they would like to take the economy over the next decade.

But the devil is always in the details and those expecting specifics will have to wait.

The complexity of the challenge requires moving forward carefully with design and implementation.  The leadership has entrusted this to a high-level committee.

The committee’s first task will be to translate the plenum’s priorities into concrete policies that are appropriately sequenced and phased.  It is when they will emerge with their recommendations that we will have a better idea of what the government actually intends to do.

The third plenum document did not live up to its hype.  But if the government is serious in implementing its one central message ‘the decisive role of markets’ then this may well prove to be a pivotal moment in China’s history. Only time will tell.

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