What to take from the Plenum?

The communiqué issued at the close of the Third Plenum that ended on Tuesday contained the general objectives, principles and the orientations of reforms, to be followed by the Decisions document, also discussed at the Plenum, which will feature more specific objectives, principles and orientations.

Pending the specifics, what can we take away from the communiqué?

The approach to reform seems quite comprehensive, encompassing not just specific areas of economic reform but aiming at changing something as fundamental as the role of the government. Also, this is about the long haul — the leadership hopes to have made good progress by 2020. It will be gradual reform, not rapid changes. The communiqué confirms that economic reform, more market orientation and further opening-up to the outside world are key pillars of China’s economic policy strategy.

On several specific areas of reform, including financial and monetary reform and rebalancing the pattern of growth, the communiqué says little. That does not mean there is no scope for movement in those areas. The Decisions document is likely to discuss them. Thus, it is too early to say whether the reform directions and orientations agreed at the Plenum will meet the expectations in those closely watched areas.

Other areas that are being closely watched, including State-owned enterprises, urbanization and rural land issues, featured in communiqué, but with language that does not suggest a major breakthrough any time soon.

The Communist Party of China will set up a central team to lead “comprehensively deepening reform”. This team will be in charge of designing the overall design of the reforms, arranging and coordinating reforms, pushing forward reform as a whole, and supervising the implementation of the reforms. This is potentially an important innovation, depending on the clout that the team will have.

A team in charge of leading and coordinating reform that reports directly to senior leaders is something that has been recommended by experts in order to overcome obstacles to reform stemming from China’s consensus-driven policymaking process in which different ministries, agencies and interest groups all having to “sign off ” on reforms. This has often made policymakers take the path of least resistance, with measures that do not face strong resistance from vested interests.

Thus, if the team has the necessary clout and mandate, it could possibly speed up the politically difficult reforms desired by the leadership in the coming years.

The communiqué stresses reform of the economic system, with the focus on balancing the role of the government and the market. Upgrading the role of the market in the allocation of resources from “basic” to “decisive”.

In line with earlier calls from senior leaders for less direct intervention from the government in the market and more provision of a framework for the market and public services, the communiqué says that “government functions must be transformed in a down-to-earth manner to establish a law-based and service-oriented government.”

It also calls for an independent judiciary, and indicates that, as the government’s role diminishes in other respects, the fiscal system is meant to play a larger role, including “optimizing resource allocation, promoting social justice and achieving national security”.

The communiqué calls for establishing a modern fiscal system that “supports the initiatives of both central and local governments”, and ensures that “the authority and responsibility to spend are matched”, balancing different considerations.

Other noteworthy calls are on improving the budget management and tax system and making the budget more transparent.

The traditional statement that “public ownership remains the dominant form of ownership suggests no major changes soon in terms of the role of SOEs. In this regard, the phrases that “development in the non-public sector will be encouraged⋯” and that “State-owned enterprises will adhere to modern corporate practices” are actually not new and therefore do not imply a change in approach or stance.

Similarly, the statements about the need to “integrate urban and rural areas” and “promote balanced factor allocation” for rural and urban areas and calls to allow farmers to “participate in the modernization process and enjoy the achievements”, “give more property rights to farmers” and “establish a unified construction land market for urban and rural areas” are not new. Thus, it is hard to say whether there is now a mandate for reforms to give farmers transferable, individual user rights to the rural land in their home villages and to let them benefit more from urbanization-related rural land sales.

Opening up remains a key element of the reform strategy, as indicated by calls for more external trade and investment, the “orderly free flow of international and domestic factors”, relaxation of inward investment requirements, speeding up the construction of free trade zones and expanding the opening-up of coastal cities. The need to “accelerate to participate and lead the new advantages in international cooperation and competition” seems a call to be proactive in international economic diplomacy.