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China’s reforms more substantial than meets eye
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On November 12, the Third Plenary of the 18th Central Committee of the Communist Party of China (CPC) announced a major turn to market-oriented policies: interest-rate and currency liberalization, reform of banks and state enterprises, clearer land ownership for rural inhabitants, and a better deal for urban migrants.
Behind this landmark decision was a potential crisis. China’s success has been driven by cheap exports based on cheap labor, infrastructure built by state enterprises with low-cost bank funding, and government budgets financed by land sales.
But labor is no longer cheap, road construction to connect major cities has given way to building large shopping malls in small towns, and land sales based on rezoning are reaching both economic limits and the limits of villagers’ tolerance.
Cheap money with limited investment outlets now risks fueling property bubbles and industrial overcapacity. Without fundamental change, China faces slower economic growth, inadequate job creation and innovation, and popping bubbles.
The solution is a rapid shift from China’s export-based growth model to one based on domestic demand; from infrastructure to consumption; from the dominance of large state-owned enterprises (SOEs) to that of small and medium-size private enterprises; from industry to services; and, more broadly, from bureaucratic control to market control.
Immense pain
All successful Asian countries have made this shift. But rapid change entails immense pain. SOEs will lose their low-interest loans, subsidized land, monopoly protection and privileged housing. Bureaucracies will lose power.
Local governments are particularly desperate. Already squeezed by exorbitant property prices and popular resistance to land takings, they now face higher interest rates, property taxes, villagers empowered by stronger rights, and expensive new requirements to provide social services to migrants.
China’s political leaders sided with reform. The Third Plenum’s announcement of its decisions took the form of a statement of broad principles, leaving many observers concerned by the lack of detail.
Key reforms underway
But the CPC’s role is to set the direction of policy; executing the Party’s decisions is the government’s job. And the Plenum did establish a top-level group to coordinate and enforce implementation of its decisions.
While implementation will be a long struggle, with occasionally fierce resistance, key reforms are already underway.
The current 12th Five-Year Plan calls for annual wage increases to average at least 13.4 percent; this year, wages are rising at an average rate of 18 percent, which will squeeze out industries characterized by obsolescence or overcapacity.
Most important, economic outcomes are becoming increasingly aligned with the authorities’ goals.
Services already account for more output and employment than industry — the Internet company Alibaba, for example, is empowering both consumers and smaller companies on a previously unimaginable scale — and recent growth has been driven by domestic demand rather than net exports. Reform is not just a plan; it is already happening.
Economic openings to Central Asia and to ASEAN (specifically to Vietnam) are well underway, and reform will include further international opening.
The Third Plenum’s decisions follow the launch in September of the Shanghai Free-Trade Zone, which will open new sectors to foreign investment and permit largely market-based financial transactions and capital flows.
William H. Overholt is a senior fellow at the Fung Global Institute and the Harvard University Asia Center. Copyright: Project-Syndicate, 2013.www.project-syndicate.org. Shanghai Daily condensed the article.
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