Article posted by UKTI Digital, for UK Trade & Investment
25 November 2013

China Economy: Third Plenum Summary: Economic Reforms – November 2013

British Embassy Beijing

Summary

This note provides a brief summary of the economic reform elements of the Third Plenum Decisions

Background

  • The 3rd Plenum took place on 9-12 November. A communiqué was published in the evening of 12 November (see earlier report).  That disappointed the market, because the document was vague and lack of details. It avoid touching some long expected reforms, e.g., the state owned enterprises (SOEs).

  • However, 3 days later, a full version of the “Decisions on Deepening Reform” rejuvenated the market. The 20,000 character document covers a wide range of topics, including market mechanism, financial services, democracy, judicial system, anti-corruption inside the Party, social welfare (education, income redistribution,  healthcare, ageing), social organisations, public security (including food security), natural resources and environment, defence, and the Party’s personnel system.

  • As expected, the ‘Decisions Document’ does not contain a detailed timetable for implementation (some timelines, e.g,. to uplift SOE’s dividend to 30% by 2020). It only says that the authorities would make substantial progress in all areas by 2020, the date former President Hu Jintao stated China would become “a moderately prosperous society in all respects”.

  • December’s Central Economic Work Conference is expected to give indication about short-term reform priorities.

Key economic reforms announced

  • Market mechanism: The focus of the Third Plenary Session announcement was on the ‘decisive role’ of the market in increasing economic efficiency. In the past, the authorities expected the market to play a ‘basic’ role. The market would play a ‘decisive’ role in allocating resources. The ‘Decisions Document’ includes price-setting mechanisms for water, oil, natural gas, power, transportation, and telecommunications. This is in line with expectation. Meanwhile, the document urged to largely reduce the government’s interference in the market. This is what has started since last November that a lot of administration approvals were devolved or cancelled.

  • Fiscal reform: There will be significant reform to fiscal relations between the central government and the provinces, including through increasing transparency; moving some spending responsibilities (back) to the centre; and continuing to roll-out important tax reforms. These measures would address widespread concerns about the sustainability of local government finances.

  • SOE reforms: Although the ‘Decisions Document’ emphasised on market’s ‘decisive’ role, it also reiterated public sector would continue as the pillar of China’s economy. But it encouraged all entities could compete at a fair status. The state sector should invest in ‘key and critical industries’ which would relate to national security and economic lifeline. The announcement that to increase the dividends paid by SOEs to 30% by 2020 was encouraging. The dividend is expected to fund for the increase in social spending.

  • Financial reforms: This includes plans to expand financial liberalisation (domestically and internationally), to encourage two-way capital flows, to speed up capital account liberalisation and to set up deposit insurance mechanism. All in line with expectation. Governor Zhou published a paper interpreting the Third Plenum, which announced the reduction of PBoC’s interference in the market, including “basically to stop interference on exchange market”, “to allow the RMB to float freely” and “to cancel restrictions on QDII and QFII when the conditions are mature”. No specific timeline was given. [Other Ministries are expected to publish their interpretations of the ‘Decisions Document’ in the coming weeks.]

  • Land reform: To establish a unified market of construction land (land used to build homes on), and to set up intermediaries for rural construction land translations. This is expected to better protect farmers’ property rights, help their income and consumption.

  • Open up the market: To loosen restriction of inward investment. To keep the policy of foreign investment stable, transparent, and expectable. The sectors that will be opened or further opened include: financial services, education, culture, healthcare, elderly care, construction designing, accounting and auditing, logistics and e-commerce. The authorities would also loosen restriction to allow more Chinese enterprises and individuals to invest overseas.

  • Hukou reforms:  Accelerating reform of the household registration system (the ‘hukou’) in small and medium cities, thereby widening access to social services. This will be expensive for the government, but would have profound (positive) implications for the economy and society.

Disclaimer

The purpose of the FCO Country Update(s) for Business (”the Report”) prepared by UK Trade & Investment (UKTI) is to provide information and related comment to help recipients form their own judgments about making business decisions as to whether to invest or operate in a particular country. The Report’s contents were believed (at the time that the Report was prepared) to be reliable, but no representations or warranties, express or implied, are made or given by UKTI or its parent Departments (the Foreign and Commonwealth Office (FCO) and the Department for Business, Innovation and Skills (BIS)) as to the accuracy of the Report, its completeness or its suitability for any purpose. In particular, none of the Report’s contents should be construed as advice or solicitation to purchase or sell securities, commodities or any other form of financial instrument. No liability is accepted by UKTI, the FCO or BIS for any loss or damage (whether consequential or otherwise) which may arise out of or in connection with the Report.

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Article posted by UKTI Digital, for UK Trade & Investment
25 November 2013