The yuan has slipped past the euro to become the second most used currency in trade finance after the U.S. dollar. We are indebted to SWIFT, the financial transaction services company, for this piece of intelligence. Its data is for October. It is a vindication of China’s push to make the currency more reflective of China’s position as a global trading power. However, the dollar still accounts for four out of every five dollars financing global trade, while the yuan accounts for barely one in twelve. In terms of all payments, the yuan ranks twelfth with a less than 1% market share.
There is a long tradition of sailors on aircraft carriers parading on deck in a formation that spells out messages. This Bystander recalls visiting U.S. carriers even doing it in Japanese characters on visits to Japanese ports. The crew of China’s first aircraft carrier, the Liaoning, has now joined this naval tradition, as witnessed by this undated photograph that has appeared on some state media web sites. The message is seems fitting — “Chinese Dream”.
Is this the committee for ‘comprehensively deepening reform’ that came out of the Third Party Plenum? Or at least its vanguard? A group of 28 senior officials, including ministers, vice-ministers, and provincial party bosses has met under the chairmanship of propaganda chief and Politburo Standing Committee member Liu Yunshan. State media say the committee is charged with promoting the reform plan put forward at the plenum, and will start a tour of the country to that end at the end of the week. It comprises a lot of heavyweights just for a PR push.
Liu is a protege of former President Hu Jintao and similarly comes out of the Party’s Youth League, the faction of its career officials. That should aid him in coordinating reforms, if that indeed is his role, across the many agencies of government at national, provincial and local level, all of which have great scope to be obstructionist where they feel their interests are at risk. Liu’s team appears to be reporting to President Xi Jinping. If this is indeed going to be steering committee for reform, putting of it under direct presidential report is another example of how Xi is centralizing power and thus tightening his political control.
Most developed countries have done it, and now so will China — boost GDP growth through an accounting change. The National Statistics Bureau says wants to use market values for assets such as land and property values when calculating gross domestic product. It also says it wants to bring its calculations more in line with international practice. That most likely means that research and development and other intangible assets will no longer be regarded as a mere expense, but will be transmogrified into an investment.
The instant effect will be a one-off jump in the GDP number. It is hard to know by how much without knowing more of the accounting detail but it is likely to be material. R&D spending in China reached 1 trillion yuan ($64 billion) in 2012, equivalent to 2% of its gross domestic product, according to state media.
It is, though, a change to be welcomed, and one a U.N. working group to set an international standard for GDP accounting agreed in 2008. The U.S., Canada, Australia and U.S have already made or are making the change on intangible assets. Europe will, too, next year.
GDP is a creature of the manufacturing economy, a measure of an economy’s hard output of goods and services. It is less good at capturing the intangible economy that is coming to represent more and more of the value created though innovation and creativity in the economies of the 21st century. Intangibles include not just R&D but also patents, copyrights, trademarks, designs, cultural creations, and business processes.
When the U.S. made the change in the middle of this year, which in its case also included counting creative works such as films and books as long-lived assets, it provided a one-off jump in GDP of 2.7% (in raw data terms, the equivalent to adding an economy the size of Belgium). When new definitions are introduced, past estimates of GDP get re-stated so percentage changes in GDP are only slightly affected. But they do capture something of the changing nature of an economy. Restating the U.S.’s historical GDP numbers using the new definitions raised annual economic growth between 1959 and 2007 to 3.39% from 3.32%. In more recent periods the difference has been higher, an 0.17 percentage points difference in 1995-2001 and an 0.12 percentage points difference from 2002 to 2007.
The first steps in the long, hard slog to implement giving markets a “decisive” role in China’s economy have been taken with the publication of a raft of detailed measures that flesh out the communique issued after the Third Party Plenum. While easing the one-child policy and ending labor camps are grabbing the international headlines, the overwhelming majority of the measures directly affect the economy. These include:
- moving ahead with interest rate liberalization, establishing a bond market and further opening capital markets;
- speeding up moves towards full capital-account convertibility;
- allowing privately-owned small- and medium-sized banks to open up the banking system and bring some of the shadow banking system into the mainstream;
- moving towards market-pricing of water, oil, natural gas, electricity, telecoms and transport;
- raising the remittance of profits from state-owned enterprises to central government to 30% from the current zero-15%;
- requiring state-owned enterprises to diversify their ownership and allowing private investment in joint ventures with state-owned enterprises and letting employees of mixed-ownership enterprises hold shares in those companies;
- strengthening protection of intellectual property rights (IPR), including possibly setting up an IPR court;
- property tax reform;
- giving farmers more property rights and hastening the loosening of “hukou” or residency permit system by scrapping it in small cities and townships and then gradually eliminating it middle-sized cities.
These are all areas where the party leadership has forged a broad political consensus, though within each there are still considerable differences between reformers and conservatives to resolve. The dual mandate that came out of the plenum — giving markets a decisive role and strengthening the role of state enterprises — gives both sides a rallying call for their cause. There is plenty of scope for backsliding as those various ideological and political struggles are fought out. Such a transformative economic to-do list carries political risks for President Xi Jinping and Prime Minister Li Keqiang. They will move cautiously, and the various fronts of the reforms will move at different paces.
China’s leaders resorted to the old management technique for dealing with broad and deep differences: kick the issue to a sub-committee. The Party’s Third Plenum agreed to set up a working group to co-ordinate “comprehensively deepening reform” — which had, after all, been the meeting’s main agenda item. The questions now are who will comprise this working group, and how much power it will have within the sprawling network of Party and government organizations to knock heads together to ensure consensus over setting policy and getting it implemented at state and local levels.
As the communique issued after the plenum pointed out, “the core issue is to straighten out the relationship between government and the market”. The task is double complicated by the plenum’s dual mandate of giving markets a “decisive” role in the economy while “unceasingly increasing the energy, control, and influence of the state economy” — that mandate serving as a proxy for the balance of power between the reformers and the conservatives.
Upgrading markets’ role from a “basic” to a “decisive” one is a significant advance by the reformers, but the lack of a more detailed, let alone bold plans for reforming the public sector is a marker of the entrenched power of the big state-owned enterprises including the banks. The areas that were highlighted for reform — fiscal and tax reform, unified land markets, a sustainable social security system, and rural property rights — are all more directly functions of government and thus more directly amenable to Party and central government discipline.
Elsewhere in the economy, President Xi Jinping and Prime Minister Li Keqiang will have to open up cracks for private and foreign firms to let markets be more decisive in the hope that that will chip away at state monopolies. One place to start is financial services. Loosen state-owned enterprises’ grip over domestic financing and give international markets more power though opening up the capital account and the rest — eventually — will follow.
The four-day behind-closed-doors Third Party Plenum has got underway. The agenda is known well-enough: the next phase of China’s economic reform to put growth on a more sustainable path— “unprecedented” changes, according to Yu Zhengsheng. The desired outlines have been sketched in the State Council’s Development Research Center blueprint known as the the 383 plan.
The first three is the actors — market, government and corporations — the eight is eight sectors that will be center stage — finance, taxation, land, state assets, social welfare, innovation, foreign investment and governance — and the final three is three bundles of high-priority policies, notably lowering entry barriers to financial markets, providing basic social security services to citizens, and allowing collective lands to be bought and sold, which implies a big change in ownership rights. (Caixin provides the summary appended below.)
Some of the 383 plan is specific and detailed, such as ending government-set prices for oil products. Other parts are broader brush, such as turning some state-owned enterprises into sovereign investment funds to pay for public services.
The big unknowns are first how much the leadership can get agreement on, and against what timeline; and second what degree of resistance both during the meeting and after will be put up by the vested interests in local government and state-owned corporations and banks that potentially stand to lose the most from moving away from the infrastructure investment-driven state capitalism of the past three decades.
We don’t expect much by way of detail to emerge during the meeting, or necessarily at the end of it. We do expect an end-of-meeting declaration of unity and a rallying cry to deepen reforms comprehensively. The loftier the rhetoric probably the less the agreement of detail.
Eight Key Sectors