Tag Archives: Third Party Plenum

Facing A Slower Chinese Economy, Xi Needs A Winning Party Plenum

THE INTERNATIONAL MONETARY FUND held its forecasts for China’s GDP growth this year and next unchanged in its latest quarterly economic outlook even as it trimmed those for the world economy. It is still expecting 7.4% GDP growth this year, slowing to 7.1% in 2015, down from 7.7% in both 2012 and 2013. “China is sustaining high growth, but slightly lower growth in the future is seen to be a healthy development,” the Fund says.

For this year, the IMF is projecting that the economy will come up just short of the official growth target of 7.5%. After a slower than expected first-quarter, Beijing launched a number of stimulative measures to get the economy back on track for hitting that target. These included tax relief for small and medium businesses, accelerated fiscal and infrastructure spending, and selective cuts in banks’ required reserve ratios.

But with the  property market still weighing on the broader economy, GDP in the third quarter, due to be announced on October 21st, is likely to confirm that growth continues gently gliding downwards, somewhere in the 7-7.5% range is this Bystander’s best guess. We expect some more if modest stimulus in the fourth quarter to make sure the full-year number comes out as close to the higher end of that range as possible. Prime Minister Li Keqiang is only the latest official to blur what counts as 7.5%; about 7.5% will be close enough.

It is likely that next year’s official target will be lowered to a more realistic 7% as the economy makes the transition to more sustainable long-term growth through rebalancing demand away from investment toward consumption, and the property market, especially residential investment, remains sluggish. However, infrastructure investment and credit will remain the main drivers of growth next year.

Excess industrial capacity and the dark shadow of provincial and municipal debt remain the main risks to the growth forecast along with the deflation of the property market getting out of hand. While the government has great capacity to absorb such a hard landing, that capacity isn’t infinite, and the policy challenge is exacerbated by the two-tier property market that has emerged in China. Bubble prices persist in large cities while small cities are experiencing a property recession thanks to overbuilding spurred by local governments desperate to spur growth.

A too-fast slowdown in property prices would work through to the banking and shadow banking system in short order. The IMF rightly notes in its report the importance of reforms to buttress financial sector stability:

It is crucial to implement key elements of the authorities’ structural reform that aim to strengthen the regulation and supervision of the financial sector, reduce implicit guarantees, liberalize the deposit rate, and use interest rates instead of quantitative targets for the implementation of monetary policy, thus encouraging market-based pricing of risks. Further expansion of the social safety net, by reducing the current high rate of social security contribution, and better health care benefits would help reduce household saving rates and raise domestic consumption.

More broadly, China needs to structural reforms to its education, labor and product markets to raise firms’ competitiveness and productivity while lowering credit growth and local government borrowing. All that touches just about every vested interest. That is meat for the forthcoming Fourth Party Plenum.

Last year’s Third Party plenum announced the need for reforms to strengthen social safety nets and the social security system as part of a 60-point blueprint sketched out for President Xi Jinping’s plan to rebalance the economy. This year’s plenum, due to start on October 20th, has as its first objective the consolidation of Xi’s rule of law cum anti-corruption drive — which will be a proxy for the jockeying for power and influence between Xi and his predecessors Jiang Zemin and Hu Jintao.

While Xi has moved faster to consolidate his power base than might have been expected, his ability to advance his economic-reforms agenda will require the backing of Jiang and Hu and their respective Shanghai and Communist Youth League factions. The appearances at National Day celebrations of some senior figures in the Party and army thought to be the subject of anti-graft investigations and who have not been seen in public recently suggests Xi may be rallying unity in the ranks to that end.

Xi may well feel his best next tactical move for economic reform will be to revamp the 100-or so central-government controlled state-owned enterprises to improve their business performance and governance. These are the big dogs in the economy, and entrenched obstacles to reform in their various sectors. Making them over would have the added bonus for him of weakening some of the power bases of those not aligned with him.

The trick for Xi remains aligning the political realities he faces with the underlying structural slowing of economic growth, but without getting too close to the feared hard landing of the economy that would undermine his political position. As we have noted before, every mini-stimulus ratchets up a notch the difficulty of introducing the policies needed for rebalancing because they don’t address the underlying causes of unsustainable booms and the vested interests that benefit from them. And that needs a political solution before it can get an economic one.

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China’s Starts To Detail Its Long-Term Economic Reforms

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.

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China’s Blueprint For Reform Kicked To Sub-Committee

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.

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Party’s Third Plenum Gets Underway, But How Far Will It Get?

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.

383 Plan:

Reform Trinity

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Eight Key Sectors

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Three Breakthroughs

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