Opinion: What the Third Plenum means for China's next decade

January 09, 2014 | BY

clpstaff

Xi's solution to China's many challenges seems to be to let the market become the decisive force in the economy. Professor Connie Carter believes that persuading the Party to support that move will be difficult

In 2012, President Xi Jinping proposed the idea of the Chinese Dream when he took office during the country's once-in-a-decade leadership transition. Expectations were high: Xi the Reformer? Xi on a par with Deng Xiaoping, the father of China's modern economic development?

Everyone waited eagerly for Xi to define the China Dream. Arguably he did that in November 2013 at the Third Plenum of the Party's 18th Central Committee and in his Explanatory Notes, which outline the country's direction for the next decade.

Before the 2013 Third Plenum, many people recognised that China was at a crossroads: The export-driven economy which powered China's unprecedented economic rise for 35 years is unsustainable. Nowadays, the world has less appetite for cheap China-manufactured goods. And China is no longer the world's factory because wages have risen, the working population is growing older, wiser and more middle class, and is demanding social justice – with blue skies and green cities.

Pundits say that China urgently needs to replace the export-driven economy with a domestic-led consumer economy. They also say that in its position as the world's second largest economy, China needs to act responsibly on the global stage – although there is no consensus on what that means. But the pre-plenum reform wish-list was long: Curb corruption; implement land reform, especially to curb the enormous land grabs that have accelerated since introduction of urbanisation and industrialisation policies; reduce pollution; reform the fiscal and financial systems, paying special attention to exchange rates, interest rates, and to making the yuan fit to challenge the US dollar as the world's preferred currency; curb social injustice; reform the household registration (hukou) system; reform the one-child policy; reform the state-owned enterprises and the banking system; and, above all, engineer a domestic consumption-led market economy to replace the unsustainable export-driven model.

Cutting through the complexities

The Third Plenum and the Explanatory Notes addressed most of those issues. The genius of Xi's plan is that he views these complexities as one integrated problem, and proposes one integrated solution: let the market be the decisive force in the allocation of capital, land, labour and natural resources in the national economy.

Ever since the 14th Party Congress enshrined the term “socialist market economy” in the Constitution, the market has been the basis of the Chinese economy while the state and public sector were the decisive force. However, those roles were reversed in the recent Explanatory Notes. Henceforth, the market will be the decisive force in allocating factors of production in China's economy. If we are to believe the Notes, the state will get out of the business of doing business and become a macro-economic stabilising force – just like in Western market economies.

This decision is transformative. It's on a par with Deng Xiaoping's December 1978 opening up policy. However, Deng's declaration was followed by the 1979 Equity Joint Venture Law and a host of legal reforms and initiatives which kick-started China's export-driven development and still powers economic growth today.

Seeking truth from facts

Time will tell whether Xi can engineer the changes necessary to make the market dominate the state-led economy. Will his government relinquish control of the commanding heights of the economy? Will it embark on mass privatisations and SOE reforms? Could the Chinese Dream be of red capitalism, green cities, blue skies, abundant patriotic rhetoric and a powerful Party – with few individual rights and freedoms?

So far, Xi seems set to levy a tax on SOEs to fund a social welfare programme that will disrupt the hukou system, which denies state healthcare and education to migrant workers. The one-child policy has been relaxed. Two committees were established to shepherd Xi's plans to fruition. But past evidence suggests that the Party will struggle to accept and implement significant changes.

We can only hope that Xi is not, as the popular Chinese saying goes, hanging out a sheep's head and selling dog meat. Both his and China's credibility depend on it.

Connie Carter, Professor of Law & International Business, Royal Roads University, Canada

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