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China Reform 2.0

11 November 2013tag:China ReformAuthor: Yuan Associates

     

     From November 9th to the 12th of 2013,the Third Plenary Session (the Session) of the 18th CentralCommittee of the Communist Party of China (CPC) was held in Beijing.  The Session reviewed and approved “The Decisionon Major Issues Concerning the Comprehensive Deepening of Reforms”(the Decision).

     

     It has been 35 years since the CPC made thelandmark decision to shift focus to economic development and adopt policies to open the economy to      outsideinvestment at the Third Plenary Session of the 11thCPCCentral Committee. After35 years of rapid economic growth, China currently faces a bottleneck to itsfurther development, and confronts a series of serious and extensive conflicts and challenges. One of the goalsof the Session was to identify these challenges and continue the process ofreform in order to mitigate the developing risks to Chinese society.

     

     Inan effort to find the best solutions for China’s continued development, the CPC’snew leadership headed by Xi Jinping is aware that continued reform andopening-up remains the only path forward and will decide the destiny of modemChina. With the themeof continued reform, the Session sought to determine and clarify the goals,strategic priorities, key working areas, implementation mechanisms, timetableand roadmap for China’s overall reforms in the next decade. Many experts callthe reforms initiated by Deng Xiaoping “Version 1.0”, and the current reformsby Xi Jinping “Version 2.0”.

     

     Advancingthe modernization of the State governance system and the capabilities ofgoverning bodies is regarded as the key purpose of the reforms. Thenew governing philosophy of ‘Governance’ (‘Zhi Li’) has been prioritized overthe former emphasis on ‘Administration’ (‘Guan Li’).This change in emphasis isconsidered a breakthrough in priorities as the ‘Governance’ (“ZhiLi”) system will emphasize the need for input from multiple stakeholders instead of the previous reliance on the decisions of one ruler or regulator. The Decision promised a timetable for reforms and theachievement of ‘decisive results’ in key areas by 2020.

     

     The Decisiondetermined a FIVE plus One reform framework. It includes reforms in theeconomic system, political system, ecological environment, culture and socialsystem, as well as within the CPC. The reform of the economic systemis the primary focus to deepen all-round reforms. The Session recognized the ‘decisive’role of the market in resource allocation within the basic economicsystem, a first in the CPC’s ruling history. It is very encouraging that the ‘market’ isexpected to play the ‘decisive’ role in China’s economic activities as opposedto the previously limited “fundamental” role that was stressed over the last decade. This shift reflects that the new Chinese leadership has reached aconsensus, believing that the core solution for continued economic reform isto properly redefine the relationship between the government and the market.

    

     Althoughthis shift is important, the greater Chinese public, particularly the eliteclass, were disappointed if not surprised that thefocus of reforms wasin the area of the ‘Economy’ instead of ‘Politics’. China’s political system willnot face any material changes although the Decision promised self-improvementinitiatives for the government and the Party system.  The public hoped, before the Session, that the CPC would emphasize political system reform in order to drive economic and social reforms.  However theXi administration determined that pushing forward economic reforms anddevelopment will beemphasized over any reform of the political system. Also, China will continueits ideological control over cultural and media sectors, especially theadministration of the Internet and social media.


 ›    SOE Reform and Private Investment: Public and non-public ownership is equally important. While the state-owned economy will continue to serve as the main component of the economic system, private and foreign owned enterprises will receive more support and face fewer market access barriers.

Ÿ   Property rights for the non-public economy are inviolable

Ÿ   Mixed-ownership and non-State shares allowed in State capital invested projects

Ÿ   Differentiate SOE operational models by different functions; open competitive sectors to non-State investment


›    Market System and Opening-up:

Ÿ   Build an integrated, open and fair market system – explore the ‘National Treatment’ and ‘Negative List’ approach for the approval of foreign investment market entry; adopt a market driven pricing system for natural resources and public services; push forward the liberalization of the Renminbi exchange rate and interest rate policies;

Ÿ   Further market opening-up – lower market entry criteria for foreign investment in manufacturing as well as service industries such as financial services, education, culture, health care, logistics and e-commerce; establish more free trade zones in addition to the China (Shanghai) Pilot Free Trade Zone


›    Transformation of Government’s Role:

Ÿ   Strengthen government’s role in macro-controls while reducing its role in micro-economic intervention – remove approval procedures for investors in all areas except those related to national security, ecological safety, important manufacturing capacity circumstances, the development of strategic resources and crucial areas of public interest

Ÿ   Continue to streamline administrative approval

Ÿ   Continue to streamline government structures by merging overlapping government organizations


›    Fiscal and Tax Reform: balance central-local tax allocation structure and reduce the overall tax burden; push forward value-added tax and environmental tax reform


›    A central-level party leadership group will be established to design the overall reform plan as well as coordinate and supervise its implementation. The group is highly expected to resolve barriers and conflicts to the progression of reform that have arisen over the past decade from an organizational perspective. 

    

     Inconclusion, continuous efforts towards reformand opening-up, inaddition to a market-oriented economic reformstrategy, will create a more favorable regulatory and businessenvironment, andprovide tremendous opportunities for multinational companies inChina.  Although the level of economicreform might still be a concern due to the limitations of political reform,this new reform plan reflects the strong resolution and commitment of the CPCleadership to the continuance of economic growth and the maintenance of socialstability. We still believe that theopportunities createdby China’s continued efforts to move its economy forward outweigh the risks associated with limited political reform.

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