The widely ballyhooed Third Plenum of the Chinese Communist Party’s 18th Central Committee didn’t live up to inflated expectations. We were all hoping, some predicting, that it would announce a new set of reforms that would lead China away from the export oriented, state run model that is petering out, and into a time when Chinese consumers would benefit from and drive economic growth. Unfortunately, the new leaders of China avoided bold reforms, consolidated the security apparatus and probably moved backward on citizens rights. It was unrealistic to expect a major breakthrough from a collective leadership that rose to power by relying on state organs, state enterprises and exporting coastal provinces. However, all is not lost: they laid a basis for underhanded reforms. They missed their first real chance, but not their last.
The first good news was how many times their communique mentioned markets. The most important market now is interest rates and Zhou Xiaoquan, retained as governor of the central bank, has been moving to free up rates. Market rates can help discipline the big state enterprises, who’ve been gorging themselves on cheap state capital, and help savers achieve their targets for education and health savings thus boosting the undernourished consumer side of growth. A supporting announcement was the emphasis on more flexible use of private capital and private investment, including an inroad into market pressure inside the big corporations. Again, a bit of market discipline could go a long way.
What to watch for in coming weeks:
— Who will be on the leading group for economic reform that they announced? Real reformers with power or just another interministerial, intra-party, inter-provincial squabble?
— Will there be a serious implementation plan with details?
— What will the leaders do to change regulatory process, as they’ve now promised, curbing state interference with the market?
— What will they do to change the nature of ownership of state enterprises? Announcing that private capital can come into state enterprises implies there will have to be a clearer share structure of state and private ownership. Will private investors influence the boards or will the party still control leadership? Will the state and other investors start getting dividends?
Reform is still possible even without the big bang type changes that came from Deng Xiaoping’s 3rd plenum of the 11th Central Committee in 1978. The 3rd of the 18th may not measure up in history, but it might be the start of some transformative, but less stunning, change for the Chinese economy.
In the final analysis, China is investing more and growing less, while trying to make a transition to a creative modern economy. The elements that are missing are the democratic ones: fair competition, accountable leaders, open information, freedom to invent and create ideas. Absent those big changes, we might see enough to keep the economy growing and tilt it more towards the Chinese people as the drivers of growth. If they get more bread and circuses, this leadership will hang on to reform another day.