The Central Committee (CC) of the Communist Party of China (CCP) issued a communique this week, unveiling a wide-ranging agenda of economic reforms agreed upon in principle at the 3rd Plenum of the 18th party congress. The reforms promise to give market forces a “decisive” role in China’s traditionally state-dominated economy by 2020. The characterization of markets as “decisive” by Chinese leadership is a significant step for the party, which to this point has defined the role of market forces in China as “basic”.
If taken at face value, the party communique outlines China’s most ambitious reform agenda since Deng Xiaoping’s announcement of the “four modernizations” following the Party Congress’ 3rd plenum in 1978. Those reforms coalesced over three decades into the socialist market economy which brought China from agricultural impoverishment to industrialization and growth. Xiaoping famously described his reforms as “crossing the river by feeling stones”. That term was invoked in this week’s communique, signaling that CCP General Secretary Xi Jinping and Chinese Premier Li Keqiang intend to make a similar mark during their time in office.
Specific policy implications of the communique remain vague, however. The document makes jargon-laden pronouncements relating to capital markets, land, and social security reform, but does not outline how or to what extent such reforms will take place. The specific policy implications of reforms outlined in the communique will therefore be unclear for some time. Concrete recommendations will be submitted to the CC subsequent to the deliberation of a small working group of its members, established during the plenum to investigate internal economic and political reform.
Surprisingly, some issue areas which analysts predicted would factor heavily in plenum discussions received no attention. Interest-rate ceilings at Chinese banks, for example, were not up for discussion. The ceilings as they stand make it difficult for private banks to compete for consumer deposits against Chinese state-owned enterprises (SOES) by raising interest rates. Chinese consumers face a near total monopoly of state firms over the sector as a result. The dominance of SOEs in China’s economy speaks to how tilted its economic playing field really is. Seventy percent of China’s equity market is constituted by SOEs.
Though disappointing in and of itself, the plenum’s failure to discuss interest rate liberalization speaks to a broader issue when juxtaposed with other proposed reforms: Chinese leadership is divided as to how or whether to maintain the pre-eminence of SOEs in the face of economic liberalization. There is tension and ambiguity within China’s reform efforts. Private companies, for example, have been granted permission to purchase up to 15% equity in Chinese SOEs. Depositor insurance, long suggested as a prerequisite for economic liberalization in China, is finally being explored by China’s central bank. China’s immobility on interest rates despite these reforms is bizarre and inconsistent, similar to its dual commitment to “strong” state control and a “decisive” role for the market economy in its latest communique. Tensions such as these make it difficult to know what to expect from Beijing moving forward.
Mixed economic messages aside, at least one concrete policy has emerged from the plenum. A state security committee centralizing Chinese defense policy decision-making was established during the meeting. The committee is likely to be chaired by the Xi Jinping, and consolidates his power to direct defense policy by freeing him from much of the politicking that characterizes collective decision making within the CC writ large.
If the ambiguity can be overcome, last week’s communique signals that markets may play a “decisive” role in China’s future. Unless the policies recommended by the newly established working group are substantive, however, the meeting’s legacy will be the consolidation of military power in the hands of the CCP’s General Secretary, in addition to confusing and contradictory economic pronouncements.