Third Plenum Decision Expands Reform Objectives; Follow-up Measures Needed to Determine Impact on Commercial Issues

By USCBC Staff

China’s new leadership has proposed a series of sweeping policy reforms in a document released late last week after the third plenum of the 18th Chinese Communist Party (CCP) Congress. The Decision on Major Issues Concerning Comprehensive and Far-Reaching Reforms is more detailed than the brief communiqué released at the close of plenum, and covers changes in everything from state-owned enterprise (SOE) dividends to China’s one-child policy. The decision has garnered much attention in local and international media for both the breadth and depth of its reforms.

Those reforms bear the personal stamp of President Xi Jinping, who played a central role in drafting the document, according to official Chinese media. This factor—along with changes in the document to symbolic language about the “decisive” role of the market in the Chinese economy—points toward a positive momentum for reforms that may benefit foreign companies in the long term. However, the decision contains few concrete timelines or benchmarks, and many economic reforms remain in very early stages. The speed, nature, and quality of implementation remain to be seen.

“Decisive” role of market and strong endorsement signal reform prospects

One of the fundamental principles of the decision redefines the relationship between the government and markets, stating that markets must play a “decisive” role in allocating resources. This language is much stronger than language in previous plenums, which referred to the markets as having a “basic” role. Though the change in wording may seem minute, major policy changes from previous Chinese administrations have been ushered in with similar changes to official messaging. For example, the reclassification of China’s economy to “socialist market” at the third plenum in 1993 served as a strong signal that further reform was supported by the leadership.

The decision also clearly has the personal support of President Xi, and the creation of a new group led by Xi is also likely directed at driving implementation rather than relying on existing bureaucratic channels. Xinhua has reported that this decision marks the first time since the year 2000 that China’s president has been head of the drafting committee. Xi’s personal involvement in the drafting of the decision was made further evident by his concurrent release of a personal explanation in which he stated that the decision had “settled the market government relationship” in China.

Sweeping content impresses, but implementation remains a challenge

The breadth and detail of the decision was seen as a surprise by many analysts, especially following the brief and vague communiqué that was released at the close of the plenum. The decision mentions more sensitive reform areas—such as SOEs, land ownership, and property taxes—in prominent roles within the document, suggesting that the will to push difficult reforms remains strong in the most senior levels of government.

It is important to keep in mind that this document is a set of goals, and does not, in fact, hold the power of law. The reforms mentioned in the document are many and will likely take a number of years to enact—the document itself sets 2020 as a target for implementation. Given the varied interests that exist within the Chinese system, there are still many opportunities for roadblocks to creep up and derail sensitive reforms related to market openings or SOE reform. Thus, while the message of the Chinese leadership on the direction of reforms is clear, CCP success in achieving these goals will depend on subsequent specific measures.

Content of interest to US companies operating in China includes:

Investment environment and fair competition

Section three of the decision notes that the Chinese government will work to enact a unified market entry system on the basis of a negative list. This would give equal access to foreign and domestic companies as long as they operate in sectors not included on the negative list. The decision further states that reforms will be made to expand openings for foreign investment, while also ensuring that foreign investment policies are transparent. This language is largely in line with what the US-China Business Council (USCBC) has heard in recent months from senior Chinese leadership following this summer’s US-China Strategic and Economic Dialogue. It is significant, however, that the decision officially states that the ultimate goal of reform is to have a unified investment regime nationwide.

Free Trade Zones (FTZs) are mentioned as a primary tool for expanding investment openings, beginning with the Shanghai FTZ and moving to other locations in years to come. Specific sectors in which the government will promote openings include finance, education, health, construction, telecom, auditing and accounting, and manufacturing.

SOE reform

Language on SOE reform figured prominently both in the decision itself and in President Xi’s separate explanation. The prominent stature of the discussion of SOEs and the relationship between the state-owned and private sectors was largely viewed as a surprise by analysts, since SOE reforms have been downplayed in recent months. Language stating that the non-public, or private, economy is a "foundation" of the Chinese economy—in addition to the state-owned economy—symbolically shows a rise in stature for private enterprise. Still, language within the decision does not deviate much from previous CCP documents, with SOEs still being called the primary foundation of the Chinese system.

Specific reforms include increasing the percentage of SOE profits returned to the state from its current norm of 5-15 percent to 30 percent by 2020 and increasing private stock holdings of SOEs. Both are good steps in changing incentives within SOEs to act as commercial enterprises, but do little to get at fundamental issues of governance and priority treatment that continue to make it difficult for multinational companies to compete on an equal playing field with Chinese companies.

Financial sector reform

Section three of the decision included language regarding reforms to the finance sector, specifically promoting the liberalization of interest rates, the liberalization of the capital market, the establishment of a national deposit insurance system, and the expansion of the banking sector by allowing “private capital” (a term that refers to domestic, not foreign, private capital) to set up small and medium-sized banks and financial institutions. Much of what is written in the decision uses similar language to documents and agency work plans that have been released over the past year, and does not represent a major shift in policy direction.

Tax/finance and resource pricing reforms

Reforms to China’s tax and pricing systems were also mentioned prominently within the decision. These reforms have been mentioned repeatedly in official documents as priority areas for near-term reform since last year’s party congress. Tax and finance reforms aim to improve holes in the current tax system to increase legitimate revenues for local and central government agencies. Areas outlined within the decision include deepening the reform of value-added tax, strengthening the management of tax incentives, and reforming the consumption tax for high energy-consuming, high-polluting goods, and potential property taxes.

Land reform, corruption, and environmental policies also key items

The decision also includes plans for reform in policy areas that will have a broader effect on the business environment in China going forward.

  • Land rights and household registration  Farmers will be given rights to use, benefit from, and transfer and mortgage their contracted land rights as long as the land continues to be used for agricultural purposes. Further reforms loosening restrictions on the movement of Chinese residents based on their household registration permits—or hukou—will also be prioritized.
  • Corruption  Improving transparency and quality of leadership within the CCP has been a central message associated with the decision and the Xi government. The decision features a structural change that will increase the authority of central level inspectors from the CCP Central Discipline and Inspection Commission.
  • Environmental protection  In addition to discussing the institution of taxes for environmental pollution, the decision also discusses including criteria for environmental protection in the evaluation of local government officials.
  • One-child policy  The decision explicitly states that reforms will allow couples in which one person is an only child to have two children, a decision that was noted with surprise and hailed as a significant step by Chinese media. Previously, only couples in which both partners were only children could have more than one child.

Future of economic reform?

The decision provides important affirmation of the wide-ranging areas that China’s Xi-Li administration is targeting for reform, including a stronger role for the market and changes to investment, tax, finance, and other domestic priorities such as hukou reform and China’s one-child policy. The decision expands upon the reform message in the much shorter communiqué released last Tuesday.

It is important to note, however, that though the document repeats the 2020 timeline from the communiqué, it contains very few concrete timelines or benchmarks for reforms. This likely means that the internal debates about reform are not over, but are now focused on the next phase: how far to take economic and social reforms and how such reforms might be implemented. As noted previously, China’s Central Economic Work Conference—a meeting of China’s top leadership expected to be held in mid-December—could provide the next inflection point where more detail on reforms could emerge. The USCBC will continue to monitor for reform-related speeches, statements, and policies, and will report further as details emerge in the coming months.