Third Plenum Outcomes Settle Top-line Reform Themes, but Debate on Specifics Expected to Continue

By USCBC Staff

A much anticipated communiqué issued on Tuesday at the close of a key Chinese Communist Party meeting sets out a bold-sounding path for China’s market-oriented reforms over the next six years, but it also affirms that the new leadership’s economic reform push is still at the beginning stages. Debate over policies that matter to US-China Business Council (USCBC) member companies—such as the lifting of investment restrictions on foreign ownership—will now be subject to further interagency negotiation. Although the communiqué itself is light on details, China’s leadership will likely provide more information with the release next week of a second document, the Decision on Certain Major Issues Related to Comprehensive Deepening of Reform.

In the communiqué—which marked the close of the third plenum of the 18th Chinese Communist Party (CCP) Congress—China’s leaders indicated that future reform efforts will increase the role of the market in economic management, restructure China’s investment regime, establish new groups related to national security and economic reform, expand property rights in rural areas, and overhaul the residency permit—or hukou—system, achieving tangible outcomes by 2020. However, other areas that have been widely discussed as possible candidates for reform—including state-owned enterprises (SOEs) and the financial sector—were largely omitted from the plenum’s final outcomes.

Most of the outcomes are “big picture,” focusing on broad areas for reform but providing few substantive details on the how or when of implementation. While China’s leaders highlighted several potential reform areas that could eventually impact foreign companies, like the relaxation of market-entry requirements and the development of more free-trade zones (FTZs), there is little indication of how or when such steps might take place. This lack of detail may indicate that internal debates about economic reforms are likely to continue, and that companies should closely monitor official speeches and policy document for details about economic reform, including those from the upcoming Central Economic Work Conference.

Third Plenum: Agenda, Schedule, and Expectations

The conclusion of the third plenum—the third major meeting of the 18th CCP Congress since the ascension of its new leadership in November 2012—marked the end of four days of meetings and discussions on a broad range of issues related to economic reform. While the schedule of events for the plenum itself is not broadly available, media reporting and extrapolation from past plenums indicate that the schedule for this year’s session likely included an initial work report from the Politburo, multiple rounds of discussions on possible economic reforms, a final work report on the status of those discussions, and the release of a final document to chart economic reforms for the coming months, known as the communiqué.

According to media reports, approximately 400 senior members of the CCP leadership participated in the four-day session. In addition to members of the Central Committee, the Politburo, and its seven-member Standing Committee, invited attendees included senior government officials and party members, such as ministers and vice ministers from government agencies like the National Development and Reform Commission and the ministries of Foreign Affairs, Commerce, Agriculture, and Finance. Also in attendance were senior executives from a broad swath of state-owned enterprises such as the Aviation Industry Corp. of China, Shenhua Group, and China Telecom Corporation Ltd.

Analysts came up with a wide range of predictions in the lead-up to the plenum, based on signals and policy statements that the party’s leadership was actively debating the possibility of various economic reforms that could significantly impact the business and commercial environment for foreign companies in China. For example, on October 26, Politburo Standing Committee member Yu Zhengsheng said that reforms would be “unprecedented” in their scope and scale. On October 27, the State Council Development Research Center (DRC)—a think tank—released its “383 report,” laying the groundwork for potentially substantial reforms. The report proposed eight key areas for reform, including finance, taxation, land, state assets, social welfare, innovation, foreign investment, and clean governance.

Key Issues Highlighted

The final communiqué—the best snapshot so far of plenum discussions—indicates that the session covered a broad range of potential reforms to address current economic issues. At the broadest level, the plenum stated that the market will play a “decisive” role in allocating resources within the Chinese economy. This differs from language used in earlier plenums, in which the market played only a “basic” role. The new language indicates a stronger position for private enterprise and a more measured role for the state. Other plenum outcomes call for further reforms to China’s investment regime and greater work to loosen market access restrictions, expansion of property rights for rural residents, and the establishment of a new national security group. Additional references in the communiqué may indicate reforms to the hukou system and to fiscal and taxation issues such as local government debt.

Notably, the plenum agreed to establish a new Central Leading Group charged with developing, implementing, and supervising reform efforts in the coming years. The group may introduce specific reform-related rules in the future. It was unclear which government officials would participate or how they might address foreign investment restrictions. Chinese media outlets noted that the establishment of the Leading Group mirrors earlier government-led bodies tasked with managing reform efforts, such as the State Commission for Economic Restructuring, a central government entity created in 1982. 

Foreign investment

The communiqué calls for China to encourage greater openness to investment, both for foreign investment in China and for Chinese firms to invest abroad. The document calls for changes in investment to further broaden economic reforms, and also calls for the relaxation of market entry requirements, the further opening of China’s inland borders, and the creation of more free-trade zones (FTZs), perhaps along the lines of the Shanghai FTZ. However, the document does not provide any details about the timing or the implementation of these proposals. There is also no indication whether such language is intended to point to ongoing discussions between the United States and China about a Bilateral Investment Treaty, or whether the language refers to other types of investment reforms. While such language could be of great benefit to US companies investing in China, companies will have to await further developments.

Finance and taxation

The communiqué highlighted finance and taxation as “critical” for national governance and called for a more modern and scientific tax system to allocate resources. This includes a number of general goals, such as better finance-related legislation, reforms to the tax system, a more stable tax burden, more transparency, better management of government budgets, and better allocation of revenues and responsibilities between the central and local governments. This language appears to open the door for further reforms to address a number of contentious issues, including concerns about local government revenues and debt and questions about various proposed tax reforms such as resource and property taxes.

National security

The communiqué also highlighted the creation of a new so-called National Security Council, which aims to improve and better strategize China’s national security. Press sources indicate it will be an interagency body that coordinates national security issues, with agency representatives from military and foreign affairs communities, as well as law enforcement agencies. Reports from the plenum suggest the Council will focus on domestic stability. Though the scope is vague, it appears unlikely that the council will have any jurisdiction or influence over China’s national security review for foreign acquisitions of Chinese enterprises. The communiqué does not provide any information about the structure or membership of such a group.

Role of the state versus the market and SOE Reform

Notably, the communiqué talks little about much-discussed SOE reform, though it does provide some insight into the government’s view of the relationship between the market and the state. China’s leadership notes the importance of maintaining a strong state-led economy, and says it will continue to promote the influence of the state sector in guiding the private sector’s economic development. At the same time, the communiqué emphasizes the role of the market system in promoting orderly competition, allocating resources—including natural resources—and determining prices, suggesting China may view the market as playing a stronger role than in the past, though still smaller than the role the state plays.

While few details were expected to emerge from the plenum on SOE reform, officials have stated that further reform plans will be released soon—perhaps in the forthcoming decision or in other reform plans from the State-Owned Asset Administration Commission (SASAC). One element that has been publicly discussed by officials during the plenum as a potential part of the SOE reform plan is whether China will permit private parties the ability to purchase up to a 15 percent equity stake in state-owned firms. Such a proposal was discussed last week in statements by some senior SASAC officials, but was later denied in a post on SASAC’s official blog. The negation suggests ongoing internal negotiation over the extensiveness and scope of reforms. It remains unclear when the reform plan will be released and how reform might take shape.

Urban-rural issues: land rights and China’s hukou system

According to the final communiqué, China’s leadership has called for reforms to address disparities between urban and rural development, including institutional improvements to increase mutual support between industry and agriculture, to fairly allocate resources between urban and rural areas, to build a unified market for land used in construction, and to better integrate urban and rural areas. One reform specifically mentioned in the communiqué is greater property rights for rural residents. While such language is vague, some Chinese experts have speculated that it could permit direct land ownership for rural residents—a reform that could benefit both rural residents and overall rural development.

The communiqué also calls for “equal participation” in the modernization process and “shared access” to work benefits for rural residents. This vague language may be a reference to China’s hukou system, a widely discussed topic in the lead-up to the plenum. The hukou system, which determines and allocates social benefits to citizens based on the location of their household registration, often creates challenges for rural residents seeking to migrate to urban areas for work. Reforms to the hukou system could permit greater labor mobility and thus improve economic efficiency. While the plenum document does not specify how any such reforms might be achieved, companies should watch key agencies such as the Ministry of Human Resources and Social Security for signs of potential changes.

Next steps for economic reform

While many questions remain about the implementation of the communiqué, the document provides some insight into the areas that will remain a key focus as negotiations over reforms progress. Though details are still developing on when and how these reforms might take shape, additional detail could appear in the pending decision. China’s Central Economic Work Conference—a meeting of China’s top leadership expected to be held in mid-December—could provide an additional inflection point where more detail on reforms could emerge. USCBC will report additional details about the outcomes of the third plenum in tomorrow’s issue of China Market Intelligence, and will continue to monitor and report on economic reform-related developments as they emerge in coming months.