China vows a ‘decisive’ role for markets by 2020

BEIJING - Reuters

Top Chinese leaders attend a session of the 18th CPC Central Committee. AP photo

In previous policy statements, the Communist Party had often described markets as playing a “basic” role in allocating resources, Xinhua news agency said, meaning the new language amounts to an upgrading of its role in the party philosophy.

“They are looking to break away from government control, allowing the markets to take the lead. In the past, prices and investment decisions were predominantly made by the government,” said Dong Tao, Asia ex-Japan chief regional economist with Credit Suisse in Hong Kong.

“This is a revolutionary philosophy, by Chinese standards.”

Still, the party did not issue any bold reform plans for the country’s state-owned enterprises (SOEs), saying that while both state firms and the private sector were important and it would encourage private enterprise, the dominance of the “public sector” in the economy would be maintained.

While the statement was short on details, it is expected to kick off specific measures by state agencies over the coming years to reduce the role of the state in the economy.

Historically, such third plenary sessions of a newly installed Central Committee have acted as a springboard for key economic reforms, and this one will also serve as a first test of the new leadership’s commitment to reform.

Among the issues singled out for reform, the party said it would work to deepen fiscal and tax reform, establish a unified land market in cities and the countryside, set up a sustainable social security system, and give farmers more property rights - all seen as necessary for putting the world’s second-largest economy on a more sustainable footing.

President Xi Jinping and Premier Li Keqiang must unleash new growth drivers as the economy, after three decades of breakneck expansion, begins to sputter, burdened by industrial overcapacity, piles of debt and eroding competitiveness.

Out of a long list of areas that the meeting was expected to tackle, most analysts have singled out a push towards a greater role of markets in the financial sector and reforms to public finances as those most likely to get immediate attention.

As part of that, Beijing is expected to push forward with capital account convertibility, and the 2020 target date for making significant strides on reform could set off expectations that the government will be looking to achieve breakthroughs on freeing up the closely managed yuan by then.

Few China watchers had expected Xi and Li to take on powerful state monopolies, judging that the political costs of doing so were just too high. Many economists argue that other reforms will have only limited success if the big state-owned firms’ stranglehold on key markets and financing is not tackled.
But instead, the focus will be on indirect steps to limit the power of state behemoths and open up space for nimbler, private and foreign rivals - opening up key markets to private and foreign investment and deregulation tested in free trade zones.

Some reforms could face stiff resistance from powerful interest groups such as local governments or state-owned monopolies, people involved in reform discussions have said.