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26 Nov 2013

Beijing's bold reform course

by Qu Hongbin

Chief Economist for Greater China and Co-Head of Asian Economic Research, HSBC

Beijing's bold reform course (Getty Images/Hou Yuxuan)

Private enterprise will lead the way in encouraging innovation

The reform blueprint that emerged from the Chinese Communist Party’s plenum is the boldest package of policies seen in decades. It covers 16 areas and 60 individual items, tackling everything from economic to social reforms, and shows the determination of the leadership to put the country on a new course.

The plan emphasises the importance of reducing government intervention in China’s economy, confining the state to maintaining macroeconomic stability, risk-control and providing public goods and services.

Beijing’s goal is “socialism with Chinese characteristics”. It says the market should play a “decisive role” in allocating resources – not just the “basic role” of the past 20 years. For the first time, the private and public sectors will be treated as equals. The master plan makes it clear that “any price that can be affected by the market must be left to the market”.

Government approval will no longer be necessary for most investments

Private enterprise will lead the way in encouraging innovation. Beijing will strengthen intellectual property protection with new courts, cutting red tape while improving funding for smaller enterprises. Expect faster deregulation in the banking, railway, telecom and culture sectors.

Government approval will no longer be necessary for most investments and there will be competition in public tenders for services, with the state streamlined by restructuring government institutions, promoting superministries and controlling the public payroll. Financial reforms and access will be tested in the Shanghai free-trade zone and rolled out to other zones.

The reforms should make China better prepared for financial opening up, attracting foreign investors and expertise, speeding up the development of the onshore financial market. But we think progress on interest-rate liberalisation, the development of the bond market and renminbi capital account convertibility will be faster than many expect.

Lack of competition in the state-owned sector has resulted in inefficiency, corruption and overcapacity. Strong resistance from vested interest groups merely makes this touchy issue even more difficult. But Beijing made it clear it will promote market-oriented reform in state-owned enterprises by further breaking monopolies and introducing competition.

It stressed that “both public and non-public ownership are key components of China’s socialist market economy” and vowed to protect the property rights of both. Giving the private sector equal legal status will make it the driving force behind China’s long-term sustainable development.

Beijing still sees the developmental gap between rural and urban areas as the main obstacle to progress. Reforms will allow farmers equal access to the benefits of China’s development, promoting farmer co-operatives and family farms. Investors will be encouraged to back modern agricultural businesses.

Farmers will be allowed to become shareholders in agriculture enterprises and given full property rights to their land, allowing migrant workers to receive fair compensation from land transfers.

There are 260 million migrant workers living in cities that are denied access to the same public services as citizens holding residency permits. Restrictions on these "hukou" permits will be abolished in smaller towns and relaxed elsewhere.

Easing the one-child policy should modestly raise China’s birth rate, slowing the population aging process. Speeding up social service reforms should also help the economy become increasingly consumption driven as people become more comfortable about spending money.

Some reforms, such as curbing overcapacity and controlling local government spending, will involve short-term pain. Yet measures such as creating a level playing field for private companies can unleash private-sector demand for investment and consumption that supports even near-term growth.

This is why we expect China to keep growing at around 7.5 per cent and the planned reforms should help lift potential growth rate in the medium to long term.

This research was first published on 2 December 2013.
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