Make or break time at China’s third plenum

By:
Anuj Gangahar
Published on:

High hopes for sweeping reform; Li says country is at crucial juncture

The November 3 plenary session of the 18th Party Congress in China will give the clearest indication yet about whether the much touted Asian century will become reality or go down in history as a story of unrealized potential.

The issues discussed and plans unveiled will be instrumental in determining if the slowing Chinese economy runs completely out of steam or sets itself on a course that will lead to a lasting extension of roughly 30 years of growth.

Sweeping reforms are being called for and it seems clear that they are required if China is to right its listing ship.

As analysts at UBS put it in a research note: "This is the make or break moment."

China’s premier, Li Keqiang, speaking at last month’s World Economic Forum in the port city of Dalian
China’s premier, Li Keqiang, speaking at last month’s World Economic Forum in the port city of Dalian
China’s premier, Li Keqiang, speaking at last month’s World Economic Forum in the port city of Dalian, admitted that China’s economy was at a crucial stage of restructuring. He said the country would improve relations with overseas firms and that multinational corporations would receive the same treatment as state-owned enterprises.

In remarks reported by Associated Press, Li said the foundation for economic reforms was fragile and several uncertainties remained. "China is now at such a crucial stage that without structural transformation and upgrading, we will not be able to sustain economic growth," he said.

Li has a PhD in economics and in his previous role as first vice-premier under Wen Jiabao his remit included economic development, finance and macroeconomic management.

Most observers are agreed that China’s growth relies too much on investment while consumption has lagged. The fast-expanding shadow-banking system, mounting leverage and the property bubble are adding to concerns. Most observers also expect the Communist Party’s central committee to pass a document that will lay out the broad strokes of China’s next phase of economic reform. "Hopes are running high that this document will make a significant breakthrough in policy across a range of economic issues," notes Standard Chartered. "The bottom line: we think the package will be significant, and it should boost medium-term confidence as details are rolled out over the coming months. A document full of old ideas and vague language would disappoint."

But some reckon that the implications of China’s slowing growth have been overblown, amounting to a pause rather than a permanent break in its upward path. Most agree that the November meeting will set out a comprehensive framework for reforms in the next few years, but is unlikely to announce a lot of details, a sweeping overhaul of local government or the tax system, or a breakthrough in land and reforms of state-owned enterprises.

This, according to UBS, would be no cause for panic. "We do expect many reform measures to be initiated gradually over the next couple of years, including financial sector reform and service sector deregulation, while the more difficult ones may follow. In the next one to two years, the economy can still grow at 7%-plus even without wide-ranging reforms, with the help of a recovering global economy, the domestic urbanization push and the still abundant domestic liquidity." The authors of the report added a note of caution, saying: "Of course the sustainability of growth is questionable without necessary and proper sequencing of reforms."

In China, the third plenum is the one that usually deals with the economy. There are other meetings at other times during the five-year term of the Communist Party’s central committee. Formal preparation for the meeting has been under way for some time and has involved input from hundreds of organizations.

There is precedent in China for the third plenum being important. The 1978 third plenum is often cited in China as being the starting point for the far-reaching economic reform that has propelled the country to its current position of relative economic strength. It will be hoped that this year’s session serves to ensure that the country’s economy continues on that path.

In the run-up to the November meeting, the signs are good that Chinese authorities mean business where economic reform is concerned.

The government has recently signalled its appetite by unveiling its plans for the long-awaited Shanghai Free Trade Zone. In a statement posted online, the government outlined its plans to experiment with a wide range of new initiatives, including easing restrictions on currency, investment, trade and business management.

"Under the precondition that risk can be controlled, China will create conditions to test yuan convertibility under the capital account, market-set interest rates and cross-border use of the Chinese currency in the zone," said the plan.

Regulations in the zone will also be eased in 18 sectors including finance and shipping. The Shanghai Free Trade Zone was due for official launch on September 29.