The Economist
November 23, 2013
China’s president unveils the most striking plans for reform in two decades. They mix unusual boldness with some characteristic caution.
Not since Mao Zedong came to power in 1949 has a Chinese leader been so quick to unveil such a wide-ranging blueprint for change. Even Deng Xiaoping, after taking over in 1978, was slow to reveal his hand. President Xi Jinping, in a 22,000-character document released on November 15th, has pledged sweeping reforms. These range from a relaxation of the country’s strict one-child policy and the abolition of labour camps to the scrapping of controls over interest rates. But rarely has a leader faced such a challenge to his plans.
Despite having overtaken Japan in 2010 to become the world’s second-largest economy, China still struggles to understand the world’s interest in its policy pronouncements. The Communist Party announced it had approved the document on November 12th after a closed-door meeting of its 370-strong Central Committee. But it had hoped, as usual, to keep its contents secret for a week while it briefed its own members. In the end it relented after three days; pressed, it appeared, by speculation (even in Chinese newspapers) that the meeting had failed to live up to its billing as a turning-point for reform. The party even took the unusual step of publishing a speech by Mr Xi in which he revealed he had personally led the document’s 60-member drafting team. State media said he was the first party chief since 2000 to take on such a role. In effect, they were saying, this was Mr Xi’s manifesto.
By the standards of the party’s normally uninspiring policy documents, this one was striking. It elaborated at length on the party’s first, terse announcement on November 12th that market forces would henceforth play a “decisive” role in shaping the economy (a conceptual breakthrough that had previously eluded the party, notwithstanding its long-standing embrace of capitalism). It called for an “acceleration” of moves to let the market determine interest rates. Probably as a prelude to this, it said that an insurance system would be set up to protect depositors: officials are worried that smaller banks might get into trouble if interest rates on deposits are freed. Controls on lending rates were removed in July. There are expectations that the insurance scheme will be set up in the next few months. The document also called for China to get on and make its currency, the yuan, fully convertible, something it has been promising to do for two decades.
The document repeated the party’s earlier pledges to let the market determine prices of key resources such as water, oil, natural gas, electricity and transport. But it toughened up the language. “The market should be left to decide the price of anything whose price can be decided by the market, and the government should not make any improper intervention,” it said. In his speech Mr Xi defined the role of government in terms that would sound familiar to centrists anywhere in the world: maintaining economic stability, providing public services, guaranteeing fair competition, safeguarding market procedures and stepping in when the market fails.
The Central Committee’s market-driven language faltered, however, when addressing one of the most contentious issues of reform, namely the role of state-owned enterprises (SOEs). The document did offer some hope to reformers worried by the initial communiqué’s time-worn assertion that SOEs should constitute the “main body” of the economy. It said that by 2020 SOEs would be expected to hand over 30% of their profits as dividends to the government (up from 15% or less now). As reformers have long been demanding, some of their assets would be given to the central government’s social-security fund. And the private sector would be given greater opportunity to invest in SOEs and do business in areas dominated by them, including banking. But the document did not demand the withdrawal of SOEs from non-strategic sectors such as hotels and property. And it echoed the language of the communiqué in its call for strengthening state enterprises’ ability “to control and influence”.
Down on the farm
In another vital area of reform—the ownership of rural land and village housing—the blueprint sent a clearer signal. In the late 1990s a vibrant property market began to emerge in Chinese cities, but not in the countryside, where property rights are far hazier. Five years ago the party said that urban and rural property markets should be merged, but progress has been slow. The constitution still says that all rural land is “collectively” owned, a notion inherited from the Mao era, and laws ban the sale of it to non-villagers or the mortgaging of rural property. The new blueprint, however, said farmers should be allowed to mortgage their homes. Some places have already been experimenting with this. In spite of the document’s appeal for caution, such trials are likely to expand more rapidly (and laws are likely to be changed) now that the party has given its go-ahead.
The state-controlled media have hailed these steps in predictably effusive language. As if China had just received a software upgrade, the package is being dubbed “reform 2.0”. Some articles call it an “historic milestone” on the road to fulfilment of the “Chinese dream”, a term popularised by Mr Xi that is now the staple of propaganda billboards across the country. In his speech Mr Xi warned that the going would not be easy. But he quoted Deng as saying in 1992 that without further reform, the country would reach a “dead end”. He clearly likes being compared to Deng, and he appears to have amassed the power to give him similar clout.
Like Deng, and indeed every Chinese leader since Mao, Mr Xi appears determined to maintain the party’s monopoly of power. As expected, his blueprint said little about political change. It talked of judicial reform but gave no details, and also mentioned the need to allow more room for “social organisations”—the party’s name for NGOs—while calling for the strengthening of the government’s “management” of such bodies.
It did offer concessions in two areas of human rights. One was a pledge to abolish the “re-education through labour” camps in which the UN estimated in 2009 that 190,000 people were being held without trial for periods of up to four years. The camps are often used to incarcerate political and religious dissidents. Even the state-run media have aired calls for their dismantling and officials have been signalling for months that change is coming. The blueprint, however, did not talk of banning other forms of extra-judicial detention, which are common.
The other notable shift was a decision to relax the one-child policy by allowing couples to have two children as long as one parent is an only child. In recent years couples who were both only children had already been permitted to have two offspring. Rural families can usually have two if their first is a girl. The new policy is unlikely to trigger a baby boom, however. Many urban couples say they would prefer to have only one child anyway, because of the high cost of housing, health care and education. The document made no promise to end government control over reproductive decisions, or reduce the sometimes crippling fines for violating family-planning regulations.
Mr Xi will face stiff resistance. The document called for faster reform of the household-registration system, or hukou, that denies rural migrants access to urban welfare and sometimes even the right to buy a car or a home. Local governments will balk at this, unless they receive greater financial support for schools, hospitals and other services. Middle-class urbanites will also have reservations about sharing resources for education and health care with outsiders. SOEs, recalcitrant bureaucrats and party ideologues will all resist market reforms that appear to threaten their interests. Zhang Lifan, an analyst in Beijing, says Mr Xi’s reforms might have stood a better chance a decade ago, before vested interests became entrenched.
It is possible, however, that Mr Xi’s power could enable him to force his proposals through. He has signalled that he is taking direct control of domestic security by setting up a “national security commission” (his predecessor, Hu Jintao, ceded this role to a colleague). He is also forming a “leading small group” to steer reforms, again probably under his direct command. A tight grip on security will be a comfort to him: the document, in its calls for controls over the internet, hints at a leadership deeply worried about social unrest and the power of online activism. Mr Xi will envy Deng, who began his reforms in a less raucous era.
