Last week, I penned a piece for The Diplomat where I outlined in broad strokes several potential economic policy outcomes that could have been results of the Third Plenum of the Central Committee of the 18th Communist Party of China (CPC). On the menu were items as diverse as reform in interest rate ceilings, deposit insurance, capital controls, state-owned enterprises (SOEs), and the hukou housing permit system. If one had to draw an overarching theme for this Third Plenum – what Xi Jinping’s key dilemma would be – it would be delivering market-friendly reform to the center and periphery of China while maintaining the Party’s position in Beijing. Xinhua, in its summary of the post-Third Plenum reforms, put it simpler: "The core issue is properly handling the relationship between the government and markets."
So what are the results of the Third Plenum, how did investors and observers react, and was the meeting a success for Xi Jinping, who was expected to fully consolidate his power and position as the PRC’s President?
The core physical result of the meeting was a rather vague communiqué issued by the Communist Party on the results of the meeting. According to Chris Buckley over at Sinosphere, the initial reports "gave only a sketchy summary of what was discussed, saying that the 200 or so central and provincial officials who attended endorsed broad proposals to seek more balanced and equitable growth through more market competition and improved government. The summary said the planned changes would include taxation reforms, integrating urban and rural society, improved government services, and building a more effective legal system.”
An ancillary aspect of the CPC’s communiqué was the notion of equality and fairness in China’s economy. According to Xinhua, "the CPC pledged to clear barriers in the market and improve the efficiency and fairness in the allocation of resources. It will also create fair, open and transparent market rules and improve the market price mechanism.” No specifics were provided on how precisely the “market price mechanism” can or will be improved.
One of the more concrete outcomes – at least administratively – was the announcement that the CPC will set up a central leading team for “comprehensively deepening reform.” The team will be a successor to the National Development and Reform Commission (which was merged with the economic reform commission). China Daily further clarified the role of the group, “Part of the new group's duties, apart from economic reform, is to plan and carry out reform on modernizing China's 'governance system' and 'governance capability’.” Caixin, in its coverage of the reforms, expressed optimism that the reforms will create a more favorable climate for China’s entrepreneurs and family business endeavors.
The Third Plenum’s outcomes are also significant in what they explicitly omit. As was long expected by observers and analysts, Xi Jinping did not go on the offensive against the increasingly stagnating state-owned enterprises.The CPC’s decisive turn towards a market-based economy will necessitate action in this area sooner or later; it could perhaps be that the Central Committee favors a gradualist approach towards the state-owned enterprises, and may even handle their reform on a case-by-case basis. This could be a manageable task for Beijing given that there exist around 120 large SOEs.
Investors were thoroughly let down by the results of the Plenum; global stocks dipped, from Europe to the United States. Neil MacKinnon, a global macro strategist interviewed by ABC News, said that "While the general approach is market-oriented, the absence of clear details is slightly disappointing.” In essence, the Third Plenum told investors what they mostly already knew about the challenges facing China’s economy and the measures needed to ameliorate the situation. The move towards further market-oriented reforms is thus largely uninteresting to investors without specific details.
Shortly before the conclusion of the Plenum, my colleague Zachary Keck wrote an article for The Diplomat explaining why negotiating reform between Beijing and the rest of China wouldn’t be easy, for a variety of reasons. These challenges will endure as China embarks on the next step in its grand opening up to the world. Minxin Pei, noted China expert and contributor to The Diplomat, writes that expectations of concrete and detailed reform emerging from the Third Plenum are “sanguine and naive” given that they overestimate the level of control Xi and his colleagues in Beijing truly posses over local governments and regional party bosses. Despite its historically centralized nature, Chinese technocracy isn’t immune from the vagaries of institutional politics.
In assessing whether this Third Plenum succeeded, China watchers must be careful not to miss the forest for the trees. Despite the disappointing lack of details, the rhetorical outcomes of the Third Plenum nonetheless reassuringly signal that the world’s second largest economy is embracing liberal reform that can only be beneficial for China’s 1.35 billion people and the world economy in the long-term. Economic reform, particularly in Communist China since Deng Xiaoping’s days, has seldom occurred overnight. The vision set forth at this Third Plenum will likely come to fruition over a gradual process of reform over the next decade.
Ankit Panda is Associate Editor of The Diplomat. He tweets at @nktpnd.