This weekend, China will plot its economic future
The ponderously named Third Plenary Session of the 18th Central Committee of the Chinese Communist Party, which takes place this weekend, is a more important event for the world economy and for global geopolitics than the budget battles, central bank meetings and elections that attract infinitely more attention in the media and financial markets.
The obvious reason for this meeting’s importance is that China is destined in the long run to become the world’s biggest economy and a political superpower. And the Third Plenum, traditionally held roughly 12 months after the appointment of a new Party leadership, has been used twice before as an occasion for the new leaders to spell out the main strategies they hoped to implement as they consolidated their power. At the Third Plenum in 1978, Deng Xiaoping launched the market reforms that unleashed the power of the profit motive in China, and it was at the corresponding event in 1993 that Jiang Zemin accelerated the process of dismantling state-owned enterprises and integrating China into the world economy that culminated with China’s accession to the World Trade Organization in 2001.
A second, more immediate, reason for the world to pay attention to this weekend’s meeting is that China has recently become not just the strongest engine of growth in the world economy, but also the biggest source of potential economic surprises, both good and bad.
In 2009, China’s astonishingly ambitious economic stimulus program probably did more to prevent a depression than anything that happened in Washington, Frankfurt or Brussels — especially in Europe and Germany, which was the biggest beneficiary of the explosion in Chinese infrastructure investment. Last summer, by contrast, it was the panicky reaction of Chinese financial markets to Ben Bernanke’s hint of a “tapering” of the Fed’s monetary stimulus, that transformed what might have been an orderly correction of U.S. bond prices into the “taper tantrum” which slowed economic growth around the world. The lesson from this experience, and the subsequent downward revisions of global growth projections by the IMF and other forecasters this autumn, was that the biggest risks to the growth of the world economy now come from uncertainties about the strength of China and other emerging economies, not from the inevitable weakness of Europe, nor from the clear but disappointing recovery in the U.S.
What, then, might this weekend’s meeting imply for China’s future? Since China is far from a democracy or an open society and the Communist Party’s meetings are not open to the media or the public, the true answers may not emerge for months or even years. But expectations are running high. President Xi Jinping declared this week that the Third Plenum would offer a plan for “comprehensive reforms” that would transform China’s mode of development and readjust the economic structure through a “new style of industrialization, urbanization, technology and agricultural modernization.” One of Xi’s key allies, Politburo Standing Committee member Yu Zhengsheng, raised the stakes further by predicting “unprecedented” policy changes. And Li Keqiang, the prime minister, whose job is actually to put any new policies into practice, has already endorsed detailed blueprints presented by government think tanks, with considerable input from the World Bank and IMF, to transform the economy and double Chinese living standards by 2020.
Many of these ideas have been consolidated into a plan, described with the Chinese penchant for numerology as 3-8-3: This rhetorical blueprint starts with three “fundamental” reform objectives: to open up markets, transform government, and improve management of both public and private enterprises. These objectives are supposed to be achieved through eight policy initiatives: cutting administrative red tape; promoting competition; reforming land tenure and residence laws; restructuring finance by gradually liberalizing interest rates and exchange rates; strengthening the fiscal system; reforming state-owned enterprises; promoting innovation, especially green technology; and developing the service sector. The benefits of these objectives are supposed to be visible in three benign outcomes: new mechanisms for trading collectively-owned land would direct more of the benefits of economic growth to rural communities and displaced farmers; expansion of market mechanisms and competition should increase efficiency and improve the quality of investment; and fiscal reforms would create a basic social security safety net, increasing household confidence, boosting consumption and helping to rebalance the economy away from its excessive reliance on infrastructure investment and exports.
All these lists may leave your head spinning with numbers — and I haven’t even mentioned Deng’s “Four Cardinal Principles” or Jiang’s “Three Represents.” But don’t worry. Although issues such as land tenure, residence rights and local government taxation are of huge importance to people and businesses within China, the risks and opportunities presented by the reform program for the world economy as a whole can be boiled down to three broad questions. Can China restructure its economy to reduce dependence on heavy industry, exports and infrastructure investment? Can China clamp down on credit growth to avert financial bubbles? And can China manage an orderly transition from the 10 percent GDP growth of the last decade to the new target of 7 percent in the years ahead?
When President Xi took over last November he seemed eager to prove he could do all these things at the same time. But that may now have changed. The financial mini-crisis and steep drop in economic activity this summer suggested that it may be impossible to simultaneously restructure industry, reorganize the financial system and keep macroeconomic conditions stable. If so, then Xi will have to choose his priorities — and the signals since the summer’s mini-crisis suggest that the choice has been made.
Rather than risk a macroeconomic hard landing by trying to simultaneously restructure industry and clamp down on credit, the Chinese will probably concentrate on reforming state-owned enterprises and shifting demand from heavy industry to services, while leaving the more ambitious financial reforms for another day. As Prime Minister Li keeps saying, while “China’s fast growth” may be over, social stability still requires “medium-fast growth.” Since the Communist Party’s position depends on it, that is what the Third Plenum will provide.
PHOTO: A paramilitary policeman stands guard under flags outside the Great Hall of the People during the third plenary session of the National People’s Congress (NPC) in Beijing March 10, 2013. REUTERS/Petar Kujundzic