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Just when everybody had dismissed the much hyped China plenum, calling it a dud, more clarity has emerged now, on the dragon’s ambitious reform agenda to move the country from a low cost labour & savings focused economy to a consumption led economy. This has lead economists and commentators to recalibrate their impressions about China’s bid to usher in a new era of change.
The reforms that were unwrapped on Friday, constituted a 22,000 word report that fleshed out the details of what was decided at the third plenum of China’s top 400 party leaders. China has given itself until 2020 to achieve results on these reforms and economists and international observers are viewing Beijing's plans with “guarded optimism” according to Reuters news agency, given the experience with past plenums.
Here’s a simple point by point breakdown of what some are calling China's ‘boldest reforms in decades’ -
#1 Relaxation of the one child policy
The new regulations fine tune China’s oppressive family planning policy and will allow couples in which at least one parent is an only child to have two children according Xinhua, China’s official news agency. The birth policy will be adjusted and improved step by step to promote "long-term balanced development of the population in China” according to the document.
#2 Interest rates
"(We will) improve the market-based yuan exchange rate formation mechanism and speed up the marketisation of interest rates” reads the document. This suggests a scrapping of rules that have imposed a ceiling on deposit rates according to experts. “Getting rid of it is key if China is to shift from a dependence on savings-financed investment to a consumer-led economy, a transformation that will weigh on foreign producers of the commodities used in China’s infrastructure boom while benefiting makers of consumer products purchased by its growing middle class” according to commentator Michael Casey of the Wall Street Journal
#3 Capital Account
The plenum has pledged to “increase the level of convertibility in cross-border capital and banking transactions” and “establish a robust and prudent overall management framework for foreign debt and capital flows and speed up the implementation of renminbi capital account convertibility." Experts say any sudden move to remove capital controls on inflows and outflows could have destabilizing effects. “It’s one reason why most economists say interest rate liberalization needs to happen first; otherwise the newly liberated savings will rush offshore in search of higher returns.” Says Casey
#4 Reforming China’s SOEs (state owned enterprises)
The plenum has pledged to end monopolies and improve the management of its SOEs to make them more market oriented. “Administrative monopolies will be further broken and competitive business will be introduced, the railway sector being one example. Those in natural monopoly sectors, such as energy and minerals among others, will separate government functions from enterprise management, promote franchises and government monitoring of them will be improved” according to Xinhua news agency. State enterprises will also be made to contribute 30% of the gains to state coffers by 2020. At present, the proportion ranges from 0-15%. The money will be used to improve people's livelihood.
#5 Opening up the banking sector
China will open up the banking sector wider, with strengthened regulation, by allowing qualified private capital to set up small- and medium-sized banks
#6 Expanding private sector role in the economy
The plenum has also suggested moves to ease the state’s grip on the economy. It has said more private capital will be allowed into the market to develop a “mixed ownership economy” The country will develop this mixed ownership to “improve the basic economic system while keeping the dominant role of public ownership, with the state-owned economy playing a leading role, while encouraging, supporting and guiding the non-public sector, enhancing its vitality and creativity” according to Xinhua.
#7 Resource Pricing
Last but not the least, China will promote a pricing mechanism that is mainly decided by the market. The document says the government should not make inappropriate interventions."(We will) push forward price reforms in sectors including water, oil, natural gas, power, transportation and telecommunications."Government-set prices will be mainly applied to key public utilities and public services. Such pricing must be transparent and monitored by the public."(We will) improve pricing mechanisms for agricultural products and emphasize the market's role in deciding prices” the document released by Xinhua news agency said
With inputs from Reuters
With inputs from Reuters
