On Friday, the detailed document on reform decisions made at last week's Third Plenum of the 18th Central Committee of the Chinese Communist Party was released. This document contained the details on reform that the initial communique lacked. Since the government decided to release a more detailed "decisions taken" document, after an unfavourable response to the initial communique (which was more vague and full of old slogans and cliches), many investors have taken this to be a clear indication that China's top leadership is serious about reform. There once again seems to be a bit of a buzz around China and its long-term growth prospects after post the release of this reform road map.
The complete "Decision on Deepening Reform'' document lays out a host of major initiatives, including a decisive shift towards free markets, relaxation of the one-child policy, elimination of re-education labour camps and reforms in land tenure, state owned enterprises, taxation and migrant worker rights. This reform road map and the surprisingly bold anti-corruption campaign show Xi Jinping as being a far more assertive and visionary leader than his predecessor Hu Jintao. He has shown that he has a good grasp of China's structural economic and social ailments, and is putting in place a plan to address the country's deep rooted governance issues. He also seems to be putting in place the administrative machinery that will help him overcome deep seated resistance to change from SOEs, local government bodies, tycoons and other local officials.
There is no guarantee he will succeed, of course, but these steps and announcements show that Xi Jinping has a strong vision for China and the political muscle to attempt change and to stand up to vested interests. He seems to want to move China in a more market - oriented direction than the growth trajectory of the past decade.
Cutting through the clutter of all the detail, three major points emerge from the document.
Xi Jinping is targeting broad reform of Chinese governance and not just tinkering with economic policies. Mr Xi's reforms seem to be targeting not just economic development and an improvement in economic efficiency, but a more basic re-write of the function and role of government. This means pushing government agencies to stop direct intervention in markets and forcing them to focus on market regulation, public service delivery, "social management" and environmental protection. Improving governance, at both the central and local level, seems to be his main aim. This is important as most of China's economic problems - be they excess investment spending or local government debt and the shadow financial system - can be linked to poor governance (especially local governance). Local bodies are rewarded for chasing GDP growth, not delivering public services, and their fiscal set-up prevents them from prioritising social issues. Mr Xi seems determined to focus more on social services and amend the local fiscal structures to enable greater focus on these issues.
The most important signal from the party was strong support for the private sector and markets. Although the party still refuses to use the words "private sector", referring to it as "non-public", they did pledge to "unwaveringly encourage, support and guide the development of the non-public economy". They also declared that property rights in the non-public economy may (equally with the state sector) not be violated. The document also says the party will "reduce central government management over micro-level matters to the broadest extent" and calls for an end to excessive central government intervention. The first section of the document is all about giving the markets a decisive role in resource allocation, as opposed to the basic role it was assigned in all previous policy statements since 1993. The clear goal seems to be to reduce the ability of the government at all levels to manipulate either the prices or allocation of natural resources. While China has mostly deregulated its product markets, government bodies still can interfere in markets in many ways: subsidised capital, energy or land for favoured companies, a maze of rules and regulations that make it hard to set up new business and formal or informal restrictions on private enterprises entering certain sectors. The clear intent of the document is to chip away at all these anti-market distortions. The document also mentions "property rights as being at the core of ownership systems" and calls for fair competition and free consumer choice. The party also promised to reduce the administrative hassles and bureaucratic hurdles to doing business. The document also talks of better protection of intellectual property rights and "the lawful rights and interests of investors", as well as a smoother bankruptcy process.
Through this document, Mr Xi has made it clear that there is only one person in control and it is him (Premier Li Keqiang has been notably missing in most of the media coverage). Secondly, he has set up two new party organs to directly deal with the turf battles that had slowed reform under the previous leadership of Hu Jintao. One is a small group on reforms, similar to other small groups set up previously to co-ordinate policies in other areas. The second is a State Security Commission to blunt the influence of more hawkish security service apparatchiks. Through these two new set-ups, Mr Xi is looking to cut through inter-ministerial turf wars and make sure economic reforms are not held up by excessively hawkish security agencies.
The main disappointment of the document has been the lack of aggressive state sector reform or a privatisation programme. Most observers agree that China's declining productivity growth and rising debt levels are both linked to the bloated SOE sector which has been guzzling a disproportionate share of bank credit but delivers declining returns on investment. From the document it is clear that while SOEs will not be privatised they will face much greater competition and tighter regulation. This approach seems to be in sync with the party's view that competition, more than private ownership is the key to economic dynamism and strong productivity.
China seems to be on the march once again. It has found a strong and decisive leader, who seems to be committed to markets and improving governance. They have identified their constraints to growth and weaknesses in their prior economic model, and seem to have a game plan to address these short comings. Many investors feel comfortable underwriting 7 per cent economic growth for the country for the coming years.
The contrast between what China has just announced and demonstrated and the current situation in India cannot be more stark. Neither do we have decisive leadership, nor do we seem to have clarity on how to get back to 7-8 per cent economic growth.
We really need to get our act together and unveil a coherent road map to address our systemic weaknesses and show concrete action on the ground, more than just sound-bites. Investors will not remain patient forever.
The writer is at Amansa Capital
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
