BEIJING Nov 18 China has pledged to make the
most sweeping changes to the economy and the country's social
fabric in nearly three decades with a 60-point reform plan that
may start showing results within weeks.
Some financial and fiscal reforms are likely to be the first
out of the blocks, analysts said, but more wrenching changes
such as land reform, reining in the power of state-behemoths,
and a more universal social welfare system may take years as the
Communist Party leaders balance reorganising the economy with a
need to maintain stability.
"It's clear that they understand what reforms are needed.
They will probably start with reforms that could offer the
highest returns with the lowest costs," said Lu Zhengwei, chief
economist at Industrial Bank in Shanghai.
China unwrapped its boldest reforms since Deng Xiaoping set
the country on a course of opening up to the world in the 1970s
and 1980s. The Communist Party pledged to let the market play a
"decisive" role in the economy and outlined changes designed to
unleash new sources of growth that it said would yield results
After three decades of breakneck expansion, the economy is
showing signs of spluttering under the weight of industrial
overcapacity and piles of debt.
Chinese leaders have made clear that reforms will be carried
out in a more concerted way by setting up a high-level group to
lead them, but analysts believe they will move first with some
less controversial reforms, such as interest rate and price
deregulation on utilities and natural resources.
"They are likely to start with some easier ones or reforms
that have already been kicked off," said Chen Letian, an
economist at Rising Securities in Beijing.
The central bank is likely to unveil a long-awaited deposit
insurance system by the end of this year or early in 2014 to
pave the way for freeing up bank deposit rates, which are now
subject to administrative caps, analysts say.
The insurance scheme would protect depositors as Beijing is
concerned some smaller lenders could go under as banks compete
for deposits in a more open regime. Earlier this year, the
central bank removed controls on lending rates.
They expect qualified private investors will get the
green-light in the coming months to set up banks to compete with
big state lenders that currently dominate.
The government will further loosen its controls on prices of
water, electricity and natural resources, in line with the
pledge to let the market play a "decisive" role, with changes
sooner rather than later.
Fiscal reform is likely to gain some urgency as a lack of
constraint on the finances of heavily indebted local governments
will make interest rate reform less effective. A bigger slice of
tax revenues would reduce their need to borrow heavily or to
sell land to raise revenues.
The leadership pledged to push fiscal reform to improve
budget management and let the central government assume more
SOME REFORMS MAY LAG
But some changes will require much more preparation and may
not show any signs of happening for months or years, analysts
say. Reform to allow farmers to sell their land more freely is
still being tested in parts of the country, so the government
appears a long way off from deciding exactly how the new idea
will work in practice.
Policymakers also want to make sure that urban areas can
absorb the hundreds of millions of rural migrants they want to
move to cities to help promote a consumer-led economy.
That means social welfare systems, from healthcare to
education, have to be strong enough to cope with the influx of
people and importantly that jobs are available in the cities.
Policymakers worry a sudden rise of landless and jobless
migrants could upset the national stability central to the
Communist Party's justification for one-party rule.
"The pre-condition for reforms is that economic growth will
be steady and social stability will be maintained," said Xu Gao,
chief economist at Everbright Securities in Beijing.
A relaxation of the household registration system, or hukou,
which currently means that migrants leave behind the public
services they are entitled to as resident of their home
villages, will only gradually be expanded from smaller cities to
bigger ones, analysts say. A more universal system is seen as
critical if Beijing is to encourage more migration to urban
But Beijing is attempting to overturn a social system in
place since 1958, so change will take probably some years, they
Reforming state-owned companies will also take years,
analysts say. The Communist Party signalled it was in no rush to
break up the monopolies that dominate many sectors of the
Instead, it appears to be targeting a slow squeeze on these
companies, which analysts say probably reflects a more practical
approach given the political power of the big state firms and
the ministries that back them.
The Communist Party has raised the amount of profit the
state-owned enterprises have to set aside for dividend payouts,
will allow private firms to enter some protected business
sectors and will allow markets to play a greater role in pricing
assets, suggesting these bloated companies will have to become
more efficient over time to cope with market forces.
The government has previously tried to open up sectors
currently monopolised by state firms - such as oil and gas,
banking, telecommunications, electricity, and transportation -
to private investors, but with little success.
The reforms pledge to quicken the process of making the yuan
fully convertible, but some government economists caution
against high expectation amid fears among some policymakers that
allowing the currency to move freely too quickly could expose
the economy to volatile capital flows, such as the ones blamed
on the U.S. Federal Reserve's economic stimulus programme.
The central bank has pledged to make the yuan "basically
convertible" by 2015 but it has never given a clear definition
of what that means.
Still, Beijing can not be too cautious, said Zhu Baoliang,
chief economist at State Information Centre, a top government
think-tank in Beijing.
"They may have to quicken reforms in all fronts, otherwise
they may not achieve the tasks by 2020," Zhu said.
The team leading reform is likely to be more powerful than
the State Commission for Restructuring the Economy, which was
responsible for drawing up a reform blueprint that led to the
shutdown of thousands of inefficient state-owned firms and the
loss of millions of jobs in the 1990s.
A top party official could head the team, they said. Some
speculate that Premier Li Keqiang could take charge, while
others pointed to Han Zheng, Shanghai's party chief.
Eventually, Beijing may have to deal with the thorniest
"Over the longer term, both central and local governments
will have to downsized and they will no longer need so many
people," said Xu at CCIEE.