Prepping for the plenum | FT Alphaville

Prepping for the plenum

Ladies and gentleman, we have what looks like a reform framework proposal…

That’s the State Council Development Research Centre’s reform framework proposal kindly brought to you by Credit Suisse ‘s Dong Tao who says (with his emphasis):

The State Council Development Research Centre revealed its reform framework proposal on 27 October. This project was led by Liu He, Deputy Director of the National Development and Reform Commission and the top economic advisor to President Xi Jinping, and Li Wei, Director of the Development Research Centre. Given that Liu has been leading the efforts of designing Xi’s reform initiatives, we believe this document should be viewed as the foundation of Xi’s framework of reforms, which will be revealed at the third plenary session of the Chinese Communist Party Congress in November. The project is coded “3-8-3″, referring to three key concepts, eight areas of reform and three correlated reform combinations.

This is a comprehensive reform package, probably the most ambitious top-down economic reform initiative in the history of the People’s Republic of China, in our view. Reform efforts like Deng Xiaoping’s ‘open-door’ policy in the early 1980s, the special economic zones establishment in the 1990s and Zhu Rongji’s initiative of joining the WTO in 2001 have changed the path of China and brought the country’s economy to the next level. However, these reforms all concentrated on one particular area. This package involves three key concepts and eight focused reform areas, covering almost the entire economy.

The tax reform is aimed at reallocating the share of tax revenue between the central and local governments. The reform makes it clear that they plan on launching a property tax after a period of transition. Beijing plans to launch a consumption tax, and the revenues from consumption would go to the local governments. This would involve shifting the production-based VAT tax towards a consumption-based tax. A major innovation of the project is the introduction of “citizen basic social protection package” which has universal coverage. This will be managed at the national level and the benefits are under each citizen’s name. This should be a foundation for abolishing the “hukou system” and launching a “new urbanization”.

Breaking monopolies is another important watching point. The proposal clearly identified the telecom sector as an industry that needs more competition. Oil and gas is another industry mentioned. Deregulating retail gasoline prices and removing import restrictions are important initiatives. Wholesale power prices are to be liberalized, but retail electricity prices are still subject to government management.

Financial reform involves interest rate liberalization. The project also suggested internationalizing the RMB within 10 years. The government plans to reduce its stake in financial institutions substantially. The proposal also recommended establishing a deposit insurance scheme.

The launch of the national asset balance sheet is another initiative. This should improve the transparency of the state assets. The project suggested increasing the punishment for violating intellectual property rights. Moving universities and most research institutes out of administrative influence is considered a way of promoting innovation. The government plans to introduce foreign competition in energy, telecom and finance, in order to improve the efficiency of the economy. For foreign direct investment approvals, it is in favor of introducing the negative list, i.e., FDI are welcome as long as the industry is not on the restricted list.

There’s also an ambitious land reform proposal which we’ve mentioned before — it would allow farmers to use land as collateral to borrow against or transfer land to others for non-agriculture purposes, and it would be one of the harder reforms to actually get done — but no sign of a change to the one-child policy. Which either means more input or no change we suppose.

We should mention that this report has been around for a little while but has only been picked up on recently. Nomura’s Zhiwei Zhang suggests it was released to the public several weeks ago.

Zhang also says (after noting that the report does not include any ambitious reforms of state-owned enterprises) that “many of these reforms appeared in the 12th five-year plan that was released in 2011 and the progress on these reforms has not been significant, so it remains to be seen how effective the new government will be in implementing these reforms.”

And that’s basically the point. The report is understandably low on detail and as CS put it “to push from a reform architecture to detailed policy design and execution, the ball will need to be moved to the bureaucrats’ court”… through and to a thicket of vested interests and, we’d suggest, with lots of water added along the route.

Related link:
China’s plenum: the bloody versus boring debate – FTAV