Vested Interests Could Stymie China’s Economic Reforms

Local party barons and powerful state enterprises could resist reforms by China’s leaders.

China’s ruling Communist Party last week outlined a series of reforms not seen in the country in decades. The changes are as deep and significant as many analysts expected beforehand as China is forced to change its economic model in order to keep growing while maintaining stability and single party rule.

The third plenary session of the party’s Eighteenth Central Committee in Beijing decided, among other things, to further liberalize trade, investment and price controls, extend land rights to farmers, give migrant workers access to education and health care, improve food and environment regulations, end the labor camp system and relax China’s one-child policy.

The broad array of proposed reforms signals that President Xi Jinping and Premier Li Keqiang, who came to power during a leadership transition earlier this year, are serious about jolting the party into changing course. The challenge, which their predecessors also faced, will be implementing them. Vested interests have benefited much from the current system and are resistant to change.

The reforms were contained in a preliminary report released by the government three days after the plenary ended. The sixty-point plan includes key areas for the leadership to obtain “decisive” results in by 2020. They are nothing less than unprecedented and would be as groundbreaking as those initiated by Deng Xiaoping in 1978 which opened China up to the world economy.

Key reforms would affect China’s behemoth state-owned enterprises which have benefited greatly from government price controls and easy credit, at the expense of efficiency. According to the Peterson Institute for International Economics, an American think tank, private companies’ return on assets in 2012 were two and a half times that of the state’s whose returns were even below their cost of capital. Their weakness is now a drag on the economy.

It appears the government intends to promote greater transparency in the state-owned enterprises and raise their taxes to 30 percent by 2020 in order to “ensure and improve people’s livelihoods.” There will be “restraint mechanisms” and “investment accountability” in addition to exploring ways “to publish important information,” including the companies’ financial records.

Moreover, the government plans to transfer capital from state-owned companies to social security funds although it gave scant details on how that would happen.

Price controls are to be relaxed. Electricity, fuel, telecommunication, transportation and water prices should be set by the market. Farmers will be allowed greater rights to sell and lease their land. But how that would affect local government, who have benefited from selling farm land to developers, remains unclear.

In its announcement, the government repeated a pledge to expand access to China’s financial sector. This would include relaxing interest rate controls in order to build a deposit insurance system as well as opening the capital account.

To protect the environment, China intends to accelerate the commodity pricing of natural resources and gradually levy taxes on them. An area that has especially drawn the public’s ire is pollution in China’s cities and rivers. There, the government promises to draw a “red line.”

The reform of the hukou, or household registration system, will be sped up to allow migrant workers and farmers to become urban residents. Migrant workers have been treated as second-class citizens in coastal factory cities, often denied access to the same education and health care as urbanites.

Laojiao, or “reeducation through labor,” will be abolished. In addition, the government vows to strengthen the judiciary and institute measures to prevent false confessions from torture.

Finally, the one-child policy is relaxed. Now urban couples are allowed to have a second child if one parent is an only child. Previously, both parents had to be an only children in order to have a second child whereas in rural areas couples were allowed to have a second child if their first one was a girl.

The reforms are clearly ambitious. The question is: does the leadership have the will to implement them when it would almost certainly rattle entrenched interests, from the powerful state-owned enterprises to local party barons?

The announced reforms signal a consolidation of power by President Xi and his deputy Le who may turn out to be China’s strongest leaders since Deng challenged the socialist orthodoxy in the 1980s. But whether they have the wherewithal to push through reforms while maintaining order and unity within the Communist Party remains to be seen.