What the 3rd Plenum of the 18th CPC Session tells you about China’s future

Shortly after the conclusion of the 3rd Plenum of the 18th CPC meeting on November 12, 2013 an extensive and comprehensive communiqué titled “Resolution Concerning Some Major Issues in Comprehensively Deepening Reform” was announced to the public.  The communiqué outlined with clarity a 60-point blueprint of social and economic changes for the coming decade.  The document alleviated the disappointment that many domestically and abroad had with the previously issued brief and ambiguous announcement at the end of the plenum.

Not everybody feels positive and optimistic about the blueprint, especially those who expected to see drastic changes with regard to political reform.  Throughout the document there is no evidence of plans for the relaxation of the Party’s control.  What is worse, as some observers pointed out, Xi Jinping has consolidated and strengthened his power by creating two new governing entities, the National Security Council and the Leading Small Group, both of which he sits atop.

Politically nobody should expect China to enact extensive reforms anytime soon.  Out of fear of social instability or as a concession to the loyal disciples of Mao, the new government will maintain the status quo while pursuing aggressive changes in social policies and economics.  Will this work?  There appear to be as many optimists as pessimists.

Let’s look at the encouraging side of the picture.  Here are some of blueprint’s highlights:

1. Create an open, fair and transparent market which allows corporations to conduct business in a fair way as long as the business is not included on the Negative List issued by the government;

2. Further open up China’s economy, including finance, education, culture and healthcare, by relaxing the restrictions on foreign investment;

3. Deepen reform in science and technology through encouraging innovation and strengthening IP commercialization and protection;

4. China’s economy will have public ownership as the mainstay while additionally allowing multiple other types of ownership.  Non-publicly owned entities are allowed to be shareholders of publicly owned entities.  Neither publicly nor privately owned property should be vandalized.  Abolish unreasonable policies or invisible barriers that negatively impact or limit growth of non-public companies and markets;

5. Allow the use of qualified private capital in the establishment of small and medium sized banks and other financial institutions

6. Redefine the role of government, reducing its interference with the market and focusing more on turning itself into a service provider that rules by law; government will no longer approve investment projects but let corporations make their own decisions while following government regulations. unless the projects are critical to the country’s security, environment, national planning of productivity, strategic resources development and important projects related to public interest; establish mechanisms to resolve and avoid over-capacity;

7. Change the focus of using the GDP growth rate as the sole indicator of success of the government to the use of other indicators such as consumption of resources, deterioration of environment, over-capacity, innovation, employment, people’s health, etc.

8. Improve budget management infrastructure through the implementation of standard and transparent systems; establish and standardize debt management and alert mechanisms for both the central and local governments; deepen tax reform through simplifying taxes, including increasing direct tax and reforming the VAT tax; gradually establish an individual income tax system which combines general and itemized categories; accelerate reform in real estate, natural resource and environment taxes;

Although “the Resolution” states that public ownership will remain dominant, it also asserts that the market will play a decisive role in allocating resources.  Compared with the wording of the 14th CPC meeting, “under the macro adjustment and control of the government the market plays a fundamental role” or that of 11th CPC meeting, “central planning plays a dominant role and the market plays a supporting role,” the role of the market is growing.

Economic and tax reform are clearly the top priorities of the new leadership.  Meanwhile, as a comprise, the new government under the leadership of Xi Jinping has promised SOEs a relative status quo, however, they may not expect to continue receiving generous subsidies from the government.  In additon, the SOEs will have to shoulder more responsibilities for social welfare, improve operational efficiency and return on investment.  SOEs are also expected to be increasingly receptive to sharing with private enterprises the industries that historically they have monopolized, such as banking.

The new leadership has done an excellent job designing an ambitious blueprint for China and, in particular, notable are its concessions to various interest groups, such as limiting political reform and maintaining SOE’s dominant positions, at least in perception, as a bargain for broad social and economic reform.  While the optimists have good reason to be hopeful, it is too early to predict any outcomes given the details have yet to be designed, finalized and executed.

Coco Kee is Managing Partner of Kee Global Advisors LLC (KGA), a corporate development advisory firm based in New York. KGA advises companies on cross-border expansion between China and the U.S., specializing in market entry and customer acquisition, growth capital raising and M&A.