Focus on Beijing, where the world’s future will be decided
THE ponderously named Third Plenary Session of the 18th Central Committee of the Chinese Communist Party, which takes place this weekend, is a more important event for the world economy and global geopolitics than the budget battles, central bank meetings and elections that attract infinitely more attention in the media and financial markets.
The obvious reason for this meeting’s importance is that China is destined in the long run to become the world’s biggest economy and a political superpower. And the Third Plenum, traditionally held roughly 12 months after the appointment of a new party leadership, has been used twice before for the new leaders to spell out the main strategies they hope to implement.
A second, more immediate, reason for the world to pay attention to this meeting is that China has recently become not just the strongest engine of growth in the world economy, but also the biggest source of potential economic surprises, good and bad.
In 2009, China’s economic stimulus programme did more to prevent a depression than anything that happened in Washington, Frankfurt or Brussels. By contrast, it was the panicky reaction of Chinese financial markets to Ben Bernanke’s hint of a “tapering” of the US Federal Reserve’s monetary stimulus that transformed what might have been an orderly correction of US bond prices into the “taper tantrum” that slowed economic growth around the world.
What, then, might this weekend’s meeting imply for China’s future?
Expectations are running high. President Xi Jinping declared it would offer a plan for “comprehensive reforms” that would transform China’s mode of development and readjust the economic structure through a “new style of industri- alisation, urbanisation, technology and agricultural modernisation”.
Politburo standing committee member Yu Zhengsheng raised the stakes further by predicting “unprecedented” policy changes. And Prime Minister Li Keqiang has already endorsed detailed blueprints presented by government thinktanks, with considerable input from the World Bank and International Monetary Fund, to transform the economy and raise Chinese living standards twice by 2020.
Many of these ideas have been consolidated into a plan, described with the Chinese penchant for numerology as 3-8-3. This rhetorical blueprint starts with three “fundamental” reform objectives: to open up markets, transform the government and improve management of both public and private enterprises.
These objectives are to be achieved through eight policy initiatives: cutting administrative red tape; promot- ing competition; reforming land tenure and residence laws; restructuring finance by liberalising interest and exchange rates; strengthening the fiscal system; reforming stateowned enterprises; promoting innovation; and developing the service sector.
The risks and opportunities of the reform programme for the world economy can be boiled down to three broad questions. Can China restructure its economy to reduce dependence on heavy industry, exports and infrastructure investment? Can it clamp down on credit growth to avert financial bubbles? And can it manage an orderly transition from the 10% GDP growth of the past decade to the new target of 7%?
The financial minicrisis this year suggested that it may be impossible to simultaneously restructure industry, reorganise the financial system and keep macroeconomic conditions stable. If so, Xi will have to choose his priorities — and the signals since the minicrisis suggest that the choice has been made.
The Chinese will probably concentrate on reforming state-owned enterprises and shifting demand from heavy industry to services while leaving the more ambitious financial reforms for another day.
As Li keeps saying, although “China’s fast growth” may be over, social stability still requires “medium-fast growth”. Since the Communist Party’s position depends on it, that is what the Third Plenum will provide. —