Update: More Details from the Third Plenum Emerge from the Chinese Communist Party

The Third Plenum came to a close last week when hundreds of Communist Party officials finalized a number of significant social and economic reforms, considered to the be the largest expansion of economic freedoms since the early 1990s. There are three major changes that have emerged: 1) expansion of farmers’ land rights; 2) encouragement of private investment in government owned businesses; 3) loosening of the one child policy. Each of these changes will have important ramifications for China as well as for the international investment community. All three of the reforms above, point to an easing of the state’s control over the economy, which has been a central quality of the Chinese economic system since Mao Zedong implemented Communist policy in the mid-20th century. These reforms, appearing out of the Third Plenum, were decided upon in the face of a number of endemic issues plaguing the Chinese economy, such as, government debt in local communities and an aging population.

Expansion of Farmers’ Land Rights

The details of the reforms to farmers’ land rights are exciting for revenue growth prospects in rural areas. Among the changes, the government has said it will give farmers the ability to profit from, share, sell, mortgage and inherit their ownership in collective assets. In addition, the released document from the government, referred to the creation of a rural property market. The control of city limits and construction growth will also be loosened in small and medium sized cities, whereas the growth of China’s megacities will be kept primarily under government control.

Slowest GDP Growth in 24 Years

The government is slowly trying to morph the Chinese economy into an increasingly capitalist and competitive system. Chinese GDP growth is expected to slow next year, following a projected growth of 7.6% for 2013, just barely topping estimates which were placed at 7.5%. Even though 7.6% GDP growth is a very solid number for most countries, it will be the slowest the Chinese economy has expanded in 24 years. The director for Asia studies for the Council on Foreign Relations in New York explained, on Bloomberg Surveillance, that the changes are not so straight forward, “I’m not exactly sure, frankly, how this is going to play out with state-owned enterprises, and I’m also not exactly sure how you have the market be the decisive force in allocating resources, the way they talk about, and you maintain the dominant role of the public economy in the state-owned enterprises.”

Encouragement of Private Investment in Government Owned Businesses

China is planning on developing a “mixed-ownership economy.” The Communist party said that 30% of state produced profits will be used to supplement public funds, increasing the ability of the government to invest in the general population’s well-being. In step with an increased focus on economic stability, the Governor of the People’s Bank of China, Zhou Xiaochuan, explained that the bank is going to “make all efforts to deepen reform and opening-up in the finance industry,” focusing on economic development. Former Morgan Stanley chief economist, Stephen Roach, commented on the reforms stating that “China is now moving aggressively to assemble the building blocks of a consumer society.”

The Yuan will also feel the effects of the reforms hashed out during the Third Plenum. China is planning on speeding up the convertibility of the currency as well as taking a more hands-off approach regarding interest rates. With these decisions, the party leadership is hoping to help stabilize bond curves and allow private investors to set up their own small to medium-sized banks. Chinese news agency, Xinhua, added that the government plans on implementing updated property-tax legislation, as well as possibly raising the retirement age.

Loosening of One Child Policy

The famous one child policy, instituted to control spiraling population growth, has worked wonders. Some believe that the policy has actually worked too well, the country estimates that the population of 15-24 year-olds, a primary demographic in factories, and a group that has been the foundation of Chinese growth for decades, will number around 67 million by 2030. The modification of the policy will allow only for families, where one of the parents is an only child, to have two children. Other couples where both people have siblings will still have to comply with the one child policy. As a result, BofA economist, Lu Ting, said that the shift in the one child policy was “quite small”.

The reforms that have come out of this latest Third Plenum are the most progressive since 1993, when President Jiang Zemin allowed for the consideration of market-driven changes. However, researcher from the government-sponsored Chinese Academy of Social Sciences, Yuan Gangming explains that these new reforms “failed to make an ideological breakthrough — for which it’s not able to rival the one in 1978.”

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