Taking the Next Big Step

　　Chinese leadership raises the bar in their commitment to deepening reform

　　The world’s media attention is firmly focused on Beijing this week as the Third Plenary Session of the 18th Central Committee of the Communist Party of China (CPC)， held in the nation’s capital from November 9-12， is expected to release a raft of new， far-reaching reform measures and policy orientations.

　　The Third Plenary Session of the 11th CPC Central Committee held in 1978 launched China’s reform and opening-up policy. In 1993， the Third Plenary Session of the 14th CPC Central Committee established the strategy of a socialist market economy with Chinese characteristics， bringing years of hesitation over market participants to an end. The Chinese economy then entered a sustained period of rapid growth.

　　The Third Plenary Session of the 18th CPC Central Committee will bring China to yet another launch point， where the possibility of a holistic policy blueprint will push for deeper economic reforms， taking the country into uncharted waters.

　　The need for reform

　　Upgrading the Chinese economy is the impetus for the third plenary session to push forward the reform. Long Guoqiang， Director of the General Office of the Development Research Center of the State Council (DRC)， said China is one of the few developing countries that benefit from economic globalization， because it adopted the strategy of reform and opening up 35 years ago， combining the opportunity of economic globalization and China’s comparative advantage.

　　China’s comparative advantage at that time was its low costs， particularly low labor costs. With measures such as opening up the coastal regions， establishing special economic zones and adopting the policy of processing trade， China effectively combined foreign capital， technologies and sales channels with the country’s low-cost advantages. In the process， China moved from a small trading nation and a closed economy， to the world’s biggest exporter of manufactured goods.

　　After three decades of development， however， China’s low-cost advantage has faded. Now there is a need for further opening up and deepening reforms to establish new international competitiveness in areas of higher value-added industries， as well as products and services of higher technology and capital concentration.

　　Long said there are many deficiencies in the old development model. The Chinese economy relied mainly on high capital and resource input to achieve rapid growth， leading to a serious structural problem that saw development of the service industry fall behind. The reasons， he said， include incompletion of opening up and excessive control.

　　At present， China’s economic growth has not reached its full potential while economic transformation and restructuring have made unsatisfactory progress， revealing many challenges.

　　For these reasons， the third plenary session must deal with eliminating systematic barriers affecting economic transformation.

　　According to a DRC report on reform submitted to the third plenary session， the goal is to establish a socialist market economy system that is vigorous， innovation-based， inclusive， orderly and protected by law. China will push forward reform aiming at improving the market system， transforming government functions and innovating corporate systems that involve administrative management system， monopoly industries， land system， financial system， taxation system， state-owned assets management system， innovation mechanisms and opening up to the outside world. The reform is unexpectedly more comprehensive than previously.

　　Long thinks the meeting indicates the Chinese Government’s strength and resolution in comprehensively pushing forward the reform.

　　New commitment

　　This is the first year of the new leadership in office and since taking the reins of power in March， it has released a series of policies and measures， including streamlining administration and delegating power to lower levels， relaxing lending rate control， setting up the Shanghai free trade zone (FTZ) and separating railway administration and enterprise functions. These reform measures have encroached on vested interest groups and demonstrated the new leadership’s courage and resolution in reform measures. In line with this， the State Council issued a document on May 15， eliminating or delegating power of administrative approval of 133 items. This is seen as the Chinese Government’s bid to eliminate obstacles to economic development and encourage domestic economic vitality.

　　Zhang Liqun， a DRC researcher， said by reducing administrative approval， the government can remove systematic barriers restricting economic transformation and development， ensure fair market competition by all participants， break industrial monopolies and improve the socialist market economy.

　　Streamlining administration and delegating power to lower levels of government means reducing the power of related government departments and officials. The new leadership’s push of this move only 58 days after it took office demonstrates its resolve in deepening reform and has brought two positive changes： In the investment sector， decision-makers will have more freedom in projects not involving state and public security； in the business sector， if the market mechanism can function effectively and industrial organizations can be self-managed， business entities will not need to obtain government approval. Streamlining administration and delegating power will make corporate activities more flexible.

　　Relaxing lending rates

　　The People’s Bank of China， the country’s central bank， announced on July 20 it would remove the lower limit for lending rates， and financial institutions can independently decide lending rates in accordance with business principles.

　　Guo Tianyong， Director of the Center for Chinese Banking Studies of the Central University of Finance and Economics， sees relaxing lending rate control as an important step for China to advance financial reform， demonstrating the top leadership’s resolve in pushing forward financial reform.

　　In a bid to relax capital control and realize the convertibility of the yuan under the capital account， interest rate liberalization is considered a prerequisite for China. Yet the Chinese Government had been reluctant to relax interest rate control， due to concerns that Chinese banks may attract deposits with high interest rates and then squeeze bank profits.

　　According to an announcement on the central bank’s website， relaxing lending rate control is necessary because all macro- and micro-conditions to advance interest rate liberalization have been mature. At the macro-level， Chinese economic performance is now steady and prices are stable， creating a good opportunity for the government to further advance the reform. At the micro-level， with steady progress in the financial reform in recent years， supervision of financial institutions has been strengthened， and they are now more capable of independent pricing. Companies and individuals are also more adaptable to the market-oriented pricing environment. After years of development， the Shanghai Interbank Offered Rate has become an important basis for pricing of corporate bonds， derivatives and financial services. Moreover， the government’s monetary policies can be effectively implemented at the financial market.

　　Guo said that fully relaxing lending rate control will help the financial industry better support development of the real economy and then upgrade the Chinese economy.

　　Pilot FTZ

　　Another indication of the Chinese Government’s intention to advance the reform process is the establishment of the Shanghai FTZ on September 29.

　　The Shanghai FTZ will explore a new path and model for China’s opening up， accelerate transforming government functions and boost transformation of the economic growth model.

　　Looking back， China’s reform and opening up in the previous three decades is known as “shallow-water reform，” as it was without experience and was allowed to learn from mistakes.

　　China has now entered “deep-water reform，” also with no experience to learn from， but this time no mistakes will be allowed. Therefore experimental projects must first be carried out in pilot programs before any systems are launched nationwide.

　　To comprehensively deepen reform， Long said the Chinese Government needs to balance the relationship between reform， development and stability.

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