After an important Communist Party plenum wrapped up on Tuesday, many observers (including myself) feared that the results showed President Xi Jinping was unwilling to launch the drastic reforms necessary to fix the economy. On Friday, more details emerged on what exactly Beijing’s top leaders approved during their conference, and the pledged reforms are much meatier and potentially more powerful than anything previously suggested, and tackle some of the worst ills of the economy.
Most notably, there is finally talk about reforming China’s dominant state-owned enterprises, or SOEs. These behemoths suck up the nation’s resources and crowd out the private sector, though they are bloated, inefficient and hamper the development of the economy. Now Xi is planning to do something about that. Beijing pledged to end some monopolies, improve SOE management and allow the private sector to invest in projects with SOEs. Such steps could make SOEs more competitive and allow greater scope for more productive private enterprise. Xi also plans to liberalize prices on commodities like water and natural gas, as well as in transport and telecom; speed deregulation of interest rates and capital flows; reduce curbs on foreign investment; and allow private investors to set up small banks. All of this will expand the role of the private sector in the economy and permit resources to be allocated more intelligently.
The concern earlier in the week was that Xi and his team seemed to dodge the reforms that were most pressing, either because they were unwilling to take on the special interests that would get hurt as a result, or they didn’t see the need or urgency. Now it is clear the Xi does appreciate the weaknesses of the Chinese economy – excess capacity, rising debt, a distorted financial sector, a lack of competition – and appears willing to confront them head on. However, what remains to be seen is how quickly these announced reforms will become reality, and how far they will really go. Some of this stuff has been talked about for a while – such as financial deregulation and market opening – but the pace of actual change has been glacial. In other areas, such as SOE reform, it is uncertain right now how much power the state is really willing to cede to the market and private enterprise.
How you see Xi’s reform efforts depends very much on how you see the health of China. If you believe that the Chinese economy is generally sound and requires no more than an extension of previous reform efforts to propel the economy forward, then you’ll believe Xi is on the right track. If you believe (like I do) that the Chinese state-led development model is fundamentally broken and a drastic break with past practices is necessary to move forward, then you’d believe Xi is not doing enough. Hopefully for China’s economic future, Xi will move beyond his promises and introduce some real change.