Far Bolder Approach Needed to Unlock China’s Growth Potential, Says EIU

China’s overhyped party plenum hinted at economic reforms, but a far bolder approach is needed to unlock the country’s growth potential, says The Economist Intelligence Unit (EIU).


The third plenum of the ruling Chinese Communist Party (CCP) central committee, on November 9th-12th, confirmed that China’s leadership will remain highly conservative and cautious in its approach to economic reform, to the detriment of wider prospects for sustainable growth, according to EIU.


The key meeting of party officials—much anticipated because of hopes that China would commit to more liberalisation of its economy—offered no more than a faint hint of reform intent, says the EIU.


“Despite all the pre-plenum hype, the meeting will have disappointed those hoping for stronger signals on economic reform, although the fact that it offered so little was very much in line with our modest expectations,” says Duncan Innes-Ker, Regional Editor and China Analyst for The EIU. As this was a behind-closed-doors gathering of China’s top party leaders, any significant decisions that may have been made will take time to filter through the processes of government and legislation before becoming clear to those outside the CCP’s inner circle.


“The plenum communiqué shows that the government remains wedded to a strong state sector,” says Innes-Ker. “Although it wants to boost the productivity of state-owned enterprises by increasing competition from private firms and by giving the market a greater role in the allocation of resources, we do not believe that this strategy will be successful in the long run.”


Against this background, the communiqué’s talk of the need for the market to play a “decisive” role in the allocation of resources, an upgrade from the “basic” role implied in previous language, may be misleading.


The EIU also notes, with disappointment but not surprise, that political reform appears firmly off the table.


Modernising the economy, as the CCP clearly wishes to do, will be difficult in the absence of accompanying liberalisation of the authoritarian political system.


The line on economic policy that seems to have emerged from the plenum is disheartening, but there is still likely to be an acceleration in the pace of reform on many fronts in the coming years.


The plenum confirms that a push to abolish the distinction between urban and rural hukou (household registrations) is in the offing, which could lead to improvements in the lives of millions of rural residents. Issues of social justice will also be high on the agenda.


Pushing forward such difficult changes in the face of vested interests will be tough, and one of the most intriguing outcomes of the plenum was the establishment of a special committee of senior leaders to promote comprehensive reform.


The EIU believes that the formation of the new panel may reflect a need to circumvent conservative (that is, left-wing) elements at the top of the CCP that remain opposed to the reform agenda being pursued by the president, Xi Jinping.


Whether or not Xi and his allies manage to overcome such resistance will be crucial to the country’s economic future. Innes-Ker notes, “China is the world’s second biggest economy, and a major trade partner for most countries. How it manages the next phase of its economic development will have implications for businesses everywhere, and executives cannot afford to ignore the outcomes of the plenum—however opaque they may seem.”


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