Tweaking the One-Child Policy and Other Surprises in China

Following last week’s communique on the third Plenum of the Party’s Central Committee, the more specific “decision on major issues concerning comprehensive and far-reaching reforms" was released on 15 November.
 
The document presents a road map to move ahead with a systematic and comprehensive program of economic and social reform. The pace of implementation is likely to be fairly gradual, but that is not really a problem as long as it continues.
 
Some surprises
The overall objectives, directions and principles that permeate the document bode quite well for the direction of economic reform in the coming decade, in our view. The most important principle is about a larger role for the market and recalibrating the role of the government, away from direct intervention towards setting an appropriate framework and providing good public services.
 
The document states that “the construction of a unified, open and orderly competitive market system is the foundation for the market’s decisive role in resource allocation . . . . We should focus on removing market barriers and increasing the efficiency and equity of resource allocation . . . . We need to “greatly reduce government intervention in resource allocation.”
 
As we expected, the clear language used implies a good mandate for better pricing and taxation of raw resources, increasing the provision of public services, and financial and monetary reform, while there seems to be less scope for speedy progress on reform of the fiscal system.
 
However, there are also surprises. There was clearer language than we expected on raising dividends from state-owned enterprises and channeling the revenues to the Ministry of Finance. To some extent, there was clearer language on farmers’ property rights to rural land, as well as on the one-child policy.
 
There is little on rebalancing the pattern of growth towards a larger role for consumption and services. However, if China can make good progress on the policy adjustments spelled out here, rebalancing would follow, given the respectable fit between its rebalancing policy agenda and the language of the document.
 
Likelihood of success
We still need to see whether politically thorny obstacles can be overcome, especially in areas such as state-owned enterprises (SOEs), fiscal reform and land reform. Nonetheless, the approach to reform of the new leadership is quite comprehensive and systematic, with a willingness to address institutional issues, as indicated by the introduction of a leading group for reform.
 
This approach increases the likelihood of success, even though it may take time.
 
We digest the directions and language in the document in the different areas of the reform agenda below, preceded by what we see as the agenda in that area.
 
The specific reform areas can broadly be classified into two areas: improving the allocation of resources and improving the quality of urbanization (“better integrating urban and rural development”).
 
Improving the allocation of resources
Pricing and taxation of raw resources
Agenda: remove subsidies to industry by raising prices and taxation of inputs such as land, energy, water, electricity, and the environment.
 
Steps/language: further reform of energy and resources prices including those of natural gas, water, oil products, electricity and transport.
 
Tax reforms
Agenda: remove the industry-bias of local governments and mitigate distortions and economic inequality, including by more taxation of assets (property, equity) and less taxation of labor
 
Steps/language:
  • “expand consumption tax to cover high energy consumption and polluting products”;
 
  • “accelerate legislation on property tax and proceed with property tax at appropriate time”;
 
  • “push forward on an environmental tax”;
 
  • improve the local tax system and gradually increase the proportion of direct taxes;
 
  • promote VAT reform, appropriately simplify the tax rate;
 
  • adjust personal income taxation;
 
  • accelerate real estate tax legislation and resource and environmental protection tax reform;
 
  • strengthen the standardized management for tax incentives, in particular regional tax incentives
 
Adjusting the economic structure
Agenda: reduce excess capacity, promote new industries, upgrade the industrial structure; stimulate domestic demand-led growth, continue SOE dividend reform and channel the revenues to the Ministry of Finance.
 
Steps/language:
  • establish and improve a long-term mechanism to prevent and resolve the overcapacity problem; include excess capacity as criterion performance evaluation local officials;
 
  • raise SOE dividend payment to 30% by 2020 with revenues used for “improving people’s livelihood”;
 
  • accelerate the development of elderly service industries
 
Institutional and administrative reform
Agenda: levelling the playing field between SOEs and the private sector by removing barriers to several sectors, increasing private-sector participation; fostering truly independent regulatory bodies, and more generally delineating more clearly the role of the state and that of the market. •
 
Steps/language:
  • Reduce government interference in markets; limit government intervention to important public utilities, public services, network-based natural monopoly sectors; and improve transparency and “social supervision” of interference, eliminate “administrative monopolies”.
 
  • Stimulate market integration; streamline and reform market regulation; prohibit regional protectionism and monopolies; improve market exit system and corporate insolvency regime.
 
  • Abolish unreasonable regulations for non-state-owned firms; reduce barriers to entry by using a “negative list” that specifies the sectors that companies cannot enter; scale down investment approvals; simplify business approval and registration requirements; and improve market supervision.
 
  • Transfer some state-owned capital to social security funds
 
  • Normal enterprise investment projects (not related to national security or ecological security, involving major productive forces, strategic resource development and vital public interests) should be decided by the firm, and approval from the government is no longer needed
 
Financial sector reform
Agenda: towards more competition and more non-bank financing, as well as better access to finance for under-serviced firms.
 
Steps/language:
  • Open up the financial sector (“internally and externally”); conditional on strengthened regulation, allow qualified private capital to set up small- and medium-sized banks; reform the IPO process; “develop and standardize bond market”; promote equity financing and increase share of direct financing; encourage financial innovation.
 
  • Improve the regulatory coordination mechanism; define the central and local government responsibilities for risk management and financial supervision; establish a deposit insurance system; improve the exit mechanism for financial institutions; strengthen the financial infrastructure
 
Monetary, exchange rate and capital account
Agenda: increase the role for the interest rate in the conduct of monetary policy, introducing more exchange rate flexibility, and opening the capital account
 
Steps/language:
  • “accelerate interest rate marketization and liberalization of interest rate market”, “make Treasury yield curves reflect market supply and demand”;
 
  • “increase convertibility of capital flows” and “accelerate RMB capital account convertibility”;
 
  • promote two-way capital market opening; increase QFII (Qualified Foreign Institutional Investor) quota and RQFII (Renminbi Qualified Foreign Institutional Investor) quota
 
Supporting more full migration
Reforming the hukou, or household registration system
Steps/language:
  • promote hukou reform with differentiated speed across small, medium, large and extra-large cities;
 
  • steadily promote a fully coverage of basic public services for residents; include migrants into the city’s housing and social security system;
 
  • integrate rural pension and medical insurance standards into the urban social security system;
 
  • establish a mechanism that links fiscal transfer payments to rural immigration population (giving local governments an incentive)
 
Public finance
Agenda: Reform the inter-governmental fiscal system to give local governments the means and incentives to fund public services and affordable housing for migrants. This calls for:
 
  • changes to the performance evaluation system for government officials; and
 
  • wholesale reform of inter-governmental relations to better match expenditure responsibilities with revenues, introduce stable revenue sources for local governments, and have more rules-based redistribution from richer areas to poorer ones
 
Steps/language:
  • Two principles: “keep the overall tax burden stable” and “maintain balanced structure between local and central government revenues” suggest no major overhaul of the fiscal system.
 
  • But urban and rural social security systems “should become better coordinated”
 
  • Local government will be allowed to broaden financing channels and issue debt for urban construction
 
  • Adjust the performance evaluation system for local government officials to reduce the weight of GDP growth and introduce as criteria production safety, resource use, environmental factors, excess capacity, technological innovation and new debt
 
  • Language on more transparency in public finance, consolidation of budgeting, establishing national and local government asset-liability balance sheet; clarifying spending responsibility with administrative authority; de-linking spending from revenue or GDP
 
  • Expand pension coverage and raise pension levels; expand health care insurance for major sickness; consolidate rural and urban insurances; gradually raise the retirement age.
 
Land reform
Agenda: Pursuing land reform to give individual farmers property rights, or at least transferable management rights; let farmers/migrants benefit more from urbanization related rural land sales.
 
Steps/language:
  • Farmers will be given individual, tradable land use rights and can use land as collateral;
 
  • facilitate larger scale farming and modern agriculture;
 
  • the scope of land expropriation will be reduced and the procedure normalized
 
One-child policy
Steps/language: allowing couples to have two children if one of them is an only child
 
About the Author

This article is excerpted from “Alert: China,” a report by Royal Bank of Scotland and affiliated companies that was published on 15 November 2013. It has been re-edited for conciseness and clarity. ©Copyright 2013 The Royal Bank of Scotland plc and affiliated companies (RBS). All rights reserved.   

 

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