China at a Crossroads
Expectations are high that President Xi Jinping and Premier Li Keqiang, nearly one year into their likely 10-year reign, will unveil reform policies that will define China’s social and economic development over the next decade and beyond. After the proposals are made public, the new leaders must prove that they can implement substantial change without derailing the growth of the world’s second-largest economy.
In our view, the announcements expected at the Third Plenary Session of the 18th Communist Party Central Committee meeting on November 9–11 may be as historically significant as those made at a similar session in 1993, when Deng Xiaoping, then party leader, launched the “socialist market economy” campaign. The anticipated announcements also reflect the monumental economic growth that followed Deng’s paradigm change and its side effects—pollution, food safety, inequality, social welfare issues and corruption.
Simply put, the Xi-Li administration’s task is rebalancing the economy—making a transition from an investment-driven growth model to a more sustainable, environment-friendly, socially stabilizing one. But it’s easier said than done. Since taking office, the administration has introduced a number of steps to rein in a frenzied property market, rampant growth in shadow banking and extravagant spending by government officials. Each has caused noticeable trembles in financial markets. It would also be naive to not expect resistance from vested interests.
So, the focus is on how deep-cutting the reforms might be, and how they will be balanced with the need to keep the country’s economy growing at an acceptable pace. The State Council Development Research Center, China’s top policy think tank, recently revealed its reform proposals, and these are expected to be the basis of the anticipated policy announcements.
The proposals are dubbed “3-8-3,” reflecting their three key reform concepts, eight major reform areas and three key thresholds for a breakthrough (Display). They cover: changes to state-owned enterprises and government controls to break the monopoly in key strategic areas; tax reforms, including the introduction of a property tax and changes to the value-added tax to achieve a degree of fiscal decentralization; a land reform and an overhaul of the household registration system to promote urbanization; and the establishment of a national social pension system. The proposals also champion the internationalization of the renminbi, which implies an eventual liberalization of current and capital accounts, flexible exchange rates and a market-based interest-rate structure built around an independent monetary policy.
How much of this will actually get done? Even assuming a 50%–70% success rate, the reforms will induce many positive changes over the long term. On the other hand, with demographic shifts likely to start creating significant headwinds for growth by the end of the decade, a failure to carry out necessary reform may mean that China would be mired in what is called the “middle income trap” in development economics when the next generation of leaders takes over the helm.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.
Anthony Chan is Asian Sovereign Strategist—Global Economic Research at AllianceBernstein.