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Legal, Economic Reforms Important At Coming Party Session

Commentary by Caixin Editor Hu Shuli

China’s blueprint for economic reform is finally taking shape. The government has appointed a taskforce to draft the plans, ahead of the third plenary meeting of the 18th Central Committee. With the country’s economy at the crossroads, these plans are eagerly awaited.

The occasion recalls a groundbreaking plenary meeting 20 years ago. The third plenary meeting of the 14th Central Committee adopted the Decision on Issues Concerning the Establishment of the Socialist Market Economy that laid out the strategic targets and broad directions of reform. It was arguably China’s most comprehensive reform blueprint in its over three decades of opening up.

Revisiting the reasons and motivations behind this landmark decision will no doubt help leaders today to crystallize their own action plan.

There’s no denying that, of the 50 items set out in 1993, quite a few have not been achieved. These include major issues like income redistribution, and other more minor matters like the setting up of a government-people supervisory body for a social insurance fund.

Furthermore, in hindsight, some of the guiding principles of the 1993 plan were clearly inadequate. For instance, the vague limits set on the scope of macroeconomic controls have led to a micromanaging today that is anathema to such measures. The overemphasis on state-owned enterprises has also contributed to a distorted economy today in which state presence is squeezing out private enterprise.

The new round of economic reform must address these problems.

China needs three critical breakthroughs to ensure progress: to redefine the relationship between government and the market; to ensure the growth of private enterprise alongside the state sector; and to strengthen the rule of law.

The first is especially important to the country, which has yet to dismantle the many shackles of its centrally planned economy of old, even though the framework of a market economy is already in place.

According to the 1993 blueprint, macroeconomic controls involved the use of administrative, financial and fiscal measures. Through the two main tools of monetary and fiscal policies, the government would regulate demand and supply, in coordination with national production.

Unlike advanced economies, China also relies heavily on government planning and industrial policies. This overreliance is a problem. In recent years, the government has increasingly resorted to the use of industrial policies to regulate the macro economy.

Today, even project approvals, land policies and environmental standards have become government tools for market intervention. The result is market malfunction in many areas of the economy, leading to misallocation of resources and exacerbating cyclical fluctuations. Overzealous industrial planning—in the form of project approvals and land and tax incentives—is also creating overcapacity in some areas.
Thus, it is crucial the government rethink its relationship with the market and set clear limits on its scope. This is particularly important today, when the economy is slowing and the temptation for government stimulus is strong.

Second, allowing private enterprise to grow alongside the state sector is crucial to the country’s long-term economic health. There have been several attempts to further the reform in the state sector, but the reform stood still over the last decade.

Many state-owned enterprises are monopolistic companies that adopt the form but not the substance of modern management. In many areas of the economy, the state behemoths engage in anti-competitive behavior to strangle private businesses.
From the 1993 blueprint to the work report of the 18th party congress, the government has repeatedly stressed the importance of fair competition for all. But, in reality, this depends on the state sector being made to gradually exit the market and assume their rightful role as providers of public goods in industries that favor natural monopolies.

Last but not least, the government must strengthen the rule of law. Experience elsewhere shows that a market economy will usually benefit from the earlier establishment of rule of law in that society. In China, however, elements of a market economy have preceded the establishment of rule of law. The country’s legal development must now catch up, or the economy will not only stagnate but may even regress.

The rule of law, based on the protection of rights, must be the basis for Chinese society. Reform in this area must be a priority for policy makers.

It has been 35 years since China embarked on its opening up, and seven plenary meetings dealing with economic development have come and gone. Today, market reforms are again at a crossroads. There is consensus that reforms are necessary; the debate is on how to proceed. History will remember well those who lead China forward on its path to reform.