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PREVIEW-China leaders to reveal reform credentials in special meeting

Kevin Yao
Wednesday, 6 Nov 2013 | 3:59 PM ET

BEIJING, Nov 7 (Reuters) - Chinese leaders will start a four-day secret meeting on Saturday to set a reform agenda for the next decade as they try to steer the giant economy towards more sustainable growth after three decades of breakneck expansion.

President Xi Jinping and Premier Li Keqiang must unleash new growth drivers as the world's second-largest economy loses steam burdened by industrial overcapacity, piles of debt and soaring house prices.

The meeting will show just how committed the new leadership is to reform after formally coming to power in March.

Economic reforms will dominate the closed-door meeting of the 205-member Central Committee of China's ruling Communist Party. Little if any news will be released during the secret gathering, although traditionally official news agency Xinhua releases a long dispatch on the last day.

Analysts said some social and political issues could be tackled, but Western-style political reform is not on the agenda.

Yu Zhengsheng, the fourth-ranked member in the elite Politburo Standing Committee of the Communist Party, said last month the meeting would deliver "unprecedented" economic and societal reforms.

Analysts caution against high expectations as stability remains the watchword for the leadership, even amid media reports top policymakers could take bold steps to deal with entrenched vested interests, such as state monopolies.

The government has pledged to allow market forces to play a bigger role in setting the price of capital, energy and land, and to cut red-tape.

That suggests the biggest changes may be fresh measures to free up interest rates and fiscal changes to allow local governments to manage their debt better and move away from a reliance on land sales for revenues.

The meeting may also decide to loosen the household registration system, which prevents migrant workers and their families from getting access to education and social welfare outside of their home villages. The system is seen as an impediment to persuading more people to live in urban areas, a trend the government wants to encourage to boost consumption.

The leaders may also push land reforms to allow farmers to sell land when they leave their villages. Currently, they cannot sell their land freely and many do not leave their farms for fear it will be grabbed by local governments for development.

"Reforms will speed up but won't be very quick," said Xu Hongcai, senior economist at China Centre for International Economic Exchanges (CCIEE), a government think-tank in Beijing.

"All the reforms are intertwined and it's hard for one to go forward very quickly."

Historically, third plenums in China have served as a springboard for key economic reforms. New leaderships usually spend the first few months in office getting familiar with issues, building consensus before unveiling policy initiatives.

Former leader Deng Xiaoping launched historic reforms to open the economy to the outside world at a third plenum in 1978. It was followed by a third plenum in 1993 that endorsed the "socialist" market economy, paving the way for sweeping reforms spearheaded by the-then Premier Zhu Rongji, which led to China's entry into the World Trade Organization.

But the third plenum under Hu Jintao and Wen Jiabao - Xi and Li's predecessors - in 2003 failed to yield key reforms. In 2008, they unveiled a 4 trillion yuan ($656 billion) stimulus package, which fuelled a property frenzy and saddled local governments with over 10 trillion yuan in debt that the economy is still trying to absorb today.

HIGH STAKES

Beijing has pledged to steer the economy away from a dependence on investment and exports to one driven more by consumption, services and innovation, which they consider more sustainable.

Chinese leaders are acutely aware of what is at stake as years of high growth, based largely on manufacturing, come to an end. Having been the factory to the world, they want to avoid the so-called middle-income trap, where wealth creation stagnates as market share is lost to lower-cost competitors and achieving high-income status stays out of reach.

The World Bank says China's per capita GDP was $6,188 last year, compared with $22,590 in South Korea, $36,796 in Hong Kong and $51,709 in Singapore - countries that avoided the middle-income trap.

"Market power may have more influence on reform. If you don't want to reform the system, then you won't be able to compete in the global market," said Zhao Xijun, deputy head of the Finance and Securities Institute at Renmin University in Beijing.

China needs average annual economic growth of 7 percent to reach its goal of doubling its 2010 per capita GDP by 2020. Li said this week China needs growth of 7.2 percent to keep a lid on unemployment.

China's economy is sagging towards its slackest pace of expansion in 23 years this year, at 7.5 percent, reflecting sluggish exports growth and a deliberate attempt to slow activity down so Beijing can carry out economic changes.

There are growing signs that Beijing may take some steps to clip the wings of state corporate giants, whose dominance was strengthened at the cost of private firms by Beijing's forceful response to the global financial crisis.

The official China Securities Journal said last week that Chinese leaders could discuss increased supervision for state-owned firms and the break-up of some monopolies to encourage competition at the plenum.

"State firm reforms will come sooner or later. The problems will get bigger if you don't deal with them now," said Xu at CCIEE. ($1=6.0968 yuan)

(Reporting by Kevin Yao: Editing by Neil Fullick)