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History suggests China plenum reforms will be limited

Bill Powell
Friday, 8 Nov 2013 | 3:43 AM ET

SHANGHAI, Nov 8 (Reuters) - If history is any guide, the next wave of Chinese reform is likely to be smaller and slower than before.

As President Xi Jinping and other Communist Party leaders gather at the weekend for a landmark conclave, foreign investors hoping that wide-ranging reforms will follow should consider that previous such meetings have shown a pattern of diminishing returns.

The four-day closed door meeting of the 205-member Central Committee of the Communist Party, officially called the Third Plenum of the 18th Party Congress, concludes on Tuesday.

At the end, the plenum will lay out the new administration's agenda - a policy document that has traditionally served as a springboard for change.

But the history of modern-era plenums suggests China is traveling a path familiar to other developing nations: as it grows richer, interest groups become more entrenched, making major reform more difficult, even in an authoritarian system.

Investors who have accepted the conventional view that major reforms are coming in the world's second-largest economy "may be due for a shock", said Patrick Chovanec, chief strategist at Silvercrest Asset Management, a New York-based hedge fund.

"None of the evidence so far suggests there's much appetite for game-changing market reform."

Past plenums have been pivotal in China, never more so than in December 1978, when newly installed leader Deng Xiaoping changed the course of history. At that meeting, he ratified a decision to open up China's then impoverished and isolated economy.

Within a month, China had approved the first foreign investment project in the mainland since the Communist Party came to power in 1949. And within four months, Guangdong province party chief Xi Zhongxun - a close ally and the father of the current president - had presented Deng with an ambitious plan to open up the southern region to trade and foreign investment.

Politically Deng was unchallenged. He had outflanked Hua Guofeng as top leader, China was economically bereft, and ideological opposition was muted, thanks to public revulsion of the decade-long Cultural Revolution, from which the country had just emerged.

Fifteen years later, as the first flush of heady growth began to run out of steam and foreign investment slowed in the wake of the Tiananmen Square massacre, Jiang Zemin presided over a third plenum in 1993. The reforms that followed this meeting were substantial, but not as dramatic nor as quick.

SLOWING CHANGE

Critical to the next stage of reform was the remaking of state owned enterprises (SOEs), which were then still largely economic dinosaurs, responsible for the health care and housing of their employees and the education of those employees' children.

At the 1993 plenum, the party pledged to reform SOEs, and to enhance the market's role - not the government's - in allocating resources.

Those were the right words, but there was resistance from the companies and local governments. Nonetheless, aided by tough minded Vice Premier Zhu Rongji, later appointed premier, the Jiang government forced through massive change in the state owned sector.

Liu Yiming, then a manager at giant state-owned Angang Steel, said Zhu was matter of fact in his approach to reform.

He cited a meeting with managers from state-owned firms as well as local officials in northeastern Liaoning province, China's rust belt, where Zhu said the companies had three years to overhaul their operations, and the government now had to bear responsibility for health care and education.

"What if we can't get all that done that fast," someone asked him, recalled Liu.

"Then we'll find people who can," Zhu replied.

That sort of resolve, many economists believe, is necessary again now to rein in the power of state-owned enterprises, curb credit growth and liberalise the financial sector over the objections of state-owned banks.

In 2003, at the third plenum of Jiang's successor Hu Jintao, big state-owned companies helped block reforms - including a "rebalancing" of the economy and greater environmental protection - and they are richer and more powerful today than they were then, many economists say.

"The question is whether powerful vested interests enriched by the current system are sufficiently entrenched to continue blocking the way forward", said James McGregor, former head of the American Chamber of Commerce in China.

"Over the last decade, monopolies and powerful state-owned industrial groups have all begun to exert an obvious impact on the formulation of policy."

Some of those arguing in favour of a new wave of reform point to the fact that a few of Zhu Rongji's proteges occupy key positions in the new government.

Most prominent is Wang Qishan, now the anti-corruption czar who for last decade handled international trade and finance as a vice premier. Another is Finance Minister Lou Jiwei, who helped Zhu force through significant fiscal reform in the mid-1990s.

However determined key aides may be, the tone, analysts say, must be set at the top.

With Xi still in the process of consolidating power, and former presidents Jiang and Hu looking over his shoulder, political analysts believe significant political reform is off the table, and game changing economic reform unlikely.

"They know there needs to be change, and the policy document coming out of the plenum will cast a wide net," said a Chinese academic who advises the government and has been briefed on the agenda at the plenum. The academic declined to be identified due to the sensitivity of the subject.

"Slow, steady reform over the next several years is likely to be the best case outcome."

(Editing by Raju Gopalakrishnan)