US-China challenges beyond 2015

The Chinese reforms: ensuring upside potential in 2014

When the budget deal was announced in Washington, the annual Central Economic Work Conference began in Beijing, only a month after the Chinese leadership officially launched the reform plans during the Party’s Third Plenum.

During the Chinese leadership transition, most analysts in the West argued that reformers had lost in Beijing. In reality, China opted for tough leaders who could implement broad reforms. In particular, President Xi Jinping and Premier Li Keqiang are decisive economic reformers. If the Third Plenum outlined the official broad contours of China’s economic policies for 5-10 years ahead, the Work Conference shall determine the objectives in the near-term.

At the Plenum, the reform proposals focused on tripartite reforms comprising the market, government and corporations. The eight core sectors include finance, taxation, state assets, social welfare, land, foreign investment, innovation and good governance. Further, the reform blueprint seeks to relax control over market access, establish a basic social security package and allow sales of collectively-owned rural land. With new urbanization, the old household registration system (hukou), which continues to discourage migration, will be gradually phased out.

The reform plans are moving in parallel with increasing financial deregulation, which, in turn, is supported by the recent launch of Shanghai’s free-trade zone (FTZ). While the FTZ advocates seek to make the renminbi fully convertible in the next few years, Beijing’s reformers hope to make the Chinese currency into a major international currency and a reserve currency, in the next few years.

The Work Conference, too, reflects the ongoing shift away from extensive growth, which relied on investments and net exports for three long decades, toward intensive growth, which will be built on consumption, innovation and sustainability in the medium-term. However, even the new reforms are predicated on adequate economic growth, which is deemed to require 7.5 percent growth in the next two years.

Nonetheless, Premier Li Keqiang’s 7 percent bottom-line target in 2014 is likely to require stronger than anticipated credit and investment growth.