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New reforms gather momentum in China

Written by Zhenbo Hou

Three quick points on decisions by the third plenum of the eighteenth congress of the Chinese Communist Party

The third plenum of the Chinese Communist Party (CCP)’s eighteenth party congress set the agenda for next phase of reform of the world’s second largest economy and 20% of the world population. Here I want to highlight three issues that are of global interest.

End of the one-child policy: correcting aging demographics

According to the spokesperson of the National Health and Family Planning Commission, China’s population has been reduced by almost 400 million as a result of the introduction of the one-child policy in the late 1970s. Despite its controversies, the population dependency ratio in China fell dramatically due to a falling fertility rate: 1.6 according to current UN estimates, which is lower than the UK and the US. However, to offset China’s aging population and tackle a wide number of social challenges, including the skewed sex ratio and parents who have lost their only child due to illness and accidents, the party has finally given the green light to allow the decades-old policy to relax. Significantly, this is going to fundamentally alter some of previous growth trajectory assumptions based on an aging demographic forecast  by increasing labour supply in the long run. On the other hand, the relaxation of the one-child policy could increase pressure on the already delicate and fragile environment and natural resource supply.

Eventual abolishment of the household registration system: let urbanisation continue

The household registration system in China creates a dual track economy that discourages rural–urban migration. Such dichotomy is deemed unfair, as city dwellers enjoy the entitlements of better schools, hospitals and other social safety nets. But a large part of the Chinese economic success in the last two decades has been its ability to absorb the rural labour surplus into large cities. This large wave of migrant workers (estimated at 262 million at the end of 2012) are now determined to become city dwellers but not yet entitled to social safety nets and public services, which can be a potential source of social unrest. Nevertheless, granting migrant workers the right to stay in the cities immediately could lead to even more of an influx of rural villagers to the city seeking for a better life, and therefore adding more pressure to much stressed public services. A step-by-step approach could be a compromise in the sense that it will allow a rural population to urbanise in the smaller cities and towns in order to lift the pressure from the mega metropolises. This would mean a new wave of urbanisation taking place in China for the next 10 years with hundreds of millions of villagers becoming city dwellers, which is going to have huge economic, social and environmental impacts.

The market will play a decisive role in setting prices: let the invisible hand do its job

Up to 30% of all secondary and tertiary assets and as much as 50% of the industrial assets in China are still controlled by the state through State Owned Enterprises (SOEs). Many of them are the de facto oligopolies or sometimes monopolies of certain industries, but the latest reform agenda made it clear last week that it intends to allow more competition in these sectors (water, oil, natural gas, electricity, transport and telecommunications), by letting the market play a ‘decisive’ rather than a ‘basic’ role in the allocation of resources. In practice, this implies breaking up the states’ monopoly on industries by lowering the barriers to entry for private capital entering the traditionally state-dominated sectors of the economy such as finance, where privately owned banks will be allowed to operate and compete with state-owned financial institutions. While one wishes that the threat of entry will result lower in utility prices for consumers, one also needs to remember similar market-orientated, liberalising attempts in education and health sectors in the 1990s were largely controversial.

China is the largest out of the BRICS economies and now it is the first to map out its policy agenda for the coming decade. Stock markets around the world reacted favourably to China’s latest blueprint for economic reforms, with America’s Standard and Poor’s 500 surpassing 1800 and the Dow Jones surpassing 16,000 at the start of the first day of trading after China launched its reform agenda: one of the best performances by US stocks in years. If China successfully implements the reform agenda set out in this latest third plenum, it will accelerate the pace in its transformation into a more consumption-led, greener and innovative market economy, which is all going to have significant spill-over effects internationally: exciting times ahead.