TOKYO Nov 4 The message from Beijing could not
be clearer: China needs to shift to a more balanced economy that
is socially and environmentally sustainable.
That was the conclusion of a key Communist Party meeting a
decade ago, yet what followed was more of the same: rapid
investment-led expansion, which turned China into the world's
no.2 economy, but left it laden with debt, environmental damage
and excess capacity.
Fast forward to 2013 and China's new leadership is again
promising more harmonious development and the question is how to
tell whether, this time, it is for real.
One encouraging sign suggesting that President Xi Jinping,
Premier Li Keqiang and their team mean business is their greater
tolerance for slower economic growth while they carry out
reforms. After three decades of double-digit rises in GDP each
year, the leaders have pencilled in 7.5 percent for 2013 - the
weakest pace since the late 1990s.
"Since the reforms of the late 1970s, leaders have always
without exception said that the growth rate is the first
priority," said Zhao Xijun, deputy head of the Finance and
Securities Institute at Renmin University in Beijing.
"The new leaders don't say they don't pay attention to
growth, but the new priority is the stability of growth rather
than a high growth rate."
The new approach was evident earlier this year when
investors fretted the economy may be slowing down too much.
Rather than adopting the sort of massive economic stimulus of
the past, Beijing announced small-scale and targeted measures to
support economic activity.
Chinese leaders have repeatedly said China needs to wean
itself off a reliance on investment and exports, which in parts
of the country have led to industrial overcapacity and
pollution, and rely more on services and consumption, more akin
to the developed economies of the West.
To do that means encouraging tens of millions of Chinese to
move to cities to live while creating a social safety net and
laws, particularly on land ownership, that will give them the
confidence to do so.
The ultimate test of the new team's appetite for reform will
be its actions, but the four-day third plenary session of the
Communist Party's leadership starting on Saturday will offer
some early clues.
Such meetings have served in the past as launch pads for
major economic reforms like those unveiled in 1994 that paved
the way for China's World Trade Organization membership, though
some, such as the one a decade ago, failed to deliver.
By nature, the pronouncements are broad and often
deliberately cryptic, but China watchers believe the tone and
level of detail can reveal where the policy focus will be.
"For example, the state owned enterprises' reform will be
touched on, but it will probably be in very general language and
similar to one used before," said Haibin Zhu, chief China
economist with JPMorgan in Hong Kong.
"But in some key areas, like fiscal or land reform they will
be using more detailed language."
In the end, what will matter more is what the authorities do
in the next six to 12 months. General expectations are that the
follow-up will not be as dramatic as in 1994, but also that it
will not be a non-event like a decade ago.
The consensus view in Beijing is that the authorities are
not ready to take on state-owned giants that dominate sectors
such as finance or energy or to let the struggling ones fail.
The focus therefore will be on the rest of the agenda:
financial, fiscal, land and government administration reforms,
pricing of resources, changes to social security and opening
protected sectors to private and foreign competition.
All are seen contributing in one form or another to China's
push towards more private investment, consumption, services and
high-value manufacturing, so any progress there would be welcome
by investors and economists.
"Many of these things hang together and you can't really go
the full length on one without another, so any significant step
on any of these will be welcome," Markus Rodlauer, deputy head
of the International Monetary Fund's Asia Pacific Division in
Washington, told Reuters.
What few seem to be advocating is for Beijing to break with
its gradual, cautious approach.
"In a way, a gradual move on all of those (reforms) is what
will in the end deliver," Rodlauer, who heads the Fund's China
mission, said. "China has been well served by its strategy of
gradual, careful reforms and does not need nor should it venture
suddenly to implement Big Bang reforms."
Of all reforms, a financial overhaul is considered low
hanging fruit. Markets and the currency are closely controlled
and capital movements in and out of the country are restricted.
Driven by the central bank's governor, Zhou Xiaochuan, the
gradual move towards market-driven interest and exchange rates
and capital flows liberalisation is already under way and there
is a clear roadmap.
In the least, investors expect to see a further broadening
of the yuan's trading band next year and the establishment of a
deposit insurance scheme - a prelude to a gradual freeing up of
deposit rates and full liberalisation of interest rates.
"If we don't see anything on financial reform in 2014, that
will be a very big disappointment," said JPMorgan's Zhu.
On the fiscal front, economists and investors will look for
steps to share more evenly revenues and expenditure between
central and local governments and the expansion of the use of
value added tax in the services sector. Local governments now
get about half of tax and other revenues, but are responsible
for more than 80 percent of public spending.
Economists and observers will also look for progress towards
a bilateral investment treaty with Washington and a similar pact
with the European Union as proof of Beijing's intention to
further open up its economy.
Some also expect to see land and residence registration
reforms tested in some areas, translated into a nationwide
policy that would support China's stated goal to boost its urban
By contrast, a proliferation of pilot schemes, such as the
Shanghai Free Trade Zone trumpeted as a laboratory for sweeping
financial market reforms, could signal a lack of political
consensus to roll out the changes on a national scale.
Economists say some caution is understandable given many of
the reforms mean handing over controls to market forces and
coming months will show how quickly the authorities want to go.
But given no one knows how much time China has before its
debt pile up, industrial overcapacity, environmental degradation
and social tensions prove hard to control, erring too much on
the safe side may be risky too.
"We don't know how much time Beijing has and we don't know
whether the incremental approach they've used in the past is
still possible," says Gudrun Wacker, a China policy specialist
at German Institute for International and Security Affairs, a
Berlin-based think tank.
"I believe they will spend the next five years trying to
manage the problems and not do anything drastic, but it's like
reading from tea leaves."