Column  Foreign Affairs and National Security  2013.11.07

Third Plenary Session of the 18th Chinese Communist Party Congress And the Chinese Economy

The Epoch Times dated October 11, 2013 reports that 6 economic issues will be the focus of the Third Plenary Session of the 18th Chinese Communist Party (CCP) Congress to be held in November. The Epoch Times is headquartered outside of mainland China and is published by Falun Gong, but it has an overall grasp of issues that help us understand them. In addition to these 6 issues, economist Yuan Xucheng, Deputy Secretary-General, China Society of Economic Reform, also adds administrative reform, but overall issues that both parties point out are not much different.
The following are the issues and their description as reported in the Epoch Times, with additional explanation from the author in brackets.

Structural Issue
Chinese economy relies on investment and, in order to raise the GDP, local governments have been increasing investment and borrowing. With the increases in the economic standard and currency circulation that led to an increase in commodity prices, the central government is forced to implement austerity. As a result, fiscal revenues of local governments have shrunk, resulting in debt obligations becoming a heavy burden, and this has in turn led to the need for revitalizing investment. The Chinese economy will repeat drastic fluctuations.

(It is common knowledge that China's economic growth heavily relies on infusion of capital and labor. It is true that currency supply has increased, with the ratio of M2 (currency plus savings) to nominal GDP surpassing 100% in mid-1990s and continuing to grow, and it is expected to reach 200% in 2013.)

As for big cities, macro-control was put in place for the past 10 years with regard to 43 housing properties, but their prices have increased 10 folds in the same period.

(宏観調控 in Chinese, macro-control in China has a unique characteristic of mixing non-economic methods. This is because automatic adjustment function via market mechanism is insufficient. When China's economy overheats and becomes chaotic, the Chinese government tries to control it by liquidating or shrinking investment projects, tightening bank credit loans, pushing for more rigorous oversight of land expropriation by the administration, putting brakes on appropriation of land for industrial parks by local governments.)

Financial reform
Because financial reform was not making progress and the economy was in critical situation, the Shanghai Free Trade Zone, whose preparation was to be initially kicked off at the Third Plenary Session, was launched on September 29. The project, backed by Premier Li Keqiang, is one of the tests for economic reform, but it is facing resistance from those with vested interests.

(It is commonly known that banks are not functioning, resulting in a shadow banking sector which is still growing. Official statistic for bad debts at Chinese banks is only 54 million yuan, but this figure is artificially small, as it does not include those for shadow banks. Some observe that the real number is 21 trillion yuan, equaling 40% of the GDP. Still, debts at shadow banks do not necessarily amount to bad debts.)

(At the Shanghai Free Trade Zone, it is explained that the banks have more freedom for setting own interest rates and for foreign currency trading, and can thus maximize their loan-deposit ratios. The details of what kind of deals are free are not yet announced, however. It is pointed out that the regulatory bodies will have to set up firewalls, in order to prevent foreign currency from freely flowing into strictly controlled domestic economy. Despite the fanfare, the inauguration for the Zone was rather modest and Commerce Minister Gao Hucheng was the only high official attending the opening ceremony.)

Land reform
Land rights are important for reform, but liberalizing the rights means taking away cash cow from the local governments, which they would resist vehemently.

(In China, as a part of infrastructure enhancement for rapid industrialization, the government promoted that farm land be turned into industrial land, and farms be modernized and operated as large scale farms, farm land surrounding large cities be diverted, and city land restrictions be eased [Deputy Director-General, Research Institute of Finance, Development Research Center, Economic Information Daily dated January 23]. On the other hand, local governments receive a large amount of "irregular" revenue via intervention in the land market. Local governments, having exclusive rights to land use decisions, impose a tax on land deals and a fee on cost, as well as depriving revenues of villagers that rightfully belong to them, resulting in villagers revolt. "Cash cow" stated above is "irregular" income that relate to land and it is reported that such income reach 50% of the total revenue for some local governments.)

Urbanization and registry reform
This reform affects interests of the privileged class. Currently, 260 million farmer mechanics are working in cities. If they are to be given the same welfare benefits as city dwellers, local governments who are already suffering from large deficits will face further fiscal pressure. Therefore, it is likely that the reform will be eventually backed away.

(Government has been denying farmers to switch to urban registry from farm village registry, but it has been aware that the system needs improvement, as farmers registered in villages working in poor city conditions is a kind of exploitation of these farmers. Implementing reform would also bring new problems, however. At present, some local governments allow farmers to switch from farm village registry to urban registry or change, but those with vested interests, as well as farmers who switched their registries, seem to be dissatisfied.)

Tax reform
It is extremely difficult to balance interests of both the central government and the local governments. Since the adoption of a separate tax system, tax revenues for the local governments have been in decline. In order to satisfy fiscal demands, local governments have been trying to increase revenues by various means.

(A separate tax system clarified tax revenues for the central government and the local governments by kinds of tax. For instance, the central government receives revenues from customs duties, while the local governments get revenues from real estate taxes. Revenues from some taxes are shared. Since the separate tax system was introduced in 1994, the tax revenues for the central government increased, in contrast to those for the local governments that decreased. This led to an allowance for "irregular" income from real estate deals.)