Implementation vital for second transition

Reform objectives and policy measures agreed at the recent Third Plenum go well beyond the economic restructuring goals that are at the center of the 12th Five-Year Plan (2011-15). China now has a more detailed and more comprehensive road map for development and reform than ever before.  [Special coverage]

It includes many non-economic objectives, including greater judiciary independence, closing the reeducation-through-labor camps, promoting social fairness and equality, relaxing family planning restrictions, and reducing the application of the death penalty. This amounts to nothing less than a plan for a second transition. The first transition, mainly focused on productivity growth, which was set in motion by the Third Plenum in December 1978 and reinforced by the Third Plenum of November 1993, has been essentially accomplished.

The need for economic restructuring to improve the sustainability of growth and create a more harmonious society was recognized over a decade ago and stood at the center of the 11th Five-Year Plan (2006-10). Little progress was made, partly because the international financial crisis that started in 2008 in the United States intervened.

To create jobs and restore growth momentum, China launched a massive stimulus program in late 2008. It was very successful in achieving those objectives, but at the expense of domestic economic rebalancing. Although the relative size of China's external surplus declined sharply, dependence for growth on investment, much of it debt-financed, increased. Fortunately, international economic circumstances are now more favorable for pursuing domestic rebalancing objectives.

It is extremely important for the world that China succeeds in its second transition. In recent years China has not only become the world's second-largest economy, largest exporter and largest player in many commodity markets, but also the world's most important growth engine. However, the big question is whether the ambitious reform plans agreed last week can be achieved without significant State-owned enterprise reform.