Communique reveals long-term goals for China's economy

A four-day key meeting of the 18th Central Committee of the Communist Party of China ended Tuesday with a communique revealing the Chinese leadership's long-term goals.[Special report]

The communique said the meeting has approved "a decision on major issues concerning comprehensive and far-reaching reforms." The decision, which contains many more details, is expected to be released soon.

According to the communique, "economic reform is key, and the core solution is the proper relationship between the government and the market, leaving the market to play the 'decisive' role in the allocation of resources, and the government to play a better role."

China will stick to the dominant role of public ownership, while encouraging, supporting and guiding the non-public sector, enhancing its vitality and creativity, the communique said.

Land in cities and the countryside, which can be used for construction, will be pooled together in one market, it said.

China will also lower the investment threshold, step up the development of free trade zones, and increase the opening up of inland, coastal and border areas.

Decisive results must be achieved in key sectors, and a well-developed, scientific, procedure-based and effective framework must be in place by 2020 to ensure institutions in all sectors have matured, the communique said.

Economists said the communique, as expected, was long on goals and short on details, and it clearly reiterates a progressive stance for further reforms.

Qu Hongbin, HSBC chief China economist, said the communique hints that the comprehensive reform plan, in the to-be-released decision, will likely contain at least three "positive surprises."

It will address the sensitive issue of income distribution, ensure that the judicial system at the local level is independent of local government interference, and will set up a central committee to coordinate and supervise the implementation of reforms, he said in a research note.

"All of these reform plans, combined with a medium- to long-term target of better defining the boundaries of the economy and the government, could allow for China's growth to be sustained at around 7 to 8 percent in the coming years," Qu said.

He also maintained that the disappointment was that there was no new statement pertaining to the reform of state-owned enterprises (SOEs) in China.

However, Qu said a pilot scheme on SOE reforms is expected to be unveiled in Shanghai, as reported by the media. This may include a "share incentive mechanism" as one of the test-reforms.

"We expect this practice to provide the context for a nationwide implementation in the coming years, if not months," he said.

Qu said the communique is still lacking details and quantifiable indicators, but it is important to look for forthcoming details over the next few months, and he remained optimistic.

Peng Wensheng, chief economist of China International Capital Corporation, expected the Chinese leadership to make reforms on SOEs.

One area that should get much attention, Peng said, is that the report said markets would be given a "decisive" role in allocating resources, indicating the country may take further steps to break up state monopolies and reform the SOEs.

China's previous policy statements often described markets as playing a "basic" role in allocating resources.

Although the communique did not announce any bold reform plans for SOEs, it would improve the SOEs' management system to end their dominance in non-critical sectors and ensure they adhere to modern corporate practices, Peng said.

The arrangements would benefit China's longer term economic development, but may cause uncertainties to short-term growth, he said.

Reform plans may also be rolled out to coordinate land policies for urban and rural regions and finally allow rural land transactions, he said, adding that the change would not occur in the short term.

China's rural land, collectively owned by local residents, is divided into arable land and construction land, which is used for rural housing and infrastructure.

Under current laws and regulations, Chinese farmers are not allowed to sell or lease out the plots that are allocated to them. Their land has to first be acquired by a local government before being allocated for residential, commercial or industrial development purposes.

Lu Ting, chief China economist with Bank of America Merrill Lynch, said the communique is a short announcement which sets the tone for a much longer version of the decision.

Lu said the communique clearly said China would deepen fiscal and budget reforms to bring in line fiscal revenue and fiscal responsibilities.

The communique pledged to deepen opening up and promote international corporation and competition. It said China would ease entry of investment, accelerate construction of the free trade zone (FTZ) and expand the opening up of border areas in inland China.

"We think China will use the FTZ as a test ground for reforms and to seek a bilateral investment treaty (BIT) with the U.S. and, perhaps more importantly, to participate in the Trans-Pacific Strategic Economic Partnership (TPP)," Lu said.

Kevin Lai, of Daiwa Capital Markets, said the communique "reveals reform directions in broad terms."

"What is most interesting is how the leadership treats the role of the market now. ... The market will play a 'decisive role' in allocating resources. In the past, it has referred to a 'basic role' for the market only," he said in a research note.

"The change of rhetoric seems to suggest that a consensus has been reached about deepening market-driven reforms while avoiding embracing fundamental capitalistic changes," he said.

The more "decisive" roles played by the market would involve areas such as interest-rate liberalization, moves to remove administrative barriers to private capital and other forms of financial liberalization, Lai said.

He said China's future reforms are going to be the "high-hanging grapes," which will be increasingly difficult to pick, since future reforms will be more about redistribution of income or wealth.