Xi’s 3rd Plenum of the 18th Central Committee

November 9, 2013

November 9 begins a major conference of Chinese leaders, with focus on reform. The world of economics followers is focused on this conference, to determine what changes will truly emerge.

The Economist, a rather neoliberal publication, argues largely for more liberalization: less protection and support for State Owned Enterprises (SOE’s), ideally privatize the remainder of them (still representing more than 25% of China’s GDP); further liberalize interest rates, exchange rates, and capital flows (“Go on, bet the farm,” Nov 2, 2013). This focus fails to recognize that the controls China exercised over its economy are the primary reason for China’s extraordinary success across the last 35 years. What other major economy avoided every financial crisis across that period of time? As one (major) example, if the free hand of financial capitalists had been at play in Chinese capital and financial markets across the time of the E Asian or the 2008 World financial crises, without doubt China would have fallen prey to the same damage as did its SE Asian neighbors in 1997 or the US and the rest of the world in 2008.

However, The Economist is right to identify land reform as a major area needing significant reform. Peasants in the countryside are not allowed to own or sell the land they farm, and the land which is useful for further expanding China’s industrial and services economy or its infrastructure, is frequently appropriated by local governments and sold off to developers at bargain prices. This is the main source of revenue to local governments, since the income tax system is very weak and there are no property taxes as a result of no land ownership. The current system of land sales is also considered by many to be the largest factor leading to corruption between local officials and real estate developers. Peasants have essentially no rights of preventing what we know in the West as eminent domain–which in the West involves a difficult labyrinth for authorities to navigate in order to take your land–and a good chance for you to get fair compensation.

Solving this problem will be slow and painful. A property tax will be needed to provide a replacement source of revenue for the local governments, which have been asked to shoulder an increasing share of the expense burden of the range of services to be provided by governments. The federal government will probably have to take some of that burden back, and the property tax system will undoubtedly take years to be brought to a level of effectiveness. Much of the land has not been properly mapped and there will be much controversy as to who gets the benefit.

Another key area is the need to continue progress toward equivalency in the rights of holders of urban and rural “houkou’s.” The latter include about 300 million who moved to the cities to work in factories, but who are denied equivalent access to health care and to education for their children, as well as other social services. Some city governments claim they cannot find the revenue to meet those needs.

China’s level of corruption and inequality are major concerns. It’s not clear whether either is increasing across the last few years, but it is very clear to Chinese leadership that both have risen rapidly across the reform period (since 1980) to very high levels, and are the focus of increasing protests in China.

Other major problems China must address include water, perhaps the greatest economic sustainability challenge, but also pollution and the need to continue progress to move the economy to reduced reliance on exports and greater reliance on internal consumption.

I do not agree that the problem loans of the state owned banks will result in a financial crisis. China has bailed out the banks one way or another in periods of past excess and has the capacity to do so again.

China is likely to make its way through these challenges.

One reason is that China has the type of government and institutional system that can direct resources where it needs them, without the interference of democratic processes, such as we have seen in the US or India. Admittedly, such powers are diminished by China’s accession to the WTO with the attendant acceptance of many Washington Consensus liberalizations. Also, there is clear evidence that the growth of entrenched wealth interests in China provides significant resistance to any form of redistribution.

Nevertheless, we must remember that those who have forecasted the demise of China since 1980 have been consistently proven wrong–and careful analysis suggests there are possible solutions to all these problems. Steady and gradual progress is what we hope for–not overnight miracles.

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