At China’s plenary meet, ‘rebalancing’ and ‘reforms’

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Sandy tracks, that have not been paved in years, snake their way through the paddy fields and lush valleys of this remote corner of southwest China.

The slightest drops of rain, villagers say, can render these roads impassable, leaving the small towns and villages of Guizhou frequently isolated - and, as a result, cut off from the rest of the country's growth story.

Earlier this year, as the new leadership took over in Beijing, Central authorities sanctioned funds to unleash a wave of construction across the poorest parts of western China, building roads, bridges and airports. In Guizhou alone, 4,000 km of roads are being constructed.

Outside Dimen, a small village of 520 households, construction workers from nearby Hunan province hurriedly wheeled crates of stones and rocks, as hammering and drilling echoed through the green valleys and rice fields.

“The new roads will change the village’s fortune,” said one Dimen resident hopefully, as he sat in the village square on a recent afternoon.

In his thirties, the villager – and his three companions – had all returned home, after they failed to land permanent jobs in nearby cities, to help their parents tend the rice fields, where farmers practice subsistence agriculture on small plots of land.

But more than the newly paved road, the future of Dimen – and that of thousands of similar villages across China – will likely rest on the outcomes of a meeting taking place this weekend more than 2,000 km away.

On Saturday, China’s top leaders – the 376 members of the Communist Party of China’s (CPC) Central Committee – will gather in a west Beijing hotel for a key meeting to push forward far-reaching economic reforms.

The meeting – the third sitting, or plenum, of the new Central Committee that came to power in November last year – has been framed by State media as being as significant as the key third plenum of 1978, which heralded China’s “opening up” and market reforms under Deng Xiaoping.

The current leader, Xi Jinping, has himself raised expectations by repeatedly invoking Deng in the months since has taken over, most notably during a trip, shortly after assuming power, to Guangdong – the same southern province from where Deng kick-started reforms.

Among the policy measures that will be discussed during a four-day, behind-closed-doors, meeting are: allowing farmers, such as those tied to their plots in Dimen, to sell their land for the first time, rather than only lease land under current rules of collective ownership; overhauling social security restrictions that deny rural residents access to social welfare benefits when they move to cities; liberalising interest rates to give households fairer returns on their savings; and considering moves to curtail the influence of State-owned Enterprises (SOEs) to allow greater competition and bring efficiency.

The first two reforms, economists say, are essential for addressing inequality between cities and the countryside, and between the prosperous coastal east and the western hinterland - inequality which is currently the widest in China’s history.

The common pressing challenge underlying all the proposed measures is taking forward the rebalancing of the Chinese economy, away from State investment-led growth, which has driven China’s growth story over the past three decades, to growth led by domestic demand, consumption and innovation.

In the villages of Guizhou, local officials are banking on a state-wide spurt in spending to drive growth, by unleashing construction projects and developing half-a-dozen tier-two cities that officials hope will drive consumption. Zhao Kezhi, the CPC chief of Guizhou, said the province saw “urbanisation” as the “solution to the problem”, with the government targeting achieving a 50 per cent urbanisation rate by 2020 to address the income inequality problem. To do so, the province is spending billions in building new semi-urban economic zones and expanding 12 tier-two cities to create “regional hubs”.

While the government hopes that urbanisation will drive growth, many economists warn that such projects may end up as bridges to nowhere – and result in worsening an already serious debt problem among local governments – without accompanying structural reforms.

The central issue, according to Michael Pettis, an economist at Peking University, is how to transfer wealth from the State sector to households. One proposed measure is liberalising interest rates, which have been kept low by the government to subsidise capital costs of State-run enterprises and manufacturers. Another measure is land reforms that would, for the first time, allow farmers to hold titles and sell their land, which is, at present, held collectively by village committees - a last vestige of China's Socialist past.

Both measures have faced opposition from special interest groups: the former from entities such as SOEs that have benefited from access to easy capital; and the latter from local governments who derive most of their revenue from land sales.

Cai Hongbin, a senior economist at Peking University, said “sweeping policy changes” are unlikely at the plenum. “The reason is this will take time,” he said. The leadership under Mr. Xi has been in office for only one year, he pointed out.

Mr. Cai said his hope was that rather than specific “policy changes”, the plenum would pave the way for “government reforms” to redefine the State’s relationship with the market, society and local governments: by allowing a greater role for the market in allocating resources, greater space for non-governmental organisations, and closer supervision on often corrupt local governments.

The challenge for Mr. Xi is that most of these ostensibly economic reform measures face imposing political obstacles, ranging from the sizeable influence still wielded by SOEs, many of which are tied to elite Party families, and the demands of dozens of other special interest groups.

“The real issue”, said Mr. Pettis, “is how to change growth built around a particular type of political structure into one dependent on a very different kind of political structure, and to do that in an orderly way in 5 or 6 years.”

“For 30 years, China was growing at 11 per cent, household wealth was growing at 3 per cent, so the State sector was clearly growing higher,” he said.

“Rebalancing means household income has to take a bigger share, and the State has to take less. For thirty years, the interests of the elite lined up with the interest of the country. For the next few years," he added, "I worry that these interests are not aligned”.