China's reform agenda: a victim of its own success.

Author:Lo, Chi
 
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Chinese leaders announced a sweeping reform blueprint in the so-called "Decision" policy document on November 15, 2013, after the Third Plenum of the 18th Central Committee of the Chinese Communist Party. From a strategic level, it indicates a turn to market-oriented policies for setting the future structural reform direction, including interest rate and currency liberalization, land reform, and changes in a wide range of economic, social, administrative, and judiciary issues. This has revived the world's expectation of China kick-starting another big wave of structural reforms and changing to a more responsible economic power in the future.

Optimists who are arguing for fast structural reforms, beware. If implemented quickly, the reforms prescribed by the Decision will destroy the system that has made China successful, causing unintended effects. Political reform is key to deepening structural changes. But any serious political reforms are implausible in the short term. So Chinese President Xi Jinping may be trying to strengthen Party control now in order to leverage on the current system to fight against vested interests and maximize his ability to impose economic reforms.

When fully implemented, these reforms will open up China's system for efficiency gains and significant foreign participation in its asset market. However, the blueprint is one thing; implementation is quite another. The inherent reform obstacles that Beijing's senior leaders are facing--notably the monetary stake that vested interests have built in the system, the tight-knit patronage networks at the local levels, and the entrenched resistance to changes--have not been changed by the Decision. They remain a barrier that President Xi must overcome.

There is still hope for political reform, however. It lies in President Xi's second term in 2018, when five of the seven members in the Politburo's Standing Committee will retire and be replaced. Until then, it is unrealistic to expect Beijing to implement any "big bang" reforms.

BE CAREFUL WHAT YOU ASK FOR

Within the existing framework, there are some "low-hanging fruit" reforms that can be carried out more easily than those that are entrenched in the nerve center of the political and vested interests. Some players argue that the Decision marks a turning point for China to speed up structural reforms. The answer is not yet, perhaps, and they should be careful what they ask for. If those deep changes prescribed by the Decision...

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