China Details Ambitious Reform Plan
BEIJING—A few days after a vaguely worded document had cast doubt around Xi Jinping's commitment to reform, China's top leader laid out a sweeping plan to remake the Chinese economy that largely erased some of those doubts.
Friday's 20-page document amounted to a blueprint for reform. It pledged to open the financial sector and relax curbs on other sectors closed to investors, allow prices of natural resources to reflect market demand and put more money in the pockets of rural residents who were often left out of the boom of the last decade.
In the document, designed to fill in the gaps of the communiqué released on Tuesday after a meeting of top Communist party leaders, leaders also relaxed China's one-child policy and signaled that they plan to dismantle the country's controversial labor-camp network.
The earlier document, loaded with party jargon and contradictory at points, had led many analysts and ordinary Chinese to wonder whether the leaders would take any decisive steps to revamp the economy, and whether Mr. Xi, who had ramped up expectations for comprehensive reform during his first year in office, had been stymied by powerful interests opposing change.
The far more ambitious plan released Friday night, on the one-year anniversary of Mr. Xi's ascension, showed him, at least on economic issues, clearly siding with reformist elements within the party.
"This reverses the disappointment markets felt earlier in the week," said economist Mark Williams, a China analyst at Capital Economics in London.
Mr. Xi also made clear he has added the economy to his power base after already tightening his hold on the military and domestic-security apparatus. He was listed as the author of an explanation accompanying Friday's reform plan, without any mention of Premier Li Keqiang, who is in charge of the day-to-day running of the economy and until now had been seen as the main go-to leader on the economic front.
Friday's document proposed a variety of experiments, including putting together markets for farmers to swap land, imposing property taxes more broadly as a way to restrain rapidly escalating property prices, creating an intellectual-property court and expanding carbon-trading exchanges to more cities.
The test now for Mr. Xi will be how to implement the plan's goals, including whether they will be introduced in coming months or more gradually.
The leadership is likely to face resistance ranging from local governments to state enterprises and the bureaucracies that oversee them. Many of the goals adopted by China's previous leadership, under former President Hu Jintao, were never completed.
"The direction is significant," said U.S. Treasury Secretary Jacob Lew, who met Mr. Xi and other top leaders on Friday and commented before the plan was released. "But the character and the pace of change matters."
The document also calls for easing China's notorious one-child policy so families in which one parent is an only child could have a second kid. Along with being criticized as inhumane, in recent years the one-child policy has deepened China's demographic problem: The working-age population is beginning to decline, putting at risk China's advantage as a low-cost manufacturer, as a tight labor market pushes up wages, before the country has made the transition to higher-value work. Japan's long slump beginning in the 1990s occurred after a similar dip in demographics, though Japan was far wealthier at the time than China is currently and was able to absorb the slowdown in growth.
"Big questions remain about how and when this will be implemented," said Mr. Williams of Capital Economics. "But if we're judging by what's in the document itself, it's a big step forward."
One of the drafters of the policy blueprint said it represents a break from the past 20 years because it emphasizes the need to use markets to limit the government's role in the economy. In an interview with People's Daily, the party's flagship newspaper, Yang Weimin, deputy director of an economic committee that advises top party leaders, said that the lack of reliance on markets produced many of China's current problems.
"The core issue is the government directly allocates too many resources and there's too much unreasonable interference. Overcapacity, the urban disease, too much occupation of farm land, local debt risks, environmental destruction are all connected to excessive government interference to a very great degree," Mr. Yang was quoted as saying.
Still, the document leaves undisturbed many of the foundations of China's government power over the economy, including the collective ownership of land and party control over the appointment of top management of Chinese state-owned giants. It looks to make changes to parts of the system that are seen as inefficient, as a way to assure growth in the future.
In some ways, the plan would stiffen state control.
A national-security committee, announced Tuesday, would largely focus on domestic issues, according to Friday's document. The blueprint said a new mechanism is needed so that "contradictions can be defused"—an apparent reference to the large numbers of protests, strikes and other mass civil disturbances common in China. "A robust system to manage sudden occurrences on the Internet," is also needed, the plans said, likely referring to how quickly political and social discussions spread over social media. The party has directed a harsh recent clampdown on online commentary.
The country will "abolish" the system of re-education through labor—part of what the official Xinhua news agency said was an effort "to improve human rights and judicial practices." Under the system, which has been in place since 1957, police are allowed to imprison people in labor camps for up to four years without formal arrest or trial. Ostensibly set up as a way to keep repeat petty criminals from clogging the court system, in practice it has been used to jail petitioners, members of the outlawed Falun Gong spiritual movement and others regarded as politically problematic.
Over the past 30 years, China's economy has grown at an average of about 10% a year, a pace of growth unmatched by any other country. That has lifted hundreds of millions out of poverty and moved China, which has a GDP of about $6,600 per person, into the ranks of what the World Bank dubs "middle-income countries." But very few places—South Korea, Singapore and Taiwan, among them—have risen from poverty to wealth, and China's leaders have long worried that the country would get stuck in what is known as "the middle income trap."
The blueprint is aimed at building a firmer foundation for growth than China's traditional dependence on exports abroad and heavy government investment at home. The plan calls for a heavier reliance on China's already large domestic economy and a rapid buildup of service industries, which generate greater employment than the capital-intensive steel, aluminum and other industries where government investment has traditionally been targeted.
As part of that transition, China wants to create private banks and other financial institutions that would lend to smaller firms that are often overlooked by China's largest state-owned banks. "Under strict regulatory oversight, [China would] permit private capital to set up small and medium-sized banks and other financial institutions," the blueprint says.
To accomplish that goal, China would speed the liberalization of its financial sector, including the introduction of a bank-deposit insurance and allowing banks to set interest rates for deposits. China would also ease its controls over capital inflows and outflows. All those moves are aimed, in part, at helping private financial institutions compete with larger state-owned ones—a goal of China central bank Gov. Zhou Xiaochuan—and boost lending to smaller, innovative firms.
The plan looks for ways to improve the livelihood of China's 650 million rural residents, whose incomes lag well behind those of urban China. For those that remain on the farm, the plan would give them greater property rights and allow them to mortgage their properties. It also envisions experiments in allowing farmers to sell their land.
Hundreds of millions of Chinese farmers also have migrated to Chinese cities for work but have been disadvantaged there because they lack the residence permit needed to get pension, medical and education benefits similar to those of urban residents. The migrants are under pressure to save whatever they earn in case family members get ill and they have big expenses, which prevents them from contributing more to consumer spending.
The plan would give ease migrants ability to get residence permits, called
hukou, in smaller and medium-size cities—though it would still attempt to strictly control their movement to China's largest cities. That's partly because China's planners fear a huge influx could create slums and partly because cities resist having to pay additional money in social benefits.
To address that issue, the plan says the central government—which receives the bulk of tax receipts—would have greater responsibility to cover social spending. Dividends paid by state-owned companies, which include some of China's largest firms, would increase to 30% by 2020, the plan says, from the current 5% to 15%, providing another kitty.
Lawrence Wang, a managing director at Primavera Capital Group in Beijing, which invests in private mainland firms, said that agriculture and land reform are good drivers of long-term growth in China. China needed to introduce these kind of reforms in order "for investors not to lose hope in its long-term growth strategy," he said.
—Grace Zhu, Yang Jie and Chao Deng contributed to this article.
