China’s Third Plenum: Reform is Coming

This past week, Washington was gripped with President Obama’s surprise announcement that you can really keep your health care plan, period. Halfway across the world, China and China-watchers were gripped with another set of announcements:

The results of the Third Plenum of the 18^th Central Committee of the Chinese Communist Party (CCP).

So What in the World is a “Third Plenum”?

The Plenary Sessions are meetings of the Central Committee, a subgroup of the National Congress. The Third Plenary Session (“Third Plenum”), which occurs once every five years, is the meeting during which leaders introduce new economic and political reforms. This year’s Third Plenum opened one week ago (Nov 9) and ended last Tuesday (Nov 12).

(For more details, here’s a great explanation of the Plenary Sessions, complete with infographic.)

To underscore the importance of this past week, it’s important to understand what’s happened during prior Third Plenums (Plena?):

• In the 1978 Third Plenum, Chairman Deng Xiaoping consolidated power, introduced radical economic reforms that propelled China’s remarkable economic growth, and implicitly attacked the cult of Mao, repudiating the Cultural Revolution.
• In the 1993 Third Plenum, Premier Zhu Rongqi announced the socialist market economy (no contradiction there) and loosened China’s state-owned sector.

So it’s no surprise that analysts excitedly awaited the results of this year’s Third Plenum, especially notable for being timed with the first year of Chairman Xi Jinping’s rule.

They Were Disappointed…Prematurely?

Shortly following the conclusion of the Third Plenum, the CCP released a vaguely-worded communiqué through Xinhua, its state news agency. It was immediately attacked for being heavy on jargon and short on specifics, tempering its promises of economic and political reforms with repeated nods to the “leading role of the state-owned economy”.

Notably, what the communiqué did not mention included:

• No mention of financial sector liberalization (the Swattie in me wonders if this is necessarily a bad thing)
• No push for further urbanization (likely because this would require overhauling the age-old hukou system)
• No indication that President Xi would take on the state-owned enterprises (which dominate China’s oil, aluminum, coal, banking, telecommunications, electricity, transportation and other fields)

Immediately following the release of the vague communiqué, global stocks dipped, headlines called the Third Plenum “disappointing” and “a dud”, and analysts called previously optimistic expectations “sanguine and naïve”, claiming they overestimated Xi and Beijing’s actual power over the rest of the country.

But in the best post-communique analysis I’ve seen, Zachary Keck at The Diplomat argues that disappointment with the Third Plenum is premature. And precisely because it lays the groundwork for helping Xi consolidate enough power to drive through subsequent reforms.

Specifically, the communiqué created two new political bodies that helps Xi consolidate power:

1. A new state security committee, analogous to the U.S.’s National Security Council. As Keck argues, this new committee is likely meant to “ensure stability as the reforms progress”, which bodes poorly for human rights, but signals the CCP is serious about implementing reforms.
2. A central leading group reporting directly to top leadership, rather than to the government. This would assist Xi in pushing through reforms by sidestepping the bureaucratic red tape—precisely addressing the problem of limited central power that Beijing faces.

Hot off the Presses: A Blueprint for Reform

And right on cue, the CCP released a new blueprint for reform yesterday, with many more details on specific reforms. These include:

1. Loosening of the one-child policy. Urban parents can now have two children if either spouse is an only child (previously, both had to be only children).
2. Abolishment of labor camps, which have been used to imprison people for up to four years without formal arrest or trial. (Unclear how heavily this will be enforced in practice.)
3. Strengthened rural property rights, allowing farmers to gain more profit from land sales to local governments (hopefully resulting in fewer of these).
4. Loosening of the hukou system, which may eventually alleviate social and health care access issues for migrants.
5. Economic liberalization and reforms. A system for insuring back deposits, fewer restrictions on offshore securities investments and M&As, looser pricing controls for energy, water, and telecommunications, and other financial changes I’m not well-versed enough to understand.
6. Environmental protection-based growth incentives. Specifically, local governments wouldn’t be judged on economic performance alone, but also on environmental protection efforts. That’s cool.

And finally…accelerated health reform. Overhaul of public hospital system, more community hospitals, changes in doc pay, and catastrophic health insurance. I hope to explore the details more in a later post, but for now, this great interview with Shanghai’s former mayor Shen Xiaoming about health reform in Shanghai may provide some indication of where China’s health system is headed.