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China girds to open sectors to foreign investors

by Frank Ching

More than three decades ago, Deng Xiaoping, who later became known as the chief architect of China’s reforms, decided to focus on economic development through pragmatic experimentation, with the country moving forward cautiously by “crossing the river by feeling the stones.”

China was at the time one of the world’s poorest countries. Thirty-five years later, the country is the world’s biggest trading nation, holder of the largest foreign exchange reserves and the second largest economy.

The Communist Party is making clear that it is not about to abandon a winning formula. The third plenum of its central committee, in announcing new reform measures, repeats Deng’s famous phrase.

In a 60-point document describing the decisions reached, the plenum declared: “We must be bold, our pace must be steady, we must strengthen the integration of top-level design and cross the river by feeling the stones.”

So while there is a “top level design,” it must be implemented gradually and cautiously.

The best example of such a deliberate pace is how the party came to its decision to allow the market to play a “decisive” role in the allocation of resources.

In 1992, the Communist Party announced at the 14th Party Congress the establishment of a “socialist market economy,” in which the market has a “fundamental” function in resource allocation under the macro-level control of the state.

Party leader Xi Jinping explained in his speech at the plenum that, in the intervening 21 years, the party tried to determine the proper relationship between government and market.

The 15th, 16th and 17th party congresses all talked about the “fundamental” role of the market in resource allocation. Last year, at the 18th party congress, the party called again for the market to play a “fundamental” role but to “an even greater extent and on an even broader scale.”

“Our understanding of the relationship between government and market is incessantly deepening,” Xi said, and now, “after repeated discussion and research,” the party leadership has decided on the need for a new expression: thus, the adoption of the phrase “decisive function” of the market in the allocation of resources.

The plenum decided: “Prices that can be formed by the market should be left to the market and the government should not carry out improper intervention.”

Even so, it is up to the government to establish rules for the market. Besides, the government will still set prices for such things as “important public utilities” and “public services.”

Caution is also evident where reform of state-owned enterprises is concerned. Before the plenum, it was widely expected that dramatic changes would be announced. Xinhua, the state news agency, carried an article on Nov. 9, the opening day of the plenum, with the headline: “SOE reform essential to a stable economy.”

Yet, the plenum apparently did not accept the need for dramatic reform, saying that “state-owned enterprises generally have assimilated to the market economy,” although they need to “adapt to new trends of marketization and internationalization” while further deepening reform.

So SOE reform seems to consist of relatively small steps, such as asking the enterprises to hand over a larger part of their earnings, to accept private investment and to prepare for tighter regulation and greater competition.

Meanwhile, the general thrust of the plenum’s decisions was to “steadfastly consolidate and develop the public sector of the economy, uphold the public sector as the key player, develop state-owned economy’s dominant role and constantly enhance state-owned economy’s vigor, control and influence.”

Another example of a significant step forward, taken deliberately but slowly, is the approach of adopting “negative lists.” This approach was signaled during the strategic and economic dialogue with the United States in July, when the Chinese government indicated interest in negotiating a bilateral investment treaty using a “negative list” approach.

This means that foreign investors will be free to enter any industry other than those on a “negative list.” Previously, the Chinese attitude was that anything not explicitly allowed on a “positive list” was off limits. The new approach should result in the opening up of previously restricted sectors.

One reason for China’s willingness to open up more is undoubtedly China’s own increased interest in investing overseas. As Chinese investments expand, Beijing will be under pressure for reciprocal access to its markets.

The third plenum marks another step forward in China’s decades-long reform process. China’s insistence on continuing to adopt a pragmatic, experience-based approach is understandable.

This means that the reforms broached during this plenum will be implemented cautiously over time while China gropes for stones in the river.

Frank Ching is a journalist and commentator based in Hong Kong. E-mail: Frank.ching@gmail.com Twitter: @FrankChing1