China’s economic system is founded on the reforms carried out in the 1990s. With the unification of dual exchange rates in 1994, markets became the main tool to set prices. Many state-owned enterprises were either privatised or went bankrupt. Since then, privately managed businesses have consistently gained ground.
The conventional formula to describe the role of private businesses now is the so-called 56789: the private sector contributes 50 per cent of tax revenue, 60 per cent of gross domestic product, 70 per cent of innovations, 80 per cent of urban employment, and 90 per cent of registered businesses. The Chinese economy is no longer one that is dominated by state-owned enterprises but one that features a mixture of private and public ownership.
Other reforms were no less important, such as policies that replenished China’s financial system by successfully removing its non-performing loans. The tax reform of 1994 created a fiscal federal system that is believed to be one of the secrets for China’s economic success as it gave local officials strong incentives to grow local economies.
The government reform got rid of a third of the ministries in the central government and downsized civil servants across the board. Finally, accession to the World Trade Organization lifted China’s economic opening to new heights, paving the way for its phenomenal growth in exports.
However, the Communist Party’s theoretical foundation has not fully reflected these reforms, despite their level of success. Thus, one of the main tasks of the third plenum was to theoretically cement those reforms, with the purpose of creating a high-level socialist market economy. As a mixed economy of both public and private businesses, China will continue to open to the rest of the world and will rely on the market to determine the allocation and pricing of resources.
The third plenum also announced new proposals of reform to strengthen the high-level socialist market economy system. Among them, two are the most significant. One is hukou or household registration reform. In China, household registration is closely tied to social benefits, such as education, housing, pensions and healthcare. Where one lives can determine their access to these services.
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China’s Communist Party wraps up policy meeting amid growing uncertainties
China’s Communist Party wraps up policy meeting amid growing uncertainties
About 20 per cent of the Chinese population live in places where they do not have local hukou and thus have no access to local benefits. For more than a decade now, the central government and various provinces have initiated hukou reforms, though results have substantially varied. This time, the central government will take an even larger role and authorities are determined to overhaul the hukou system within five years.
Another significant reform that came out of the third plenum addresses local government budgets. The plenum pledges to hand over collection of consumption taxes to local governments to strengthen local budgets. In the meantime, it also proposes that all income (as well as debt) raised by government resources be included in the government budget. One implication of this is local governments’ commercial debt will be included in local governments’ budgets.
This move will hopefully make local debts transparent and thus easier for the public as well as the central government to monitor. Just like the overhaul of the hukou system, the tax reforms are expected to be finished in five years. It will become the ultimate tool to control local debts.
In conclusion, the Communist Party’s third plenum laid out a grand plan for China. The proposal to build a high-level socialist market economy system is an affirmation of the reforms carried out in past decades, cementing their results into the party’s theoretical framework. With this goal and the other policy initiatives, it will surely be remembered as one of the most important meetings in the Communist Party’s history.
Yang Yao is Boya chair professor at Peking University
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