Market manifesto: Xi Jinping's call to action

China's 'new magnificent revolution' will usher in a larger private sector and sweeping financial reforms. It will strengthen the economy, while cementing the state's hold on power.

One hundred and sixty five years after Karl Marx predicted the end of capitalism with his polemic The Communist Manifesto, Xi Jinping, as head of the world’s biggest political party and one of the few remaining communist countries, has just restored the market to the centre of the economy.

The oblique and internally contradictory Third Plenum communiqué was followed a few days later by a much more detailed and coherent formal Decision and guide to action.

Having reaffirmed the correctness of the reform policies of the past 35 years, the Decision describes the next phase as “a new magnificent revolution”. The Decision places the market at the centre of policy, saying that “the market has a decisive role in allocating resources [and] in deepening economic structural reform”.

It went on to say that “the market deciding resources allocation is a common law of market economics” and to “complete the socialist market economic system, we must respect this law, and strive to resolve the problems of imperfect market systems [and] excessive government intervention”.

It sets out to “reduce direct government allocation of resources” and instead to base resource allocation on “market principles, market prices and market competition”. It limits the government’s role to ensuring “macro-economic stability … [provision of] public services [and] guarantee[ing] fair competition.”

About 40 per cent of the document deals directly with the economy, the rest with a range of issues from culture, to education and science, to the military. Winding back the government’s role and giving greater scope to the market and private initiative to solve problems and generate wealth is the key theme running throughout it.

The leadership has set itself a seven-year target to do the job. “By 2020, decisive results are to be obtained in reform [and] the reform tasks put forward [are] to be completed.”

The aim is for an economy in which the state sector is still dominant (the “socialist market economy”), but the private sector will be larger than today and more dynamic. While giving “full rein to the guiding function of the state-owned economy … [the Party] must unwaveringly encourage, support and guide the development of the non-public economy and arouse the vitality and creativity of the non-public economy”.

To these ends, the Decision commits to strengthening protection of property rights for all sectors, including rural as well as intellectual property rights. Experiments in setting up an intellectual property court are foreshadowed. There is to be “equality of rights, equality of opportunity and equality of regulations” between state and privately owned enterprises.

While state-owned enterprises will continue to be the dominant form of ownership, they are exhorted to adapt to the market, embrace competition, raise efficiency and “eliminate” monopolies. They are also instructed to “explore” adopting transparent “finance and budgeting” methods. A system will be introduced to permit bankruptcy so that only the “fittest survive”. The non-state sector is encouraged to participate in SOE reform by taking equity positions.

Price reform is to be extended under the principle that prices are to be “mainly” determined by the market and that governments are to resist intervention in price-setting. In a rare case of detail in the Decision, it was announced that the market should set prices of water, oil, natural gas, electricity, and telecommunications.

Domestic and international “financial openness” is to be “expanded”. The government will bring shadow banking into the light by permitting the establishment of private “small and mid-sized banks and other such financial organs”. The Decision also calls for “financial innovation [to] enrich financial markets … and products”. Areas specifically identified for reform include equities and bonds. 

The renminbi exchange rate and interest rates are to be determined by market conditions. The Decision calls for “national debt yield curves [to] reflect the relation between market supply and demand”. Capital markets are to be more open for capital movements in and out of China. The convertibility of the renminbi for the capital account is to be accelerated.

Foreign investment is to be encouraged. The Decision specifically mentions opening finance, education, health care, culture and other services to foreign investment and to lift limits on foreign investment in child and elderly care, architecture, accounting and auditing, commerce and logistics, electronic commerce and other services and “general manufacturing industry”.

Government regulations on investing offshore will be eased to “establish the dominant position of enterprises and individuals in foreign investment. They will be permitted to go abroad to invest without restrictions on destinations and activities. Both mergers and acquisitions and greenfield investments are encouraged.

The Shanghai free trade zone is to be advanced as a key experimental area “to move reform and opening up forward”. More free trade zones are also to be opened, with an emphasis on the interior. Special policies will also apply to “border regions”, which will open them further for people movements and local trade.

Political, social and judicial reforms take up about half of the Decision’s 60 policy announcements. These include relaxing restrictions on rural labour mobility, the hukou, so that peasants are free to move to townships and small cities; “middle-sized” cities will be gradually opened, but not big cities. The one-child policy has effectively been abolished with the decision to permit couples with only one partner without a sibling to have a second child. There would be few couples today in China of child-bearing age where at least one partner did not have a sibling. The odious re-education through labour system (laogai) has now been abolished.

It is too obvious to say, as many commentators have, that it all depends on implementation. Of course it does, but to say that misunderstands the intention of the Decision.

The Decision is not intended as a blueprint for reform – though in places it is quite specific – but rather to set overall policy directions. It is an exhortation from the top of the Party that China must continue to reform in order to sustain economic growth. Tens of millions of Party officials across the country at all levels are now studying the Decision in detail. 

The Decision seeks to change the balance between the state and market, curbing the former while strongly legitimising the latter. Officials at all levels are now on notice: do not meddle in the market, or at least meddle less than before.

Already, local Chinese media are reporting examples of implementation of the Decision approvingly. At the recent Caijing magazine’s business and finance conference in Beijing, Chinese speakers from the business and research communities consistently praised the Decision. 

Xi’s embrace of the market in his manifesto is not, however, because he has come lately to its virtues. It is because he wishes to strengthen the Communist Party’s control on power by strengthening China’s economy. He is determined not to become a Mikhail Gorbachev. The Decision had much to say on “democracy” as well, but it is was all directed within the Communist Party to internal processes.

So with this Decision, Xi is going to ride the tiger, promoting a more decentralised market economy where the private sector is encouraged to expand while maintaining and even tightening China’s authoritarian one-party state. Karl Marx was fond of pointing out “historical contradictions”. China’s has just got a lot bigger.

Dr Geoff Raby is chairman and CEO of Beijing-based advisory firm Geoff Raby & Associates, and a former Australian ambassador to China. He is vice chairman of Macquarie Group China and a Vice Chancellor's Professorial Fellow at Monash University.