Open statement from the President of the European Union Chamber of Commerce in China, Davide Cucino, on the issuance of the communiqué of the Third Plenum of 18th CPC Central Committee Congress Go back »

2013-11-13 | All chapters

“The third plenum communiqué does not seem to represent a paradigm shift or suggest urgency for meaningful reforms. The document falls short of providing a roadmap for reform and may miss important opportunities, but it does provide a malleable framework that acknowledges a fundamental need for government control to be ceded to market forces and so could still lead to meaningful changes during practical implementation, according to the European Union Chamber of Commerce in China.

The vague and ambiguous wording of the third plenum communiqué means that the document alone is not determinative. This alone is concerning at a time when European business believes that a clear and comprehensive set of reforms needs to be laid out. However, this is not surprising given the vested interests but nonetheless does not preclude the possibility of meaningful reforms actually taking place. Indeed, the significance of the landmark third plenums of 1978 and 1993 were only apparent in hindsight.

Much of the wording of the communiqué is ambitious and could signal meaningful change in the right direction. Yet at the same time many key reforms―notably state-owned enterprise reform―are not touched upon directly in the communiqué making claims about the reforms being comprehensive seem overstated.

It is therefore too early to tell if this third plenum will meet the hype that was built up around it and prove to be the path-breaking moment for which European business was hoping. Depending on how it is read, the communiqué could seem either daring and determined, or could seem to be purely prescribing platitudes and to have missed significant opportunities.

Many of the pronouncements are encouraging. The communiqué’s ‘core issue’, the need to better handle the relationship between the government and the market alongside the ‘determining’ role stipulated for the market to allocate resources, echoes the overarching recommendation offered by the Chamber in our Executive Position Paper. In that paper released in September, the Chamber recommended that better use of market forces must be the catalyst to ensure that China’s increasingly limited resources are directed to the most productive areas of society and that this must inevitably entail a fundamental reassessment of the government’s role in the economy and business environment.

Other encouraging aspects of the communiqué that mirror European Chamber recommendations include emphases on fair competition; public administration reform and the need for transparent and open rules; a balancing between growth and green development; the likelihood of increased revenue streams for local governments through fiscal reforms; reiterations of the need for improved rule of law and that judicial power be exercised in accordance with the law; as well as important passing references to the elimination of market access barriers to investment.

Taken together these encouraging statements would appear to signal a strong likelihood of meaningful change being ushered in as a result of consensus within the plenum. However, despite repeated mentions of the need for comprehensive reforms, indications of movements on some highly significant reforms were lacking. There was scant reference to financial sector reform, dampening expectations of any imminent further liberalisation of interest rates, which the European Chamber considers essential for ensuring more efficient capital and resource allocation.

More importantly, the communiqué gave worrying signals about any possibility for state-owned enterprise (SOE) reform. In a survey of European Chamber members conducted the week before the third plenum, SOE reform was identified as the area of reform considered most important for China’s sustainable economic development; and three-quarters of member respondents were negative about China’s chances of economic rebalancing if various SOE monopoly sectors―such as over the banking, telecoms and energy sectors―are not broken. However, the communiqué places public ownership at the core of the economic system and emphasises the ‘leading role’ of the state-owned economy. This is disappointing as the European Chamber believes that a diminished role and increased competition for SOEs is essential to ensure that all other connected reforms, such as fair competition, increased rule of law and better allocation of resources will not be impeded by state-owned enterprise influence.

The Chamber had been hoping for indications that a clear roadmap for reform would result from the third plenum. These hopes had been further raised by some positive actions that have been introduced in the months leading up to the third plenum congress. These include steps taken towards a liberalisation of interest rates; policies to allow greater private investment―though worryingly maybe not foreign investment―into previously SOE-dominated sectors; the reduction of 221 administrative approval procedures; and, in particular, the recent inauguration of the free trade zone in Shanghai. In this context, the rather lukewarm and ambiguous wording of the communiqué, which does not seem to reflect an aligned Chinese leadership in terms of the urgency and level of reforms required, did not serve to meet expectations.

A number of China’s leaders have certainly understood the need to give a greater play to market forces and the dividends that meaningful reforms would bring. The recognition of the need to balance the relationship between the government and the market demonstrates that there is an acknowledgement by some that government intervention in the economy has led to inefficient resource allocation, low efficiency and high administrative costs. The European Chamber hopes that the reformist approaches will prevail and bring about changes that can serve to tackle current problems in China such as overcapacity and rising corporate and local debt, as well as likely future problems that could result if meaningful changes are not enacted, such as an inability to sustain moderately fast growth. A leadership that is split and indecisive will not be able to bring about in the time required the comprehensive reforms that our members believe are necessary to create the conditions for China’s sustainable growth.

Much will now depend on the more detailed plans that are expected in the Decision and in forthcoming policies from the State Council, as well as on the ability of the leading small group on comprehensively deepening reform that is to be established. The European Chamber has previously called for the establishment of such a group that has authority over implementing ministries to coordinate and supervise reform and so welcomes its establishment. Hopefully the leading small group will be led at the highest level and will have the power and remit to speedily force through a roadmap of concrete actions to execute and build on some of the general reforms mentioned in the communiqué.

Previously China could make a choice between economic restructuring and maintaining growth. Now economic restructuring is necessary to maintain growth. The plenum gave itself a KPI of ensuring decisive results by the year 2020. That is a long time away. Urgent structural changes and bold, truly comprehensive reforms, including to the financial system and steps to bring state-owned enterprises into equal competition with private players, are required now. Crossing the river by feeling the stones is necessary, but the river is already starting to swell and firm ground on the opposite bank needs to be reached soon.”

About the European Union Chamber of Commerce in China

The European Union Chamber of Commerce in China was founded by 51 European member companies in October 2000 to give European businesses a common voice across different business sectors, nationalities and regions of China. The European Chamber now has more than 1,700 member companies and is active in seven chapters across nine cities: Beijing, Nanjing, the Pearl River Delta (Guangzhou and Shenzhen), Shanghai, Shenyang, South-west China (Chengdu and Chongqing) and Tianjin. The Chamber is recognised by the European Commission and the Chinese government as the authoritative and independent voice of European business in China.

Source: The European Union Chamber of Commerce in China

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