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New Leadership’s New Reform Road Map

Nov 18 , 2013

At the 3rd Plenum of the 18th Chinese Communist Party (CPC) Central Committee, a number of reform policies were discussed, just as in the previous eight consecutive “3rd Plenums.” What makes this one unique, nevertheless, is the brand new roadmap for reform, which, like an “outside-in” shot in tennis, takes the advantage of the favorable international situations in order to reinforce the domestic reform changes.

Take a look at China’s consideration for the TPP negotiations, for example. TPP, the Trans-Pacific Partnership agreement, had a humble start with only four founding members of Singapore, New Zealand, Brunei and Chile in 2005. The U.S.’s involvement in TPP, however, soon developed it into a major international FTA project. The number of countries in TPP jumped from four to nine and eventually has reached 12. Together, the TPP members now constitute 36% of the world economy. However, China, the world’s biggest exporter and the second largest economy, has not been part of TPP, as one of the TPP’s ultimate goal is to curb China’s exponential growth over the last three decades. One may anticipate China giving them tit-for-tat by activating the Regional Comprehensive Economic Partnership (RCEP); nicknamed 10+6 ASEAN-based FTA, RCEP covers more than 40% of the world economy and 60% of the world trading volumes without the U.S. participation. While some experts argue that the two world’s largest trading partners, China and the U.S., would inevitably wage a war of nerves using TPP and RCEP as their proxies, it seems the new Chinese leadership has changed its attitudes toward TPP and domestic reforms.

A Chinese Ministry of Commerce official made an announcement on the eve of President Xi Jinping’s U.S. visit that China, for the first time, is interested in learning more about TPP. China’s willingness to join TPP is a deja-vu, as it follows the trajectory of its joining WTO at the turn of the century. In case of WTO, China reluctantly embraced the forces of globalization simply in order to accomplish its export goals.. However, as a result of joining WTO, China not only succeeded in terms of trade but, in the bargain, also evolved domestically as it pushed through major changes and reforms to meet international standards and restructured industrial sectors across the country. Noticing such “outside-in” effects, by entering TPP negotiations, the new Chinese leadership expects to bring about intensive internal reforms as TPP sets up high standards not only on world trade issues but also in other fields such as property rights protection, environmental and social issues, labor and skills, financial systems as well. These issues all coincide with China’s current domestic challenges.

The domestic challenges that the new leadership faces are overwhelming; the list includes financial and real estate reforms, government reforms, economic, social and structural transformations, etc. However, like the Chinese proverb, “to eat with one mouth at a time,” the reform roadmap plans to establish a free-trade zone in Shanghai, inviting world powers to play international games in China.  This can be seen as another “outside-in” strategy. Shanghai FTZ is only 28 sq. kilometers but its success would encourage creation of more free trade areas along China’s coastal areas and hinterlands. As free trade zones grow in number, the FTA standards will naturally be spread throughout the country. Different from the previous reform roadmap, the TPP and Shanghai FTZ would trigger off the new round of “outside-in” reforms.

Looking back in history, China’s reform that started 35 years ago with the first “3rd Plenum” in the end of 1978 has extended from east to west, from coastal areas to hinterlands, from the countryside with agriculture reform to cities with industrial reforms, and from economic issues to social and political ones. The roadmap for the previous reform started from the easier parts and to the more difficult ones. Once all the “soft” parts had been tackled, only the “hard” parts remained untouched.

The new reform roadmap will reverse the previous one and start from the most difficult parts, such as the marketization of interest rates and exchange rate, capital account opening, RMB internationalization and other financial and fiscal reforms. Of course, all domestic reforms would consider external variables, as a country’s foreign policy is an extension of its domestic one. Chinese new leadership now seems to have a comprehensive set of reform policies, which links both domestic and international issues.

Looking forward, the new roadmap for Chinese reforms will provide solutions for both its domestic and global issues and speed up Chinese globalization process.

Niu Tiehang is a senior fellow at China Center for International Economic Exchanges and editor-in-chief of Globalization Journal.

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