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Plenum to Herald New and Comprehensive Reform

Nov 07 , 2013
  • Ding Yifan

    Deputy Director, China Development Research Center

The upcoming Third Plenum of the 18th Central Committee of the Communist Party of China, slated for November 9-12, has become a hot topic in the media.

Ding Yifan

Since the end of the Cultural Revolution, it has been a tradition that the Third Plenum, has centered on economic issues. It is therefore highly likely that this plenary session will set the tone for a new round of reforms and economic development under the new leadership. But the Party meeting will only chart the direction for development, and will unlikely give too much detail on reform. Detailed economic reform measures will be formulated by the government after the plenum, in line with the guidance from this meeting.

It is expected that future reforms will mainly focus on the following four aspects: how to better tap the role of the market in resource distribution; how to transform the government functions and improve government capabilities in macro-economic control and regulation; how to deepen fiscal and taxation system reforms and to reform the rural land use system; and how to deepen reform in social security system to guarantee social equity and fairness.

On giving a bigger say to the market in resource distribution, one of the likely priorities is to speed up reform in the field of infrastructure, with a goal of breaking monopolies, promoting competition and reconstructing the supervision system. Emphasis will be given to lowering the market access threshold, developing a competition-oriented market structure, and developing an effective supervision system for the sectors of natural monopoly.

Another priority is to promote financial reform through lowering the access barriers in the financial industry and accelerating the market-driven interest rate liberalization. The financial market system should be improved to better satisfy the needs for industrial upgrading and urbanization. A multi-level capital market system will be prioritized to cater to the needs of medium-sized and small enterprises and innovative enterprises. The proportion of bonds in the total financing structure should be significantly increased. The coordination functions of the central bank in preventing systemic risks in the financial system should be strengthened amid growingly active cross-market financial innovative activities. And an orderly financial management system will be constructed, in which the central and local authorities shoulder their respective supervision and management roles.

On transforming government functions, the following issues are noteworthy and of particular importance.

First, a significant, substantive reduction of administrative approval items is likely to be a key reform task, and this will herald deepened reforms in the government administrative system. Direct administrative interventions such as loan scale, land quota and production quota will be reduced, and monetary and fiscal tools will be applied to improve macro control and regulation. The priorities in market supervision will be adjusted by reducing the beforehand approval items for industrial access, and strengthening the frontline inspection and supervision of quality, safety, environmental protection, energy conservation and technical standards. Anti-monopoly and anti-unfair competition law enforcement will be strengthened to ensure and defend a fair environment for competition.

Second, there will be an improvement in the transparency of government operations and functions. Public spending and transfer payments at all levels of governments should be made more transparent, and the detailed computing methods for fiscal revenue and expenditure and inter-government transfer payments should also be made public. A system is expected to be set up for the People’s Bank of China and the departments of statistics and auditing to regularly report to the National People’s Congress, and data and the computing methods that do not involve national secrets should be made public in a timely manner.

And third, the salary system for civil servants will need improvement. A reasonable income level and its growth mechanism for civil servants and employees of public institutions will be decided in accordance with economic growth, inflation and the average income level. An honest annuity system will be established, and civil servants and employees of public institutions who don’t commit major mistakes or are cleared of corrupt activities can receive an annuity upon retirement.

As for deepening fiscal and taxation reforms and reforming the rural land use system, the following reform measures are more urgent.

The first is to deepen land reform. On the basis of the current land ownership structure, farmers are likely to be given the rights to dispose, mortgage and transfer collectively-owned land. A market featuring equal entry and fair trading can be expected. Under the prerequisite of control over the planning and use purposes, collectively-owned rural land should be given equal footing with state-owned land so as to develop an open, equitable and unified trading platform and to form a land pricing system under the unified land market. The land quota approval and annual quota control will be gradually eliminated, and a land management responsibility system with clear-cut rights and responsibilities between the central and the local governments should be instituted.

The second is to launch a new round of fiscal and taxation reforms. Under the preconditions of maintaining basic stability in macro tax burden and the central government’s fiscal revenues, the central government will likely take back some fiscal and tax administrative power, establish a “national basic social security package” and deepen reforms in the fiscal and taxation system. The administrative power in basic pension, judicial system, food and drug safety, border control, maritime administration and trans-regional river basin administration will likely be in the category of the central government’s administrative power.

The third is to promote and speed up the local tax system with real estate tax and consumption tax as the main items. The establishment of a real estate registration system will speed up. Regions for the experimental implementation of real estate tax will be expanded and the tax will be applied nationwide after a transitional period when relevant regulations and systems are improved, and the tax will be clearly defined as the main tax sources for district and county governments. Domestic consumption tax will be categorized as local tax under the principle of consumption of origin, and will be levied at the retail chain rather than the production chain, and at the same time, a vehicle purchase tax will also be categorized and levied as a local tax.

The fourth is to regulate the local debt issuance system to prevent debt risk. The government accounting system should be improved, and a balance sheet of governments should be compiled. Debtors will be clearly defined in the local government. and transparency in local financial activities will be improved. The local financing vehicles are expected to be regulated, the scope for local governments to issue debts will be expanded, and a warning system for debt risks should be established.

In terms of deepening reform in the social security system, improvement is likely to be associated with the reform of state-owned assets.

First, the basic pension will be unified in the country; subsidies for medical insurance will be transferred along with the movement of policy holders, and will be borne by the governments at a higher level when the holders migrate from one administrative region to another; the per-capita allotment from the central government for students under compulsory education will be a unified amount according to the number of on-campus students; and subsidies for people entitled to a minimum living allowance in the country will be distributed equally. All these items will be recorded in the unified social security cards for individuals, and all people will be entitled to such benefits.

Second, some progress has been in the reform of the state-owned asset management and state-owned enterprises in the past years, but problems still exist, such as an unclear definition, low operation efficiency and weak competitiveness. Compared with other types of ownership in the economy, the colossal amount of state-owned assets can and should play a unique role in the country’s modernization drive. Through deepening reform, it is intended to further define the functions and role of state-owned assets, promote the capitalization of state-owned assets, improve the operation model and governance mode, and to achieve the goal of increasing national strength and maximizing social benefits.

Furthermore, reform measures may also involve an improvement in the competitive environment and the incentive mechanism, and the acceleration of innovations and green development. The government will encourage a construction of a new type of corporate innovation system, foster and cultivate a batch of innovation-driven leading enterprises through fair competition, and tap their advantages and role in technological research and development, technology integration and promotion of industrialization.

Ding Yifan is the deputy director of the Research Institute of World Development at the China Development Research Center.

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