In November 2013, the top leaders of the ruling Chinese Communist Party (CCP) unveiled an ambitious roadmap for economic and social reforms to be implemented by 2020. The policy strategy hammered out by the CCP’s Central Committee is the strongest signal yet of President Xi Jinping’s commitment to replacing the existing export- and investment-focused economic model.

The new model stresses domestic consumption and services. This is a shift widely seen as essential to China’s long-term economic stability.

The CCP has declared that markets are to play a “decisive” role in the allocation of resources, as opposed to a “basic” role, as had been the case previously. Exactly what that will mean in practice is not entirely clear at this point.

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A communiqué issued by the plenum provided a list of policy goals, rather than specific measures. And the content of the reform program will undoubtedly be a topic of debate within the party, while implementation will be affected by the outcome of power struggles between officials at the various levels of the government structure.

Beijing’s stated intention to curtail some of the privileges enjoyed by state-owned firms sends a positive signal that the country’s new leaders recognize the need to create a more level-playing field for private businesses. In that vein, restrictions will be eased on private investment in some currently protected economic sectors, notable examples being energy and finance.

Liberalization of price controls and the setting of interest and foreign-exchange rates is also under consideration, as are steps to simplify the tax regime and modernize the law on property.

It remains to be seen how the various policy initiatives make their way through China’s vast bureaucracy.

It is a safe bet that implementation of many of the key reforms will be a gradual process. And it remains to be seen how the various policy initiatives make their way through China’s vast bureaucracy.

There will be no radical break with the development model dominated by large state companies. While the government will try to make state firms function more like profit-driven private enterprise, large-scale privatization is not in the cards. Consequently, the commanding heights of the economy will remain in state hands for some time yet.

As such, the reforms will produce little in the way of immediate benefits for foreign companies operating in China. The policy document states in general terms that the government will explore a regulatory framework to guarantee equal treatment of foreign investors outside of the defense industry and other strategically important sectors.

The authorities have also mooted the establishment of a special court to prosecute intellectual property violations. However, to the extent that the plan has any immediate effect on investment flows, it will be mostly limited to increased confidence that there will be substantive improvements in the investment climate down the road, an important consideration for investors taking a long-haul approach to doing business in China.


The PRS Group
About The Author The PRS Group
The PRS Group is a leading global provider of political and country risk analysis and forecasts, covering 140 countries. Based on proprietary, quantitative risk models, the firm's clientele includes financial institutions, multilateral agencies, and trans-national firms.

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