Economic Reform in the Third Plenum: Balancing State and Market

Nicholas Borst (Federal Reserve Bank of San Francisco)



China's top leadership met this November to set a course for the country's next wave of reform. President Xi Jinping promised a “comprehensive approach” to reform prior to the plenum and the official “Decision on Major Issues Concerning Comprehensively Deepening Reforms” largely delivers on this promise in the economic realm, where large changes in fiscal policy, competition policy, factor pricing, and state-owned enterprise reform are outlined. (The “Decision,” made public November 16, serves as the main source for this article). The document sets out an impressive list of declared goals for economic reform, but the true test will occur when implementation runs up against the power of vested interests.

At its core, the strategy for reform revolves around creating and a more market-based and competitive economy. The key challenge to achieving this goal is establishing a proper relationship between government and the market. To reach the next state of economic development, the Chinese government recognizes that it must become comfortable with allowing a greater share of economic activity to occur outside the scope of government influence. A reduction to government interference with factor pricing, removing regulatory barriers to investment, and reforms to state-owned enterprises are all outlined necessary reforms.

The call to adjust the state’s relationship to the market echoes a speech given by Premier Li Keqiang this March on the need to cut regulatory red tape and for the government to focus on proving public goods. The move to restrict the government’s role in the economy represents a major shift in attitude and ideology for a government historically defined by interventionist impulses. The plenum report calls for the government to relax the approvals process, give enterprises independence in making investment decisions and for the central government to avoid regulating micros issues and focus on macroeconomic coordination.

The plenum report calls for the market to play a “decisive role” (juedingxing zuoyong) in the allocation of resources in the economy. This represents an elevation from previous party documents, which assigned the market a “fundamental role” (jichuxing zuoyong) in resource allocation. This change in language reflects a step forward in the continued reduction in the number of official price controls. Areas that are specifically targeted in the report include the prices of water, oil, natural gas, electricity, transportation and information technology.

Read the full report.

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