China’s DRC Report Provides Overview Of Possible Reforms

The author is Nomura economist Zhiwei Zhang

The Development and Research Center (DRC) of the State Council released a report with a long list of structural reforms. The report was prepared for the Third Plenum of the 18th Congress of the Chinese Communist Party (CCP) that will take place in November in which a comprehensive reform plan will be announced.

The DRC report provides a good preview of what may be released during the November party congress. Many of the reforms in the DRC report will likely be part of the final reform plan to be approved in the November CCP congress meeting, although we believe the DRC report will not be the only input into the CCP plan. The media has reported that the one-child policy may be relaxed following the CCP congress, yet it was not included in the DRC report.

The reforms in the DRC report are generally consistent with what we believe should be done. Many of these reforms appeared in the 12th five-year plan that was released in 2011 and the progress on these reforms has not been significant, so it remains to be seen how effective the new government will be in implementing these reforms.

The DRC report does not include any ambitious reforms of state-owned enterprises (SOEs). It mentions that some parts of monopolized sectors such as railway, oil and gas, electricity, and telecommunications should be opened to investment, but the reforms were not focused on changing the ownership structure of SOEs.

In that sense, it is less ambitious than the joint report "China 2030″, which was issued by the World Bank and the DRC in 2012 and highlighted the ownership reform of SOEs as a key reform for China. This is a sign that SOE reform may not be a key topic for discussion in the CCP party congress.

The DRC report makes an aggressive land-reform proposal that would allow farmers to use land as collateral to borrow against or transfer land to others for non-agriculture purposes. We understand this is a highly controversial issue in policy circles and expect the final CCP plan to keep reforms in this area rather vague, as there may not be consensus to implement aggressive reform in the near term.

The DRC plan also discusses the reform of public administration, the fiscal system, the financial sector, the management of state assets, innovation, and opening up the economy. In particular, it highlighted the importance of opening up the services sector to promote competition and proposed the establishment of a "basic welfare package" for all citizens. Whether these can be implemented remains to be seen.

Overall, the DRC report on reforms seems to be a step in the right direction. Yet, we believe it will take time for these reforms have a positive, observable effect on the economy.

We maintain our view that economic growth will slow to 7.5% in Q4 and 6.9% in 2014.

(The article has been edited for clarity)