Success of Xi’s ambitious economic plan may rest in rural regions

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#1
Key messages from President Xi...

Success of Xi’s ambitious economic plan may rest in rural regions

HONG KONG — China’s Communist Party has burnished President Xi Jinping’s plans for an economic overhaul with exultant propaganda about a historic turning point. But the success of his proposals, and the long-term health of the Chinese economy, could rest on policy battles reaching down into thousands of towns and villages over land, money and a misshapen fiscal system that has bred public discontent and financial hazards.

The party’s Central Committee under Mr Xi endorsed a package of 60 overhaul goals, released to the public on Friday, that the government said would propel China closer to becoming a secure, powerful and well-off country by the end of this decade.

The economic goals include expanding the role of markets in energy and natural resources, encouraging private investment in finance and easing state controls on interest rates.

But the committee’s decision and Mr Xi’s accompanying statement also dwelled on another set of problems that could matter just as much for China’s economic health: Farmland rights and revenue, local government taxes and finances, plus chronic shortfalls between many local governments’ outlays and the money they receive from the central government.

Mr Xi said in a statement accompanying the overhaul goals that the barriers to rural development were among China’s biggest worries.

“There has been not-fundamental reversal of the constantly growing disparity between urban and rural development,” he said in the statement, which was issued through the official news agency, Xinhua.

In many ways, China’s rural problems are a knot of issues about land and revenue. Local governments have grown dependent on taking farmers’ land for relatively little compensation and selling it to developers for a profit. They have been encouraged to do so because the central government takes the bulk of revenue, while assigning many tasks to local governments that require expenditure.

In China, farmland is, by law, owned by the village collectively, but in practice, the land is controlled by the state, giving officials a powerful voice over when to develop land and on what terms.

The central government transfers revenue to local governments, but many town and county officials say the amount is not enough to meet ambitions set by central leaders, economists who study China said. Officials in county and city governments, eager to secure jobs for their constituents and advance their careers, have also gone into dangerous debt to pay for building and business projects that often use that land as collateral for loans or to attract investors.

“Some acute problems in our country’s economic and social development are also related to the inadequacies of the fiscal and taxation system,” Mr Xi said.

Solving these problems is all the more pressing for him and Prime Minister Li Keqiang, because absorbing tens of millions of rural residents into cities is a crucial part of their policy.

Unless China’s leadership finds a way to unravel this knot of land and finance problems, many farmers will remain too poorly compensated to make a safe passage to life in cities, said Mr Hua Sheng, an economist at Southeast University in Nanjing, Jiangsu province.

Chinese cities also impose household registration restrictions that exclude rural newcomers from services, such as clinics and schools.

“Without making changes in land policy, the household registration system and government finances, it will be very difficult to advance urbanisation of the population,” he said. “China’s future growth also depends on solving these grassroots problems.”

The plan endorsed by the Central Committee last week showed that the government is exploring how to defuse problems by shoring up the finances of local governments, clearing up their dangerous debts and giving farmers more secure legal rights over their land, economists said. The government intends to build on policies that allow farmers to lease out land, encouraging the aggregation of fragmented plots into larger, modern family farms.

“The government is signalling a desire to blunt local government opposition to land reforms,” said Mr Eswar Prasad, a professor of economics at Cornell University who was previously in charge of the Chinese division of the International Monetary Fund. “Loss of revenue for local governments as a result of land reforms will presumably be partially compensated by changes to the tax and expenditure systems.”

But many local officials will still resist or try to evade policies that reduce land revenue, said Mr Tao Ran, Director of the China Centre for Public Economics and Governance at Renmin University in Beijing. The officials do not believe that the new transfers from the central government will be enough to compensate for their loss of the revenue, he said.

“There will be strong opposition in terms of implementation,” he said in a telephone interview. “The local governments often have such big debts that they don’t want to give up their monopoly control of farmland. A lot of their borrowing is mortgaged by land.”

The Chinese government could try to ease fiscal imbalances by giving more power to local governments to set their own spending and tax policies, partly reversing centralising changes made 20 years ago. But the central leadership is reluctant to give local officials a great deal of leeway, said Mr Arthur Kroeber, Managing Director at GaveKal Dragonomics, an economic research firm.

“If you give local governments more power, they’re less accountable, and the central government has less ability to control the behaviour of local governments,” he said. “But the problem with centralisation is that it’s a gigantic country.” THE NEW YORK TIMES
http://www.todayonline.com/chinaindia/ch...al-regions
“夏则资皮,冬则资纱,旱则资船,水则资车” - 范蠡
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#2
An expect's view of the impending China reform...

China’s new reforms, in theory and in practice

Last Tuesday, the Third Plenary of the 18th Central Committee of the Chinese Communist Party (CCP) announced a major turn to market-oriented policies: Interest-rate and currency liberalisation, reform of banks and state enterprises, clearer land ownership for rural inhabitants and a better deal for urban migrants.

Behind this landmark decision was a potential crisis. China’s success has been driven by cheap exports based on cheap labour, infrastructure built by state enterprises with low-cost bank funding and government budgets funded by land sales.

But labour is no longer cheap, road construction to connect major cities has given way to building large shopping malls in small towns and land sales based on rezoning are reaching both economic limits and the limits of villagers’ tolerance.

Cheap money with limited investment outlets now risks fuelling property bubbles and industrial overcapacity. Without fundamental change, the country faces slower economic growth, inadequate job creation and innovation, as well as popping bubbles.

The solution is a rapid shift from its export-based growth model to one based on domestic demand; from infrastructure to consumption; from the dominance of large state-owned enterprises (SOEs) to that of small and medium-size private enterprises; from industry to services; and, more broadly, from bureaucratic to market control.

THE PAIN OF SHIFTING

All successful Asian countries have made this shift; South Korea and Taiwan are models. But rapid change entails immense pain. SOEs will lose their low-interest loans, subsidised land, monopoly protection and privileged housing. Party and state bureaucracies will lose power (and income).

Local governments are particularly desperate. They have huge debts, which they amortise by rezoning and selling land. Already squeezed by exorbitant property prices and popular resistance to land-taking, they now face higher interest rates, property taxes, villagers empowered by stronger rights and expensive new requirements to provide social services to migrants. The desperation of local potentates and SOE executives has created powerful resistance to reform.

At a plenary reportedly marked by acrimony, political leaders sided with reform. As one economic planner said, when asked about resistance before the decisive meeting: “In the end, all of our leaders understand numbers. The implications of the numbers are clear.”

The Third Plenum’s announcement of its decisions took the form of a statement of broad principles, leaving many observers concerned by the lack of detail. But the CCP’s role is to set the direction of policy; executing the party’s decisions is the government’s job. And the plenum did establish a top-level group to coordinate and enforce implementation of its decisions.

IT IS ALREADY HAPPENING

While implementation will be a long struggle, with occasionally fierce resistance, key reforms are already under way. The current 12th Five-Year Plan calls for annual wage increases to average at least 13.4 per cent; this year, wages are rising at an average rate of 18 per cent, which will squeeze out industries characterised by obsolescence or overcapacity.

Moreover, the government’s anti-corruption campaign is targeting some of the most powerful industry groups, such as the petroleum faction, thereby weakening their resistance to reform.

Most importantly, economic outcomes are becoming increasingly aligned with the authorities’ goals. Services already account for more output and employment than industry — the Internet company Alibaba, for example, is empowering both consumers and smaller companies on a previously unimaginable scale — and recent growth has been driven bydomestic demand rather than net exports.

Reform is not just a plan; it is already happening.

Economic openings to Central Asia and to Association of Southeast Asian Nations (specifically to Vietnam) are well under way, and reform will include further international opening. The Third Plenum’s decisions follow the launch in September of the Shanghai Free-Trade Zone, which will open new sectors to foreign investment and permit largely market-based financial transactions and capital flows. The liberalisation of capital flows is intended to be a gradual national policy, channelled through trusted institutions in Shanghai.

For trade in goods, the new free-trade zone is intended to compete directly with Singapore and Hong Kong. China fears dependence on those entrepots in the event of conflict. For foreign investors, the policy will be to expand greatly the range of opportunities while curtailing foreign control; foreign companies, for example, may hold minority stakes in the telecoms sector, while dominant foreign companies like Monsanto will face constraints.

MANAGING POLITICAL RISKS

President Xi Jinping faces the politically risky task of pushing the CCP’s reform agenda against fierce opposition while the economy slows.

By emphasising party control — through a crackdown on SOEs, government opponents, and critics in the media and academia — Mr Xi seeks to maximise his ability to impose economic reforms while minimising the risk of a challenge from conservative forces.

Above all, he is determined to avoid the fate of previous leaders like Hu Yaobang and Zhao Ziyang, who lost their jobs after a critical mass of their opponents came to believe that economic and political reform jeopardised party control.

So, at least for now, China will focus on another great wave of economic reform, whereas political reform will mostly be limited to reorganisation of government agencies to boost efficiency and strengthen efforts to reduce corruption. (There have been some steps towards reform, including a decision to remove judges from local political control.)

And yet, the country will find it increasingly difficult to postpone stronger measures that would appease popular demands for fairness, including the establishment of an independent judiciary, which could prove to be no less an imperative than structural economic reforms.

Likewise, the leaders must either accept much of the information revolution’s swamping of controls or engage in far more costly repression.

Hopes for political reform rest on the possibility that Mr Xi’s second term will see the accession to top leadership of reformers like Politburo member Wang Yang and Vice-President Li Yuanchao. For now, however, China will focus on another great wave of economic reform. PROJECT SYNDICATE

ABOUT THE AUTHOR:

William Overholt is a Senior Fellow at the Fung Global Institute and the Harvard University Asia Center.
http://www.todayonline.com/chinaindia/ch...d-practice
“夏则资皮,冬则资纱,旱则资船,水则资车” - 范蠡
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#3
As discussed in another thread... China is relaxing on Hukou and one-child policy... about time...

And so the freefloating of Yuan will be imminent... in terms of how the Chinese define "imminent": ie within the 5 years plan. But I reckon will be very substantial in next 3 years. By end of 5 years I think RMB would be a global reserve currency, comparable to Yen but small vs EUR or USD.

MORE: PBOC Plans to Set Up Managed Floating Yuan FX Rate: MNI
2013-11-19 08:26:34.920 GMT


By Bloomberg News
Nov. 19 (Bloomberg) -- The People’s Bank of China plans to
basically remove its day-to-day interventions in the domestic
foreign exchange market as the central bank works to establish a
market-based floating exchange rate, Market News International
reports, citing PBOC Governor Zhou Xiaochuan as saying in a
study guide as part of the 3rd plenum.
* The study guide was issued by a Communist Party press after
the third plenum of the party’s 18th Central Committee: MNI
* Zhou says restrictions and the approval process for QFII and
QDII programs will be removed when conditions are ripe: MNI
* PBOC Deputy Governor Yi Gang says the central bank will
start trial program allowing individuals to make overseas
investments: MNI
* Zhou says PBOC will cut the ratio of treasury bonds held
until maturity: MNI
* Zhou says it is necessary to improve treasury yield curve to
reflect market benchmark to allow it to play an important
role in financial resource allocation: MNI
* Zhou says PBOC will increase the convertibility of capital
account transactions by individuals and for direct
investment purposes: MNI
* Zhou says monitoring of speculative capital flows will be
increased and PBOC can take temporary measures on capital
movements in an emergency: MNI
* Zhou says PBOC will expand yuan daily trading band, MNI
reported in a flash headline
* Link to Report: NSN MWI3HC3H0JK0 <GO>
Before you speak, listen. Before you write, think. Before you spend, earn. Before you invest, investigate. Before you criticize, wait. Before you pray, forgive. Before you quit, try. Before you retire, save. Before you die, give. –William A. Ward

Think Asset-Business-Structure (ABS)
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