Hard slog of implementation ahead

State-owned firms are also to contribute 30 percent of their after-tax profits to the budget by 2020. This is an important step; the State Council's plan for dealing with inequality earlier in the year was a lot more vague on this point. At present, central SOEs do not pay dividends into the budget, but rather a portion of their dividends are redistributed to other SOEs via the State-owned Assets Supervision and Administration Commission. The figure of 30 percent appears to have been inserted in what is otherwise a non-specific document to establish a non-negotiable red line.

There is also a mysterious single line in the Decisions document about allocating some State capital to the National Social Security Fund, another long-held desire of the reformers. Once the National Social Security Fund gets equity in SOEs, it would receive dividends directly and it could send in independent directors, which would be a step forward in governance standards.

If these progressive pledges are pushed through in the next few years, there would likely be significant improvements in SOE efficiency. The key is how aggressively such measures are pursued.

There is a lot of talk in the Plenum document about "government function reform" - making the bureaucracy less interventionist and more business-friendly - a priority for Premier Li Keqiang. At the recent Trade Union Congress, Li gave a relaxed speech about how he sees the economy. He told the story of a young entrepreneur who wanted to open a bookshop in his hometown. The man dutifully collected the 20-odd business licenses demanded by the local bureaucracy, and then after he opened the shop some officials turned up to say his window glass was the wrong color. Since the owner had no spare cash, they demanded books as payment. For the Premier to speak publicly about the venality of parts of the bureaucracy he oversees is a breakthrough. Only by eliminating the need for so many licenses and stamps and by simplifying rules can he eliminate the space for bribes. Again, though, the key is implementation, all the way down to the local level.

The Ministry of Finance has been mandated to oversee open and transparent budgets, create a local government debt-management framework, sort out the transfer system and expand the bases of VAT and resource taxes. The document has also called for the acceleration of Property Tax legislation. And it said that municipalities should be able to issue bonds, though this is unlikely to occur on a meaningful scale any time soon.

Financial-sector reforms are broadly as we expected: accelerated interest-rate liberalization, further opening-up of the capital account, privately held banks, and greater freedom for companies to issue foreign debt and do cross-border transactions. But another win for the market was the announcement of a registration system for IPOs, to address the corruption in the existing approval system. The People's Bank of China also got backing for a deposit insurance system and a bank resolution framework, both essential for completing rate reform and resolving the wave of non-performing loans that is coming.

The Plenum document also called for a unified market in "construction land", which is the land that farmers build their homes on. Such land will now be opened up for direct sale by farmers, which would boost farmers' incomes, provide cheaper housing, and potentially spur more land reform.

There will also be a new group to lead these reforms. Leading Groups are formed by members of the Party leadership to oversee major policy areas, the Finance and Economics Leading Group, for example, co-coordinated the drafting of the Third Plenum document's economic sections. Setting up a new leading group to oversee reforms is a good move, as a high-level body is needed to drive reforms through an often resistant and uncoordinated bureaucracy. In recent months, some reformist economists have called for the revival of the Party-level body that drove reforms during the 1980s.

The key to all this will be implementation. But we now have a road map of sorts, so we are cautiously optimistic about the prospects for the economy during the next few years.

The author is head of research, Greater China at Standard Chartered Bank.

(China Daily 11/22/2013 page9)