November 14, 2013

China: The Next Phase of Reform

China: The Next Phase of Reform

Summary
The commitment and ability of China's leaders to follow through on new policies and to meet rising expectations will be tested as they strive to balance competing social, economic, political and security challenges. Three decades ago, China embarked on a new path, creating a framework that encouraged the country's rapid economic rise. The successes of those policies have transformed China, and the country's leadership now faces another set of strategic choices to address China's new economic and international position.

The much-anticipated Third Plenary Session of the 18th Communist Party of China Central Committee concluded Nov. 12 after four days of closed-door deliberations among top political elites. The full document containing the policy proposals will not be released for days or even a week, but the initial information suggests China's leaders are seeking more significant changes in their policies to try to stay ahead of the challenges the country faces.

Analysis
According to the communique broadcast by state mouthpiece China Central Television, important policy changes include the establishment of a committee to guide the country’s comprehensive reform agenda, the establishment of an integrated National Security Committee responsible for coordinating public safety and national strategy, and the easing of the country's 33-year-old family planning policy to allow more couples to have a second child. The communique also stressed that Beijing is committed to carrying out comprehensive economic reform over the next decade in accordance with China's economic, social and political transformation.

In light of China's imminent demographic imbalance, the changes to family planning were expected. The country's massive pool of cheap labor previously underpinned its economic and social transformation, but as China prepares to transition toward a consumer-based economy, its aging population is a problem.

No details have been given on the structure of the National Security Committee. The goal was to merge different institutions in charge of diplomacy, security, military and intelligence into a coordinated agency under the authority of the president. However, the decision -- which is far more than an institutional change -- came after a re-evaluation of China's internal and external security environment and of the country's emerging role in the international community. Beijing recognizes the need for a more delicate and coherent team to handle the country's strategic issues and pursue its national interests.

China is now at a turning point. The country's economic growth has firmly cemented Chinese businesses and national interests around the globe. It has raised the living standards, but also the expectations, of China's citizens. There is a growing sense of Chinese patriotism that exists beyond the confines of the Communist Party. The emerging educated middle class has traveled the world, has seen multiple systems in action and is taking a greater interest in local and national political decisions. Modern forms of communication such as social media give Chinese citizens the ability to rapidly share successes and grievances across the country, to identify and single out cases of political corruption and to more actively keep the Party and leadership under scrutiny. At the same time, the expanded Chinese imports of raw materials and exports of commodities have substantially expanded China's active foreign interests, requiring a more nuanced and potentially a more activist foreign policy.

Beijing wasted no time ratcheting up public expectations over its reform agenda prior to the meeting. Proposals included financial liberalization, the restructuring of state-owned enterprises, the readjustment of fiscal structures between central and local government, steps to counter official corruption, the expansion of property taxes and pricing reform. At the same time, top leaders were busy setting expectations for a new economic transformation. This led many to believe that the meeting would bring the country to the next stage of economic prosperity and social development, like Deng Xiaoping did in the post-Cultural Revolution meeting in 1978.

Admittedly, China has moved well beyond the massive economic mismanagement and social disorder of the post-Cultural Revolution period. However, the inevitable loss of the demographic advantages that sustained the country's economic miracle, combined with the prevailing social inequality and regional disparities as well as the rising political awareness of the middle class, mean the new leadership is facing even greater challenges to preserve its legitimacy. Doing so requires a constant commitment by political leaders to respond to China's changing internal and external environments. It also requires a path toward reform that meets public expectations while overcoming anti-reform elements.



Read more: China: The Next Phase of Reform | Stratfor
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