China Announces Sweeping Reform Agenda at Plenum

November 15, 2013

The Chinese Communist Party (CCP) on November 12 concluded the much anticipated Third Plenum of the 18th Central Committee. Based on the vague official communique released at the plenum’s closing, most initial media commentary quickly pronounced the meeting disappointing—if not a total failure—causing markets to punish Chinese stocks. But the new leadership team proved these judgments to be premature with the release on November 15 of a comprehensive blueprint containing the most sweeping reform proposals in decades. The bold reform package is a powerful demonstration of President Xi Jinping’s personal authority within the system after only a year at the helm of the CCP.

Q1: Why was the initial press read of the plenum so far off?

A1: The miscue essentially reflects a poor understanding of the basic mechanics of CCP procedure and practice. As a general rule, plenums are not heavy on specifics. They usually set broad guidelines that, depending on the plenum’s particular focus, are then translated into more defined policy outcomes at a series of closed-door end-of-the-year meetings tasked with designing implementation. The media criticisms were based on the lack of detail contained in the plenum’s official communique, but the function of the communique is to describe in lofty terms the plenum’s achievements, not to provide explicit recommendations. Instead, the plenum’s “decision” or resolution, which trails the communique by several days when made public, usually contains more granular directives. This document often is kept secret, but, given this plenum's significance as the Xi administration’s first major policy conclave, the leadership clearly wanted to make a statement.

Q2: What are the major reform recommendations contained in the “decision” document?

A2: Politburo Standing Committee member Yu Zhengsheng put it well late last month when he hinted that “The depth and strength of the reforms will be unprecedented and will promote profound changes in every area of the economy and society.” The document directs an immediate end or substantial reform to many of the regime’s most noxious—and longstanding—practices. It abolishes in one stroke the labor camp system, promises a “step by step” reduction in the number of crimes subject to the death penalty, and eases the one-child policy by allowing couples to have two children if just one of them is an only child, as opposed to the current stipulation that both parents must be. Other important social reforms include establishing “reasonable requirements” for rural residents to obtain hukou, or residency permits, in large cities, and to create a path for rural migrants to have access to affordable housing and social services in the cities where they reside.

The document reaffirms the dominant role of the public sector in the economy but upgrades the market to a “decisive” role in allocating resources, in contrast to the previous characterization of the market’s role as “basic.” Financial sector liberalization is a central focus of the reform package. It allows for private capital to set up small- and medium-sized banks, calls for the establishment of a deposit insurance system, and urges the acceleration of market-based interest rates and the convertibility of the renminbi capital account. Promoting a sense of urgency, central media immediately featured the heads of the various financial regulatory agencies commenting on the implications of the reforms for their respective industries.

Even the mighty vested interests in the state-owned enterprises (SOEs) did not escape the reform tidal wave. The document announced that thirty percent of SOE profits would be remitted to the central government by 2020, up from the current zero-to-fifteen percent. Private firms also will be allowed to enter some of the protected sectors—such as railways—and they are encouraged to take part in reforming the state-owned firms. The document also calls for professionalizing the management of the SOEs and for separating their business functions from government.

In keeping with Xi’s anti-corruption drive, the document also stressed reforms to the CCP’s anti-graft watchdog that include making its officials less susceptible to interference from local officials in their investigations. It calls for a more consultative policymaking process, emphasizing new oversight responsibilities for the rubberstamp legislature and additional checks on CCP power. The Chinese military also will undergo potentially sweeping structural reform, with a proposed shift to a joint command system and the establishment of operational theater commands that may ultimately replace the current seven military regions.

Q3: What about the two new leadership groups established at the plenum?

A3: The plenum also called for the launch of two new high-level leadership bodies to improve policy coordination and implementation. On the economic side, the CCP leading group for “comprehensively deepening reform” is expected to be chaired by either President Xi or Premier Li Keqiang and to be staffed by several other senior Politburo members. It will have an extraordinarily broad writ and be tasked with managing the entire reform process from policy formulation to design and through to implementation. A key challenge going forward will be clearly defining the structural relationship between this entity and the policy executing agencies tasked with carrying out its directives.

Similarly, the document called for the creation of a national security coordinating mechanism notionally modeled on the U.S. National Security Council (NSC). Unlike the U.S. NSC, however, the Chinese entity likely will have a strong focus on internal security matters. The reference to its creation in the document was mentioned in the section concerning the regime’s social management policies, and the Chinese foreign ministry spokesman was quick to underscore that the body would be aimed at dealing with “terrorists, extremists, and separatists.”

Still, there may well be some internal confusion—or perhaps friction—over the body’s jurisdiction. Of note, official media initially translated the body’s name into English as the “State Security Committee,” using the regime’s code language typically associated with internal security matters. In citations following the release of the full plenum document, however, the English rendering now refers to a “National Security Commission” and states explicitly that the body will deal with both internal and external security matters. As of this writing, the nomenclature discrepancy has not been rationalized on the official news agency’s English-language website, which is unusual.

Q4: What does this all say about Xi Jinping’s standing in the system?

A4: The decisive plenum outcome underscores that Xi has fully consolidated power and is rapidly emerging as the most powerful Chinese leader in more than a decade. The establishment of the National Security Commission—a goal that eluded his two predecessors—shows he has tamed the most powerful elements in the party machinery, the military, and the intelligence and security services, all of whom will lose at least some policy autonomy under this new framework. Other reforms hinted at in the “decision”—such as the mooted military structural changes and the modifications to the anti-graft system—also reflect longstanding debates within the system that never were resolved due to substantial bureaucratic resistance and infighting. Moreover, both of the new leadership bodies demonstrate that Xi has sufficient clout to create structural solutions at the highest levels of the system to get around ministerial-or organizational-level foot-dragging. We should now watch closely to see if Xi staffs these new bodies with his close associates as yet another demonstration of his growing power.

Christopher K. Johnson holds the Freeman Chair in China Studies at the Center for Strategic and International Studies in Washington, D.C.

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