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 China's Third Plenum: What The 'Smart Money' Thinks - Opinion Piece

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PostSubject: China's Third Plenum: What The 'Smart Money' Thinks - Opinion Piece   Mon Nov 11, 2013 8:10 am

China's Third Plenum: What The 'Smart Money' Thinks



For most of the thirty-five or so years that I’ve been in the China-watching business, the easiest question of all to answer has always been: “Tell us what will happen next?” Easy because the best answer has consistently been: “Pick a point sufficiently high on the chart, ten years out, and China will reach that.” It might not have followed a straight path in actuality, but at the end of the ten years, the extrapolation – which was always somewhere between 8-10% — was pretty nearly always essentially right. True, some years, 1989, for example, were more challenging than others, but over the long run, the past was always a good predictor of the future. That was, until recently.

The last few years have proved more difficult for China. Growth has been less reliable, and linked to Western economies by its reliance upon exports, and infrastructure investments tied to those same exports, China’s economic fortunes have to some extent been held hostage to our own anemic growth. In addition, internal social issues over environmental degradation, labor conditions, corruption, heavy-handed local administration and economic inequities, etc., have made China an even more complex place to govern. All in all, day by day, managing China is less and less easy for the guys at the top. Which raises the question: what are they going to do about it? There is good reason to believe that in the next few days, we’ll get a glimpse, or maybe more, of what’s in store for China in the near-term future.

Between November 9th and 12th, the ruling Chinese Communist Party is holding its third plenary session of the 18th Central Committee, notable because of its coinciding with the early-days of the Xi Jinping-Li Keqiang leadership decade, and because of the historical record of prior third plenums: the 1978 third plenum launched what was to become the economic reforms that transformed China from a moribund autarkic economy into a global powerhouse, and the 1993 third plenum established the market reform agenda that was later to be essential to the modernization of China’s economy under Premier Zhu Rongji, both major thresholds of policy change that were fundamental to catalyzing China’s development progress. With a pedigree like this, it is not surprising that many observers expect big things over the next few days.Barry Naughton, a long-time and highly-respected observer of the Chinese economy sets-up the key questions regarding the agenda for the third plenum as being:

  1. Is there a clear direction for reform of local government finances?
  2. Will the Party take bold steps to reform land ownership?
  3. Will the Party move to abolish dual citizenship and give rural migrants full rights to live life as equals in the city?
  4. Will the Party boldly re-affirm the rights of private businesses and begin to scale back the privileges of state-owned monopolies?


And, as if in response, Deutsche Bank, in a recent “Data Flash” recently quoted Yu Zhengsheng, Chairman of the Chinese People’s Political Consultative Congress, as saying that “the scope and aggressiveness of the [anticipated third plenum] reform package will be “unprecedented” and the impact on all aspects of the economy and society will be “profound”.” Not bad, for starters! Deutsche Bank then goes further, however, by predicting some answers to Naughton’s questions:

  • China [will] to reduce entry barriers (investment restrictions for private investors) [in key industries] by 90% in the medium term,
  • China will “significantly increase it openness by granting foreign investors market access to most services industries”,
  • China’s capital account will “become basically open within 3-5 years” and a few thousand privately owned banks [will] be set up in coming 5-7 years”,
  • There will be major Hukou [urban resident privileges] and rural land-use-rights reforms,
  • China will “list most of the unlisted [State Owned Enterprises] SOEs on the stock market, and establish a [Singaporeian inspired] Temasek-like state asset management company to run the SOE portfolio”,
  • and big reforms in the rights of municipalities to issue bonds for financing, in the Social Security system, and in the establishment of property taxes.

A set of initiatives that, if adopted, could truly change the Chinese economic landscape, and which are, in fact, not that much out of line with what other institutional observers of the China scene are also predicting.
However, at the same time, on the eve of this next third plenum, with the cover story of The Economist urging President Xi Jinping to “Go on, bet the farm” and prove that he is the reformer that many have been hoping for, there are also weak signals of uncertainty, if not doubt. The Washington Post’s editorial page editor, Fred Hiatt, has reported from Beijing that “what is striking in many cases is the… uncertainty and, at times, even pessimism about China’s future” that he found while there. And, there is, as well, a small set of smart bettors [who I am referring to as "smart money"] – anonymous for sure, but with whom a casual inference drawn from screen names suggests a high-degree of China expertise among those who can be reasonably identified — who are “trading” in predictions on www.SinoMarkets.org, and who are betting on a much more modest “near-term future” – 2020, where the probabilities [as of November 10, 2013] of China achieving:


  • Democracy with Chinese characteristics” A multiparty democracy with Chinese characteristics emerges, with a vibrant civil society, a robust and wealthy middle class, a thriving economy, and a cooperative yet assertive role in the international community: is given odds of a bit below 21%;
  • “Inner-party’ democracy, international trouble” China reaps the benefits of a unique bipartisan government, a successful economic transition, and a push for religious freedoms but faces ongoing challenges in its foreign affairs: is given odds of about 21%;
  • “Strong CCP faced with economic challenges” A resilient, authoritarian, one-party China copes with a stagnating (but not yet failed) economy and a number of domestic challenges and pursues a broadly cooperative foreign policy out of economic necessity, is given odds of: nearly 34%; and
  • “Doomsday” The loss of central state control, [experience] a “perfect storm” of economic failures, and a loss of ideological legitimacy [which will] put China at loggerheads with the international system and send it spiraling down a cataclysmic trajectory, is given odds of nearly 24%.

What can we tell from the small number of predictions that have been made to date? For one thing, even among experts, there is little agreement, even when the set of four scenarios that they were asked to choose from [which were, in turn, derived from four scenarios discussed in the roundtable “China in the Year 2020,”Asia Policy, no. 4 (2007): 1–52] were quite varied. There was really no one choice that dominated as the most likely outcome! Perhaps, more importantly, however, is that what is, at 34%, the most likely scenario coming out of the third plenum is likely to be much more similar to the present status quo than the most optimistic predictions for the plenum are suggesting. To be fair, many of the predictions by BusinessWeek, Brookings Institute, and The Financial Times are also modest in their expectations, but they all are also flirting with a small, but finite probability of something really big, really happening on the upside. Our expert China bettors are as well, but they are flirting more with “down side” than with “upside” breakthroughs. It is sobering to recognize that our “smart bettors” have assigned a surprising large – nearly 25% – probability to the Doomsday scenario, which if realized would have potentially catastrophic consequences for all of us. Furthermore, the rationale for such choices quickly bring us back to practical reality, and include: institutional inertia, an unwillingness of the Chinese Communist Party to trust its fate to democracy, a perceived need by the Party to “overcompensate by trying to exert more control over daily life”, and finally the recognition that “there is no ready alternative.”

China-watching has always been a risky proposition, and the future looks to be even more so. The opinions of a small number of observers is hardly sufficient to capture the complexity of the phenomenon we are trying to predict, but these are, for the most part, well-informed and thoughtful observers, and this is is an important issue for all of us. Only time will tell the eventual outcome, but it is clear that we might be standing on the brink of big changes, one way or another, for a significant player in our global economy, not to mention for a large percentage of our species.

http://www.forbes.com/sites/billfischer/2013/11/10/chinas-3rd-plenum-what-the-smart-money-thinks/

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