The 3rd Plenary Session of the 18th CPC Central Committee approved a decision on “major issues concerning comprehensively deepening reforms” in economic, political, cultural, social and ecological areas, and set forth that “decisive results must be achieved in key sectors by 2020”. The decision gives a broad blueprint for China’s reforms and development for the next few years and will have profound implications for China and the world.

The decision, while covering all areas of reforms, has pinpointed explicitly that economic reform is the key, and the core of the economic reform is the proper relationship between the government and the market, leaving the market to play a decisive role in allocating resources, and the government to play a better role. The role of the market has thus been elevated to a “decisive” position, a big jump from the “basic” role approved by the 3rd Plenary Session of the 14th CPC Central Committee 20 years ago. While only a one-word difference, it is a fundamental key tone and will lead to a series of changes ahead.

Wider market cccess and fair competition

First, energy and infrastructure. Since the market, instead of the government, has the final say, either state-owned, private or foreign companies, should have equal chances and access to resources. By far the most essential resource in economic growth, energy, including oil and gas, power generation and supply, will allow private and foreign investors access to exploitation, refining, transport, wholesale and retail sales. The monopoly of China Oil, Sinopec and CNNOC will ultimately be broken. Retail prices of fuel will no longer be decided by the National Development and Reform Commission, but by the market. Power supply will also be diversified. Infrastructure construction will also encourage private and foreign participation. All business entities should have fair and open competition, so as to reach the best mix of market resources and result in the highest possible productivity, with minimum cost and maximum returns.

Second, trade and investment. The government should not intervene excessively in trade and investment, but rather leave it to the market to determine fair competition. The threshold of investment will be lowered (no minimum capital requirements, for instance). As a rule, the negative list mode will gradually be applied to the whole country.

Third, a cure for overcapacity. The existing serious overcapacity in a number of industries has actually been the direct result of too much government intervention. The local governments, in particular, have pursued growth through excessive investment, not caring about real market needs and returns. As the market will decide the supply and demand of resources, all investment projects have to be based on strict, scientific market feasibilities and returns, instead of government will. The excessive investment will only lead to investor losses, and will gradually be wiped out by the market.

Fourth, financial liberalization. The real economy, once operating on a market basis, will inevitably require a compatible banking and financial system. The latter, in turn, will support the real economy. Therefore, Chinese banking and the financial system will see significant change in the years ahead. The supply of financial resources will be oriented to market demands, with no discrimination against small and medium-sized enterprises. Bank lending rates should also be decided by the market, or by negotiations between lender and borrower. Full market competition will gradually evolve among state-owned, private, foreign, state-private partnership, or private-foreign partnership banks. The government will step back, with its governance role limited . The current monopoly of state-owned commercial banks will lose its legal basis.

Fifth, innovation. Innovation, the key for China’s restructuring and upgrading, will increasingly rely on market forces, instead of government handpicking. The recent boom in Internet shopping on Nov 11, showed how market forces can trigger major innovation. It is thus expected that more innovations will happen and new markets will be created.

Sixth, public goods. The government should offer public goods, such as affordable housing, education, medical services, physical training and community services. On the other hand, however, they are also resources and thus should be decided by the market. It does not mean that they will all be commercialized. The government will still run part of the services, as in all other countries. The private and foreign investors will be allowed access to those sectors as well, offering adequate, best quality supplies, while the government will procure most of them, and then provide to the people.

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