On the 30th of December 2013, Professor Yao Yang, Dean of the National School of Development at Peking University gave a speech on the “14th Learning-Mode of China——Century Success Forum”. The following is an excerpt of his speech:
The progress of society, and the wealth and power of a country or nation depends on entrepreneurs. Three aspects will be discussed today: first, how to understand the historical meaning of Third Plenary Session of the 18th CPC Central Committee; second, the economic reforms of the Third Plenary Session of the 18th CPC Central Committee; and third, obstacles that might be encountered in future economic reforms.
How can we understand the Third Plenary Session of the 18th CPC Central Committee and its status over the past 30 years? It should be interpreted from a political viewpoint. Even though the Chinese political system is different from those of Western countries, it can be guaranteed that every decade each administration is able to successfully hand over power to the new administration, forming a cycle every 10 years. On the whole, the past 30 years can be divided into three stages. The first stage is the preparation phase for reform from 1978 to 1991, especially the 1980s. There was an era of neo-enlightment throughout the 1980s, when new ideas and thoughts were introduced. Meanwhile, reform only existed at an embryonic state. At that time, rural reforms were carried out sucessfully, while reforms in the cities had not begun. After Deng Xiaoping's southern tour in 1992, real urban reforms began. In the era of Jiang Zemin and Zhu Rongji, difficult reforms were completed, especially reforms of state-owned enterprises and the government, and entry into the WTO. In the first decade of the 21st century, economic growth was so fast because there had been a foundation laid with the reforms of the 1990s. Some people are under the impression that the reforms were at a standstill during the Hu-Wen government from 2003 to 2012, but I think every era has different tasks. What has been done in this era is actually to make up for the problems that remained from the 20 previous years. The two most important aspects are reflected—countryside and social security. Data shows that basically the countryside has achieved full health care coverage, and social security has also been rebuilt in cities. Both achievements were a great contribution made by this government. The year 2013 may be called a stage of "reform reawakening"; the next decade will be a decade of reform, described by Third Plenary Session of the 18th CPC Central Committee.
Over the past 35 years, three Third Plenary Sessions might be remembered in history. The first is the Third Plenary Session of the 11th CPC Central Committee in 1978. The second is the Third Plenary Session of the 14th CPC Central Committee in 1993, in which the overall framework of the socialist market economy was established. The Third Plenary Session of the 18th CPC Central Committee will be an important conference to complete China's socialist market economy. What should be changed with the economic reforms? Mr. Yao Jingyuan believes that to allow the market to play a decisive role in resource allocation is the most important factor. But how do we implement this into practice? I think several important aspects should be promoted. The first is the negative list management mode; the second is the reform of household registration and population policies, the third is to reform the system of land tenure, the fourth is the reform of the financial system, and the fifth is the adjustment of the central-local relations.
The first aspect is about the negative list management mode. Negative list management mode is a record of non-prohibited activities. Our management mode refers to the things which are allowed and should be done versus those which are disallowed and shouldn’t be done, or rather, those things that may lead to a criminal conviction if done. After the adoption of the negative list management mode, the areas which are inaccessible or subject to a lot of controls will be specified in the future. Companies can engage in those which are not on the negative list. The introduction of a negative list was attributed to the fact that it was an indicator established in the China-US strategic economic dialogue this year. In the China-US Strategic Economic Dialogue, vice Premier Wang Yang had promised to the United States that not only a negative list but also post-establishment national treatment would be established. Post-establishment national treatment refers to foreign companies. Before foreign companies, state-owned enterprises and domestic enterprises were separate, and foreign enterprises had different management modes. In the future, the same management mode will be adopted in all types of companies, which will pave the way for a bilateral investment treaty (BIT) as the next step. Shanghai Pilot Free-Trade Zone has attempted to carry out the negative list. Now we have many controls over enterprises, if the negative list can really be achieved, this will accelerate China's pace towards a market economy.
The second aspect is the reform of the household registration system (houkou) and the adjustment of population policies. The adjustment of the population policy refers to allowing couples to have a second child if either parent is an only child. This is attributed to the contribution of professors in the NSD. Nowadays, when taking the subway, we can see that young people everywhere are on the streets. In 20 years, our country will usher in a "Silver Tsunami", when our total population of 65 and above will probably be the equivalent of the current US population. This will be a huge challenge. Today, a change in family planning policies is essential to meet the challenges of the aging population. In February of last year, the State Council announced a policy on the reform of the household registration, but it was not implemented. The policy proposed in the Third Plenary Session of the 18th CPC Central Committee actually stepped back a little, compared with the policy proposed last year. The country should relax overall control of farmers settling in counties or below the county levels. As long as you have a stable job and residence, you can apply for hukou. According to the statement of last year, as long as you have lived continuously for three years in a medium-sized city, you can apply for a hukou. This time, it is more vague in the case of medium-sized cities. Our country should strictly control the size of the population in large cities. In any case, if the reform of the household registration system is achieved, urbanization will be greatly promoted.
The third aspect is about the reform of the agricultural land system. There are three items in the reform of the agricultural land system in general. The first item is about clarification of property rights. The relationship between farmers and the collectivity is that of between contractors and contractees. In the past 20 years, the reform of the rural land system was carried forward step by step. Ten years ago, the right was said to remain for 30 years. Now it said to be an authentic right, which means measuring the land and the area of each household is determined, then the land deed is sent to every household. What is needed for issuing the deed? The Third Plenary Session of the 18th CPC Central Committee put forward two directions of important policy. The first is that productive land can be used as a mortgage. For example, I have seven acres of land, which previously was only used to grow food and vegetables. And now it can be considered as a property to the bank for a loan, enabling farmers to have property rights. The other is about collective construction of land and homestead, which can directly enter into the market. Previously, the land was acquired through the government, and then compensation was given to farmers. Now this part is omitted. Farmers can sell their own homestead and collective construction land in the market, namely, they could meet developers directly. If these two objectives are realized, then essentially farmers would have property rights for the first time. For example, if we live in cities and have a house, we have our own property, because houses can be traded. In rural areas, although the farmers are considered in collective ownership of the land, they cannot liquidate the land. If these two goals are realized, farmers will have liquidity.
The fourth aspect is financial reform. Two items should be reformed concerning international issues. The first is to achieve the convertibility of capital accounts. Nowadays, even though ordinary people hold substantial investable RMB funds, they cannot invest in the U.S. stock market, rather they can only purchase goods and services in United States, which is called capital controls. In the future, capital controls may be relaxed. Another upcoming reform is an expansion of the floating range of the RMB. The value of the RMB will be decided more by supply and demand. Reform in the domestic area involves not only marketization of interest rates, which will soon be promoted, but also financial markets, which are open to domestic private capital, and is a huge challenge. Now that Internet finance is very popular, such as the Alipay of Alibaba, with tens of billions (RMB) to hundreds of billions, all it takes is to use of this kind of money, and you’ve got an Internet finance industry. The next step of its development will depend on whether or not regulators will permit participation in Internet finance, which is a financial system reform issue.
The last part of the reform is central-local relations, the core of which is the matching of administrative and financial powers. Now the revenues of the central and local budget is that the central and local governments take 50%, but spending of local governments account for 85%, while the expenditure of the central government only accounts for 15%. Who should make up for the huge gap? On the one hand, the central government makes up for this by transferring payments, and about 40% of local government spending comes from the transferring of central government funds. Some of it depends on the self-financing of local governments. Now most of it comes from selling land. What measures will be taken to allocate administrative and financial powers? One way is to take away their spending power, and the other way is to give local governments more channels for raising revenue, such as giving them more space for debt issuance, even allowing local governments to issue bonds directly in the stock market. Basically this is the content of several reforms.
So, where is the difficulty here? I think the challenge is enormous. Current reforms are not like that of the 1980s and 1990s, when the results were obvious. Now the results of reform are not clear. The difficulties are reflected mainly in the following aspects: the first is the negative list and how to determine the negative list. In the financial sector, where is the negative list? Does Internet finance belong to this list? A lot of people are doing business in Internet finance. In the future, whether it is operated in a transparent way will be a great challenge. In addition, besides the industries on the negative list, what is the standard of approval and how complex is the process? This must also be determined.
The reform of the household registration system is faced with great challenges. Each province is independent to adjust its population system, but there is no way to allow each province to adjust the household registration system. Also, none is willing to take the lead in doing it. Zhengzhou used to open its hukou, and it failed. Therefore, the reform of the household registration system must be done as a whole for the country. Whether to resume the 90th item (citizens have the right to choose where to live) of the 1954 Constitution of the People's Republic of China is still a question. It was removed in the 1982 Constitution of the People's Republic of China. Since the reform of the household registration system should be carried out, can it achieve a comprehensive adjustment at the national level?
The debate on reform of the agricultural land system is serious. After the release of the Communiqué of the Third Plenum of the 18th Central Committee of the CPC, many people are eager to have a try, especially some people who are engaged in capital operations who would like to set up a company. For example, trust companies would like to invest in agriculture. The Rural Work Conference stressed three points, including that collective ownership of the land cannot be changed and land management cannot be changed. Xi Jinping, the General Secretary, impressed everyone with the following words: the food is controlled by our own hands (emphasizing food security). The reforms mentioned above are about collective land ownership. For example, I have seven acres of land mortgaged to the bank. If I do not pay, it is actually very difficult to be liquidated by the bank because ultimately the land is in the hands of the collective. This is a contradiction. Collective constructive land directly enters into the market, which not only creates many issues of hukou from a legal perspective, but also may be in conflict with urban planning. For example, I am a city dweller tired of city life and I would like to build a house in the countryside. A lot of people have this idea, and they think to build a house is very cheap. When I find a farmer and tell him that I would like to tear down his house and help him build a new house, where he can live on the first floor and I can live on the second and third floors, many farmers would be willing to do so. However, property rights are not guaranteed. Therefore, many companies who want to invest in agriculture must be very careful, because the law is not complete. To promote the reform of the land system is quite difficult.
International parts of financial reform are not a problem because it is forced out. A force mechanism will promote the internationalization of the RMB, because the central government has determined to promote the internationalization of the RMB. However, if the RMB wants to become an international currency, it must be entirely convertible. Also, it should fluctuate, which could be achieved ??soon. It remains to be seen in the domestic arena. Several large companies proposed to open a bank, and Alibaba proposed to build an Alibaba Bank. People were originally very optimistic that this could be achieved, saying that it could be approved before the end of the year, but now it seems quite difficult to finalize. This illustrated that the pace is very slow for the market to be open to domestic investment. Regulators fear bearing responsibility. Now when you do business in Internet finance, there is no problem if no problems occur, but if a problem occurs, they can shirk their responsibility, saying that it's not their responsibility and I never allowed such activity in internet finance. If there is something wrong, they can use legal means to punish those offenders.
There are many problems with central-local relations. One of the difficult points is that our country is a unitary state. The authority of local governments comes from the central government, which should shoulder important responsibilities for the local government. While in a federal state, the authority of the central government is acted out by the local government, which should be responsible for financial obligations. In China, a local government cannot declare bankruptcy, because when a local government cannot pay its debts, the central government has the responsibility to pay off the debts; this is the core contradiction. The problem of how to achieve fiscal decentralization in a unitary state is difficult to resolve. The current solution is that the central government holds the power. It would hold the financial power and use transfer payments, which is not going to change. If the central government gives up the revenue, then the regulatory capacity of the central government to local governments will be greatly decreased. For issuing local government bonds, I personally still hold a more cautious view, because in the end the central government would back it, and then give the wrong signal to the market. Following this, the interest payments of these local government bonds will be very high, and it will become very difficult for there to be enterprise development.
To sum up, the reform program is exciting, and Xi Jinping, the General Secretary, not only is taking the lead and serves as head of the leading group of reform, but also sets a schedule. We must complete all of the reforms by 2020, which is exciting. But there are a lot of obstacles to overcome to achieve this goal. Of course, much more about how to change the market and make it more market-oriented and free were discussed in the Third Plenary Session of the 18th CPC Central Committee, but little about how to control the government was discussed. The great power of the government, especially the local government, is reflected in the management. The local government itself is actually a large company, which plays with entrepreneurs in the market. In this market, there are still great challenges to building a true market economy. So, the next step is to change not only the economy, to become market-oriented, but more importantly, to change the government through economic reforms, so that reform of the government is further deepened. (This article was not reviewed by the speaker).
