China Vows Big Expansion of Economic Freedom

Plan will ease slightly the one-child policy, develop a "mixed-ownership economy," and accelerate convertibility of the yuan, among other changes.

In the biggest expansion of economic freedoms since at least the 1990s, China’s leaders vowed to expand farmers’ land rights, loosen the one-child policy, and encourage private investment in state businesses.

Couples can have two children if either parent is an only child, the Communist Party said in a statement yesterday fleshing out policies set at a four-day conclave in Beijing this month. Farmers will get more rights over collectively owned rural land, while the household registration system that impedes internal migration will be scrapped in towns and small cities.

The new leadership of President Xi Jinping and Premier Li Keqiang, installed in March, is accelerating an unwinding of Communist Party economic policies that originated during or shortly after the reign of Chairman Mao Zedong. The party needs to fuel growth to cement its grip on power in the face of economic headwinds ranging from local-government debt to an aging population that is set to shrink the nation’s workforce.

“The bottom line is that there’s a sweeping reform plan,” said Wang Tao, a Hong Kong-based economist for UBS AG who formerly worked for the International Monetary Fund. “At least from the blueprint, it seems very exciting.”

The family-planning policy, put in place three years after Mao’s death in 1976, was intended to alleviate poverty. It has saddled the nation with a declining labor force: The United Nations estimates that the number of 15- to 24-year-olds, the mainstay of factories that drove growth for two decades, will shrink by about 67 million by 2030.

Under the current policy, couples are only allowed to have a second child if both parents are only children.

China’s stocks rose ahead of yesterday’s release, capping the benchmark index’s biggest gain in a month, on speculation about the reform document. The Shanghai Composite Index climbed 1.7 percent, while yields on the nation’s 10-year notes increased to the highest level since 2007.

“Now it’s going to be the hard and complicated slog of implementation,” said Stephen Green, head of Greater China research at Standard Chartered Plc in Hong Kong.

Former central bank adviser Li Daokui said that a planned scaling back of hukous, the household registrations that limit labor mobility, will be the biggest change to that policy since it was established in 1958 under Mao. UBS says the overall expansion of economic rights will be the largest since 1980, while Mizuho Securities Asia Ltd picked the late 1990s, when state-owned housing became privately owned.

The government will give farmers rights to share, profit from, sell, collateralize, and inherit ownership in collective assets, the document said, adding that a rural property market will be established. The hukou system set up under Mao also will be gradually relaxed in medium-sized cities, while the sizes of mega-cities will be strictly controlled.

 

State Profits

China will develop a “mixed-ownership economy” that helps state-owned assets maintain or increase their value and boost their competitiveness, according to the state-run Xinhua News Agency.

“I’m not exactly sure, frankly, how this is going to play out with state-owned enterprises, and I’m also not exactly sure how you have the market be the decisive force in allocating resources, the way they talk about, and you maintain the dominant role of the public economy in the state-owned enterprises,” Elizabeth Economy, director for Asia studies at the Council on Foreign Relations in New York, said on “Bloomberg Surveillance” with Michael McKee and Tom Keene. “That remains to be played out.”

The party also said 30 percent of profits produced by state capital will be transferred to public finances, allowing the government to spend more on improving people’s well-being. Current policies require central government-administered companies to transfer only as much as 15 percent.

“China is now moving aggressively to assemble the building blocks of a consumer society,” said Stephen Roach, former chief economist at Morgan Stanley and now a senior fellow at Yale University’s Jackson Institute of Global Affairs. “The measures aimed at family planning, capturing excess SOE profits, and rural income support should lead to a stronger social safety net,” he said, referring to state-owned enterprises.

The People’s Bank of China will “make all efforts to deepen reform and opening-up in the finance industry” to promote economic development, Governor Zhou Xiaochuan said in a separate statement.

 

Exchange Rate

The nation will accelerate convertibility of the yuan and freeing-up of interest rates, improve treasury yield curves, and let qualified private investors set up small-to-medium sized banks, according to the decision.

Authorities pledged to speed up property-tax legislation, and the nation will explore raising the retirement age, according to Xinhua. China will push pricing changes for water, oil, gas, power, transportation, telecommunications, and other sectors, the document said.

Bank of America Corp. economist Lu Ting called the shift in the one-child policy “quite small,” given that it only applies to families where one parent is an only child, rather than allowing all parents to have two children.

UBS’s Wang said the change may have only a limited impact on the birth rate.

Still, Yuan Gangming, a researcher with the government-run Chinese Academy of Social Sciences in Beijing, said the plenum decision amounts to the broadest reform pledge since 1993, when President Jiang Zemin paved the way for market-driven changes and a realignment of the relationship between central and local government spending.

At the same time, the latest plenum’s policies “failed to make an ideological breakthrough—for which it’s not able to rival the one in 1978,” Yuan said. He was referring to when then-paramount leader Deng Xiaoping broke with three decades of Maoism and introduced pro-market policies that preceded growth averaging 10 percent a year.

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