In November 2013, the central committee of the Communist Party of China (CPC), at its third plenum, issued a Directives Paper (with 16 items and 60 prescriptions), setting out a long-term strategic compendium of China’s reform agenda, based on the principle of separation between market and state under the unifying predominance of the Law. Its prescriptions refer to three basic objectives: inclusiveness, protection of rights, and improving economic efficiency. The Directives Paper formulates an ambitious plan of reforms over the next 20 years, aimed at overhauling the factor price system. There are two pillars to the Reform. First, labor market developments should provide workers with enhanced bargaining power. Government is expanding the basic social safety net, promoting low catch-up, enforcing labor contracts and introducing collective bargaining. Second, capital market reform has been speeded-up by the urgency of dealing with non-performing loans held in state-owned enterprises and credit platforms guaranteed by local governments. The Government intends to foster bond markets, encourage private banks to finance SMEs, build a strong prudential framework, deregulate interest rates, and move to Renminbi convertibility in the new Shanghai free trade area. We believe that the political feasibility of the Reform depends on the sequencing of its implementation. Benefits in the early stage would legitimate more contentious future policy decisions. But the deep social changes involved in the Reform also imply risks. Reforming rural land and natural resource prices will be difficult. Farmers’ land-use rights will be secured by law and made transferable in rural land markets. Fuel, water, electricity and carbon prices will rise progressively to their social marginal costs within an integrated urban rural model to accommodate 350 million migrants over the next 20 years. New smart cities and greater social inclusiveness will be spurred by relaxing the hukou system and the one child policy. Tough political decisions will be required related to fi scal sharing amongst local H77governments, and rebalancing the tax system towards more progressive direct taxes.
