WEEKLY COMMENT 14-11-2013

WEEKLY COMMENT 14-11-2013

By Barry Edwards

China’s New Economic Vision

 

Last Tuesday the Chinese President, Xi Jinping, issued a communique about the decisions made at the ‘third plenum’ of the Chinese Communist party’s 18th Central Committee. This eagerly awaited announcement did not give a lot of detail but hinted at some of the decisions that were made.

In China, plenums are not held very often but they do set out the course of the planning of the economy and have been instrumental in changing the progress of the country. The first one, in 1978, was the most dramatic since it set China on its path of economic development changing the disastrous effects of the Cultural Revolution imposed on the country by Chairman Mao.

The second one, in 1993, continued the modernisation of the economy and started the enormous expansion of manufacturing capacity that changed the product sourcing of developed countries almost eliminating inflation in the process. It also brought China into membership of the World Trade Organisation which confirmed their acceptance of the basic rules of trade.

A plenum means ‘a full assembly of people or a committee’ from the Latin ‘plenus’ meaning full. In China, this means gathering together 350 of the most influential people from all sections of the economy and deciding what changes need to be made to advance and improve the social and economic development of the country. The vague announcement on Tuesday alluded to a change in the restrictions imposed on farmers moving to cities and allowing them to sell their land. It also said that markets would play a decisive role in allocating resources.

Although that is not much to go on, it is a big step in social freedoms and is a clear commitment to make everyone equal eventually and open up the economy to the effects of the markets instead of the iron grip top down controls currently practised. We are told that a more complete announcement will be made next week which hopefully will give a little more detail.

The Chinese are very wary of bringing forward democracy from the Russian experience  and seem to prefer to get the economy thriving before loosening political control. That approach has its critics but it is considered a wise move to make sure everyone is established and contributing to the economy before the democratic process is unleashed on a nation that has never experienced a system that we are all familiar with. In fact, democracy is a fairly recent phenomena in all countries when you look back historically and many have not learned how to make it work properly yet. The debate on this will continue unabated but, in my view, the Chinese method may well save many lives from the disruption of being thrown into a new kind of government in a short time.

If you imagine what it would be like in a world where the second largest economy and the most populated country had a civil war, how would that effect the rest of world. It may lead to another world war based in Asia since other countries would take sides and support one side or the other. It does not make a pretty picture and would certainly ruin all developed economies causing chaos and violent reactions in those countries. History tells us how easily these things get out of hand and circumstances occur that cannot be controlled properly. It is probably best that the Chinese evolution continues the course it is on at the moment.

The point of that short political diversion is that this is major consideration in many countries that have eventually become democratic and many people believe that the path to democracy in china should be handled very cautiously. The Chinese leadership is fully aware of this dilemma and it explains to some degree the way they are slowly relinquishing control. They are feeling their way along a well-trodden path that has demonstrated extreme violence in other parts of the world, trying hard to be fair and true to their principles at the same time. That is not easy to implement and they are managing to move forward without excessive suppression.

This explains how they manage the announcements of their economic progression because it allows for the widest interpretation of policy that filters down through the bureaucracy and is implemented at local level. The problem that creates is that it is a slow process and it is often abused as it is instigated. That is why the communique stated that a new committee is being established to ensure the plans are managed effectively and if there are any blockages, they will have the power to overrule the local officials. This will improve the effectiveness of delivery and reduce the widespread corruption that is endemic in the local Communist Party structure which is something the leadership have been very strict on recently.

The China specialist commentators have, in the main, reported with confidence that this third plenum is a major move forward and they are certain that this new regime is determined to speed up the changes to the economy. Reading between the lines is the art of understanding the Chinese leadership’s intentions, very similar to how economists interpret central bank announcements!

We will have to see if the announcement next week gives some more detail about the decisions made but you can be certain it will require careful analysis by those that understand the cryptic wording.

That’s all for this week, more observations next week.