The most recent third Plenum has proposed many bold, structural reforms that, if implemented correctly, can both enhance the effectiveness of the government and improve the standard of living. The 60-point document has outlined measures to enable local governments to sell bonds in order to fund construction, thus deepening financial markets. Moreover, there is the potential for officials to be rated on measures including borrowing levels, theoretically reducing the burgeoning debt levels in China’s local governments.
The structure of how revenues are generated coupled with which part of the government foots the cost of welfare programs has created an onerous issue for local governments. “Currently local governments are responsible for 80 percent of spending while getting about 40 percent of tax revenue.” The shortfall in revenues, as well as securities to tax, has left the local government to use unconventional means for funding. In addition to Local Investment Companies, local governments frequently requisition land at set prices, which are used for “compensating” the displaced individuals, followed by a sale of the same land to commercially related enterprises at a premium, generating profits (revenues) to fund expenditures. However, the recent 60-point document discussed reforming the hukuo system. Potentially encouraging urbanization through scaling back the household registration system, the facilitation of labor mobility between rural and urban areas may prove an additional burden to local governments. As a result, the plenum discussed requiring SOEs to contribute 30% of their profits to the state. This additional revenue source could make the reduction in the hukuo system increasingly feasible. As one analyst points out, fundamentally, “The localities have so much power [if] their incentives are [not]-aligned with the party’s grand objectives that [is] a real problem.”
Other notable reforms revolve around the CCP’s continued assertion that China will further liberalize its market as well as changing the one child policy. Establishing market-determined prices for commodities as well as incentivizing both private and foreign investment are a few of the key reforms outlined by Xi and the CCP. Regarding the one-child policy, the plan essentially enables all parents to have 2 children. Since any parent who was an only child (should be most parents over the next decade or two) is allowed to have a second baby, all couples whose families followed the law will be legally entitled to a second child.
It will be interesting see how all of these reforms are actually implemented. China has consistently, for many years often discussed reforms, and, although many have been successful, others were not provided with the means to be truly effective.