China Politics Weekly No. 105- August 29, 2016

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More reforms…

There has been increased momentum around economic policy recently, as Bloomberg noted in an article this week. As evidence, the article cited the NDRC’s encouragement of private companies to take part in 165 investment projects; statements by MOFCOM that there would be further opening of certain sectors to foreign investors; reports that central steel and coal SOEs will reduce capacity by 10%; new trial measures to let SOE employees own shares; and new State Council opinions on further clarifying fiscal responsibilities between central and local governments.

In fact, the list doesn’t due justice to the activity that we have seen in recent months. In addition to the above, last week the State Council also issued a major plan for reducing costs for the real economy. Since June, other important policies include Central Document No. 18 about reforming the investment and financing system; State Council Document No. 48 on setting up a fair competition review mechanism; and State Council General Office Document No. 56 on reorganizing central SOEs.

Perhaps more importantly, top leaders are emphasizing the need for implementation in addition to policy formulation. July’s Politburo meeting was very clear on this point, saying that the time for studying was over and now is time to get things done. The State Council’s recent decision to send inspection teams to the provinces to oversee overcapacity reductions is further proof that there is increasing emphasis on implementation.

…and more confusion?

The problem is that, not all of these policies are necessarily well-formulated or consistent. SOE reforms are perhaps the most obvious example. The recently mooted employee stock ownership pilots are a step in the right direction (though small- they will only be trialed in around 200-300 of China’s 150,000 SOEs, and results will not be evaluated until 2018). They will help to align firm and employee incentives in a way that should improve efficiency and maximize profits. However, a new “accountability system” for SOEs also recently released is bound to have the opposite effect. It focuses on punishing SOE managers who make unwise investments; this is bound to sap initiative and make SOEs overly risk-averse.

One of the consistent themes of the past year (and one often echoed on this most recent trip to Beijing) has been a lack of clarity about economic policy. Are officials supposed to give more play to the market? Or pick winners in emerging industries? Are they supposed to stabilize growth? Or clean up the environment? China does not need more policies; it needs more clarity on what the overall plan is and what needs to be prioritized.