Pension reform not discussed at China's Third Plenum

Few were surprised by the Communist Party’s Third Plenary session in Beijing. But economists say some of the wording suggests reforms are not far off.
Pension reform not discussed at China's Third Plenum

China’s Communist Party concluded its four-day close door plenary meeting earlier this week. Topics included deepening economic reforms to ensure the market plays a more “decisive” role in allocating resources, changes in judiciary systems and country-wide implementation of free-trade zones.

Some economists caution that markets may be disappointed by the communiqué released given high levels of anticipation leading up to the talks. The Chinese government for example sadi it will increase control and influence over state-owned enterprises. Officials also failed to address pension reforms, the one-child policy and the residence permit reform (Hukou).

No major progress emerged on the SOE reforms. Although officials stressed that public and non-public economies are an important part of the Chinese economy, the government emphasized plans to “resolutely solidify and develop the state-owned sector by making it play a predominant role and increasing its control and influence”, notes Ting Lu, a Chinese economist at Bank of America-Merrill Lynch.

As such, any hopes of China’s SOEs soon applying a similar model to Singaporean state investor Temasek – which uses stock holdings in SOEs to set up sovereign investment funds with goals and evaluation criteria – aren’t likely, argues Liao Qun, chief economist at Citic Ka Wah Bank.

One point economists repeatedly highlighted was the change of wording in economic reform discussions. For the past 20 years, the mainland described markets' role in allocating resources as “basic”.

Yet in the latest round of talks, officials used a much more concrete word to describe markets' involvement – "decisive". Some economists say this suggests that the government is determined to deepen market-oriented reforms – Deutsche Bank for one argues this could make deregulation a top priority for mainland officials.

It could also change pricing schemes. In China, the National Development and Reform Commission (NDRC) is responsible for setting and adjusting prices for a number of commodities, including fuel.

“The word ‘decisive’ signals that markets will play a determining role in economic activities, such as pricing,” Raymond Yeung, a senior economist at ANZ, tells AsianInvestor. “The government will also respect market mechanisms.”

Shanghai’s free-trade zone was also a point of discussion. China’s State Council in September unveiled the blueprint for a free-trade zone, which would ideally result in interest rates being determined by the market, offer full renminbi convertibility, and the possibility that foreign investors could invest into industries notoriously difficult to access, such as the telecommunications sector.

Deutsche Bank says that “controls on market access will be relaxed, the development of free-trade zones will accelerate and inland borders will be further opened up. This is in line with our expectation that ‘national treatment’ will eventually be given to foreign as well as domestic private firms in most sectors”.

“If the free-trade zone in Shanghai proves to be successful in three years, it will be rolled out in the whole country,” Yeung notes. “It is a very aggressive target.”

According to the communiqué, the Communist Party of China (CPC)’s central committee will set up a team responsible for deepening the reforms and implementing actual change by 2020.

China also plans to set up a State Security Committee (SSC), similar to the White House National Security Council (NSC) in the US. The SSC will likely be chaired by President Xi Jinping. Other key members will likely include Premier Li Keqiang, the chairman of the CPC Central Military Committee, the Minister of Foreign Affairs and the Minster of State Security, as well other senior officials related to foreign affairs.

Previously all reforms were led by the NDRC and implemented by local governments. Now, they will be led directly by the country’s top leaders and executed by related military officials and other high levels of government.

The lack of discussion on the pension reform was undeniably disappointing, economists agree. Yet some anticipate more information on pensions will emerge from the "decision" – a much longer and more detailed version of the communiqué released a week after completion of the plenums.

“The communiqué also highlights the importance of social security, which means it’s possible that the ‘decision’ may give some details on pension reforms,” Liao says.

Some expect that China’s pension system will eventually be managed by the central government rather than by local authorities – such as municipals or county governments – with some basic payments supplied by the central government. This will help to alleviate the financial pressures on local governments.

Other issues include the ‘double-track’ pension system – where civil servants in government organisations do not pay pension premiums while employees in private enterprises pay high premiums. While some are sceptical that this will be cancelled given the high levels of conflict of interest among civil servants and other beneficiaries, Liao believes it may be eliminated at some point.

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