How Big a Reform is Coming to China's Economy?

RUNNING the world’s biggest country requires sacrifice. For the Communist Party’s top 376 officials on its central committee, the sacrifice includes the occasional weekend. From Saturday November 9th until the following Tuesday, they will gather in Beijing for the third time since Xi Jinping became head of the party nearly a year ago. The “third plenum”, as this meeting will be called, is the new leadership’s chance to lay out its stall on economic reform. In the past similar gatherings have shaken the world. The third plenum in 1978, for example, sealed Deng Xiaoping’s authority over the party, allowing his vision of “reform and opening up” to prevail. Another third plenum, in 1993, set the stage for a ruthless shake-out of loss-making state-owned enterprises (SOEs).

If the past provides the inspiration for ambitious reform, the present furnishes the compelling need for it. In recent years China’s growth has slowed significantly to under 8%—and were it not for a timely fiscal stimulus would be slower still. Some of the slowdown is inevitable, the consequence of a diminishing technological gap with the rest of the world and a declining working-age population. But two other macroeconomic trends are causing concern. The investment spending sustaining China’s growth appears to be yielding sharply lower returns. At the same time, credit is growing faster than GDP (see chart 1). It suggests that people are borrowing to buy assets, particularly land and property. The more these assets appreciate, the more people borrow.

Will Mr Xi rise to the occasion?

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