ECONOMIC
THE DECISION OF THE THIRD PLENUM OF THE
18TH CENTRAL COMMITTEEE OF THE CPC
– A TURNING POINT FOR REFORM
On November 12, 2013, 373 delegates participating in the Third Plenary Session of the Communist Party of China’s
(CPC) 18th Central Committee finished deliberating on China’s ten-year reform program. Subsequently the CPC Central
Committee published a manifesto entitled “A Decision on Major Issues Concerning Comprehensive and Deepening Reform”.
The Decision lists 60 reform items under 16 categories, covering a wide range of areas, including economic, political, social,
cultural and environmental reforms, and institutional CPC and national defense transformation. On November 12, 2013,
373 delegates participating in the Third Plenary Session of the Communist Party of China’s (CPC) 18th Central Committee
finished deliberating on China’s ten-year reform program. Subsequently the CPC Central Committee published a manifesto
entitled “A Decision on Major Issues Concerning Comprehensive and Deepening Reform”. The Decision lists 60 reform
items under 16 categories, covering a wide range of areas, including economic, political, social, cultural and environmental
reforms, and institutional CPC and national defense transformation.
STATE-OWNED ENTERPRISES
Improving China’s economic system is a critical part of
the reform initiative. The Decision adjusts the relationship
between government and market, so that for the first time
the market will play a decisive role in resource allocation.
Emphasis on market forces is intended to promote fair
competition, remove industry sector entry barriers and
ultimately result in increased efficiency and fairness.
The Decision outlines measures to reform SOEs, but does
not contemplate privatisation. SOEs are set multiple goals
of diversifying shareholders, innovating the state assets
management system and introducing market competition in
“natural” monopoly sectors.
The goal is to develop a mixed-ownership economy, with
more SOEs converting to mixed-ownership structures and
private investors participating in state capital investment
projects. The SOE reform plan is expected to open up
investment opportunities for private investors, except for
national security sectors. Currently, there are more than
100,000 SOEs, among which 112 large SOEs are under
direct supervision by the central State-owned Assets
Supervision and Administration Commission (SASAC).
At the end of 2012, the total assets of central SOEs were
valued at RMB44.8 trillion (approximately US$7.35
trillion). A senior SASAC official is reported as saying that
private investors are welcome to acquire shareholdings in
SOEs and participate in decision-making at shareholder and
potentially board level and that they could be permitted to
invest in up to 15% of an SOE's equity.
The Decision states that China will establish state capital
operating companies and convert qualified SOE group
holding companies to state capital holding companies.
It is likely that this new approach will adopt Singapore’s
Temasek model to manage and invest state capital through
strategic investments, M&A and capital market activities.
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Reforms will also be introduced in “natural” monopoly
industries, such as public utilities, minerals and railroad
networks to separate government regulatory functions
from state business management and operations. Some
natural monopoly sectors will be operated by franchisees
independent of government agencies.
The Decision indicates that the government will improve the
state-owned capital operation budget system, so that by 2020,
the proportion of SOE profits allocated to public finance will
be increased to 30%, from the current 5% to 15%.
The Decision requires that SOE corporate governance be
improved by means of long-term incentive and control
mechanisms, strengthening of investment accountability
requirements, and disclosure of important information.
SOEs are required to increase market-oriented recruitment
and fairly determine executives' income levels.
FoREIGN INVESTMENT
The Decision highlights increased market access for foreign
investors, unifying regulations and policies applicable
to domestic and foreign investors, and keeping foreign
investment policy stable, transparent and predictable.
China will further open service sectors, including finance,
education, culture and healthcare to foreign investors.
Restrictions will be eased for foreign investment in childcare and old-age care, architectural design, accounting and
auditing, commercial logistics, and e-commerce companies,
and the general manufacturing sector.
In November, 2013, the Ministry of Commerce (MOFCOM)
announced that it will improve management of the foreign
direct investment regulatory regime and revamp foreign
investment laws. Measures include relaxing restrictions
on registered capital requirements, equity percentages
and business scopes for foreign invested companies. In
addition, multinational corporations are encouraged to
ECONOMIC
establish regional headquarters, R&D centres, procurement
centres and financial management centres, and to invest
in technology intermediaries, innovation incubators,
productivity centres and technology exchange markets.
China’s IPO share-offering system, moving away from an
approval-based to a registration-based system. If properly
implemented, this will bring fundamental changes to
China’s stock market.
ANTI-CORRUPTION
RULE OF LAW
China’s leadership has announced that it intends to build
clean government by intensifying anti-corruption efforts
against “tigers” and “flies” (high-ranking and low-level
corrupt officials). The Decision highlights the CPC’s
determination to reinforce anti-corruption efforts and
“restrict power within the cage of rules and regulations.”
One key anti-cor r uption measure is refor m of the
CPC disciplinary inspection system by strengthening
supervisory powers of upper-level discipline inspection
agencies. The new “vertical” discipline inspection system
is intended to reduce interference in the operations of locallevel discipline inspection agencies from other government
bodies.
Since the beginning of 2013, there have been several high
profile legal cases involving senior government officials,
resulting in increased legal awareness among the public.
The Decision confirms that the authority of the Chinese
Constitution and the principle of the rule of law will be
upheld, that no organisation or individual can operate
outside the Constitution or laws, and that all persons are
liable for violations of law.
Other measures are intended to regulate and limit
government power. Those measures include establishment
of a unif ied and open market system with orderly
competition intended to facilitate market activity, and
streamlining administrative approval and licensing
procedures, which should limit government control
over market forces and reduce officials’ rent-seeking
opportunities.
FINANCIAL SYSTEM
The Decision confirms that China will accelerate interest
rate reform, allowing the market to determine interest rates.
By removing interest rate controls, capital should flow to
more productive industry sectors and companies. A deposit
insurance scheme will be established to mitigate risks of
financial instability.
Qualified private financiers will be permitted to sponsor
and establish small to medium-sized local banks to serve
local financial needs. Commentators anticipate that the first
small and medium-sized private banks will be established
based on the recommendation of local governments, and
approval by the China Banking Regulatory Commission.
The Decision confirms the government’s determination to
promote freedom of cross-border capital movement, accelerate
capital account convertibility and establish a foreign debt
and capital movement oversight regime. The pace of Chinese
outbound investment and offshore fund-raising is likely to
increase. In the short term, it is likely that investment quotas
under the Qualified Foreign Institutional Investor (QFII)
and RMB Qualified Foreign Institutional Investor (RQFII)
programs will be increased and foreign financial investors
will have greater access to investment products.
The Decision states that the government will modernise
The Decision calls for establishment of an “in-house”
counsel system within provincial and sub-provincial
governments. The Decision confirms the status and power
of government legal counsel, who are likely to play a more
important role in the governance of government bodies.
The Decision confirms the intention of the government to
improve judicial enforcement of intellectual property rights
and mandates the establishment of designated intellectual
property courts throughout the country (in addition to
existing IP courts).
JUDICIARY
T he Decision st ates that China will improve the
independence and fairness of its judicial and prosecutorial
systems. Observers have long commented that Chinese
courts are susceptible to local government influence. The
implementation of centralised control over personnel,
finance and property of sub-provincial courts and
prosecutors’ offices at provincial level is intended to
minimise localisation of judicial power and reduce political
interference with the judiciary by local governments.
The Decision also announces reforms to the adjudication
committee system. The committees comprise presiding
judges and leaders of courts and prosecutors’ offices and are
the highest decision-making bodies in any Chinese court.
Committee members review important cases and draft
opinions, and decide on sentencing and awards of damages.
Under the new regime, the power of the adjudication
committees will be significantly reduced and presiding
judges will have unfettered power to make judgments.
RURAL LAND
The Decision proposes an ambitious plan for reforming
China’s rural land regime. Under the Chinese Constitution
and relevant laws, all urban land is owned by the state,
while all land in rural and suburban areas is collectively
owned. Rural land is divided into arable land, forest land
and construction land, the latter includes home-site land,
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Business Insights and Directory 2013
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ECONOMIC
commercial construction land and public construction
land. Rural land generally cannot be assigned, transferred
or leased for non-agricultural construction uses; only the
government can, for public interest purposes, appropriate
rural land for other uses.
In recent years, land appropriation has been a major source
of discontent across rural China. Local governments have
paid farmers low compensation for land used for urban
expansion and industrial development projects, and officials
have sometimes been in league with property developers.
The Decision states that rural commercial construction
land maybe assigned, leased or used for in-kind equity
contribution by land owners. Such land will be treated
equally with urban state-owned land in terms of access to
the real estate market and will be accorded the same rights
and be valued in the same manner as urban state land. The
Decision requires the establishment of a unified market for
urban-rural construction land.
The Decision treats arable land that farmers hold under
long-term tenancy arrangements and rural home-site land
differently to rural commercial construction land. The
Decision calls for establishment of a rural property rights
market and openness, fairness and compliance in rural
property rights transactions and farmers will be allowed
to mortgage or transfer tenancy rights to arable land and
home-site land use rights. The new land disposal options
should help expand farmers’ financing channels, facilitate
capital accumulation and enable farmers to grow their
businesses.
HOUSEHOLD RESIDENCY SYSTEM
As part of China’s urbanisation efforts, it will revamp the
existing household residency (hukou) system and welcome
rural migrants to settle in small- to medium-sized cities.
Currently, there are approximately 300 million migrant
workers, many of whom have left their farmlands in order
to work in cities and do not have residency rights, including
social insurance.
Restrictions in towns and small cities will be fully
lifted, restrictions in medium-sized cities will be relaxed
gradually, but “reasonable” requirements for hukou in
large cities will be retained, while the size of populations in
megacities, including Beijing and Shanghai, will be strictly
controlled. The government will make basic urban public
services and welfare available to all permanent residents in
cities and integrate rural migrants who have been granted
city hukou into the urban social insurance network.
some exceptions. In recent years, the percentage of China’s
aged population has increased, which has stressed China’s
under-capitalised pension system. Commentators generally
agree that China must delay its retirement age in order
to prevent a pension crisis. According to the Ministry of
Human Resources and Social Security, China will increase
its pensionable age progressively and implement payment
incentives in order to encourage people to stay employed.
The new policy will not affect benefits of senior workers
who are retiring soon, but going forward middle-aged and
young workers will no longer be able to pay into the state
pension for 15 years and wait for retirement.
ENVIRONMENTAL PROTECTION
The Decision stresses the importance of building an
“eco-civilisation” and commits to pursuing a green and
sustainable path to balanced economic, ecological and social
development. The Decision states that as part of the overall
effort to build a greener economy, China will introduce
measures to increase compensation for environmental
damage and impose criminal penalties. New resources
taxes will be assessed on the use of most natural resources,
and special fines will be imposed on persons exploiting,
damaging or polluting natural resources.
The Decision calls for strengthened environmental
monitoring and assessment capabilities. An early warning
mechanism will be established to detect overuse of land,
water and marine resources and improve monitoring
of emissions. The Decision emphasises using markets
to combat pollution and stresses the need to develop
environmental marketplaces, including trading of carbon
emissions rights.
China’s current system for evaluating government
official performance rewards economic growth, which
has contributed to weak enforcement of environmental
regulations. The Decision proposes exit interviews for
outgoing leaders to assess their environmental records.
CONCLUSION
China has set aggressive reform targets and the road ahead
will be challenging and require much hard work, more
particularly since the Decision requires that by 2020, China
should achieve “decisive” achievements in key reform
areas. Oversight of implementation of the Decision is being
undertaken by a new government body, the Central Reform
Leadership Committee, which is headed by President
Xi Jinping. In the meantime, regulators are working on
amending existing regulations and drafting new legislation.
PENSIONS SYSTEM
The Decision proposes measures that will have far-reaching
effects on China’s social insurance regime. Currently,
the majority of female employees retire at either 50 or 55
years of age, and male employees at aged 60 years, with
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[ Article released in February 2014]
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Authors: Susan Munro, Partner, and Hannah Cao, of
Counsel, Steptoe & Johnson LLP