China's structural issues, led by aging and the sharp reduction of the return on investment, have made economic reform more urgent than ever. Aware of this, only a few months ago, at Davos, China's new economic mastermind, Liu He, offered a very rosy picture of the extent of economic reform we should be expecting from China in 2018. On that positive tone, China watchers were looking for signals of economic reform at the recent Central Committee meeting. The meeting could not have been more relevant as it introduced relevant amendments to China's Constitution, the first since 2004.
The constitutional amendments proposed by the Central Committee do not mention economic reform directly, which could be disappointing given the expectations Liu He created in Davos. However, the indirect impact of the amendments proposed should be taken into account as well, no matter how difficult it may be to draw clear-cut conclusions.
The key theme of the amendments seems to be further power consolidation. This is not only reflected in the lifting of presidential term limits, but also in a more ambitious vision of China's role in the world and a more centralized model of the State, both thanks to a more powerful oversight body (supervisory commissions) as well as more limited policy space for local governments. Whether a more centralized model will push reform forward is clearly difficult to tell. When looking at the possible indirect impact of these four key amendments on economic reform, here are my take-aways.
The most eye-catching amendment proposed is clearly the lifting of the presidential term limits along with the constitutional status granted to the leadership of the CPC and Xi's thoughts, which will pave the way for Xi to stay longer in office (i.e., beyond 2023 when his second term will end). While undoubtedly important for economic reform, its impact cannot yet be assessed as it depends on President Xi's ultimate will to carry out the reform. This is the most important tea leaf for China watchers to be able to read in the near future.
Another relevant amendment which could have a bearing on economic reform is a bolder international role for China, and more specifically, the confirmation of the leadership's self-awareness of its global role and the clarification of such role. In fact, China's own way towards global leadership has now been sealed in the Constitution but with its own characteristics. In particular, a preference for soft power and cooperation is clearly stated in the amendment, as opposed to hard power/dominance through confrontation. More specifically, the proposed amendment highlights China's adherence to a peaceful development path and a mutually beneficial strategy of opening-up. The link to opening up is the key to a rather positive assessment of China's future intentions on that specific aspect of reform, but it is also true that no expected change in terms of public ownership dominance should be expected based on the proposed amendments. If anything, the opposite is true - China's socialist economic model has only been cemented further by the proposed amendments. The reason for the specific mention of opening-up in the paragraph on China's global role is that it really points to China's outward moves rather than inward opening-up, as in the past. I, thus, argue that not much should be read in terms of further market access for foreign companies operating in China. If anything, it is the Party's full support for China's wider economic role in the world that is been enshrined in the Constitution.
The other highlight is the listing of supervisory commissions (at the central and local levels) as a new part of State organs and the detailed account of their role and structure. The supervisory commission is now parallel to administrative, judicial and prosecutorial organs of the State, all of which are created and supervised by the People's Congresses. It is also an extension and a constitutional reflection of Xi's campaign to reign in corruption. The listing of the supervisory commission as a State organ gives the CPC a much tighter grip on the country's developments. The impact of such control is hard to assess, but one could argue that it could run counter to the idea of a more market-based model, in so far as it implies additional centralization of power. In fact, the perceived contradiction on the role of the State and the role of market forces at the occasion of Xi's first key party meeting, namely November 2013's Plenum, seems to be leaning in favor of the State with further centralization of power.
Finally, it is also worth mentioning that the proposed amendments grant constitutional status to a clearer division of labor between central and local governments for law making, in line with the Legislation Law and Local Organization Law which were upgraded during Xi's first presidency. Such division of labor, again, puts boundaries on local governments' law-making, which effectively helps centralize power even further. What this means for economic reform is that it should be increasingly difficult for local governments to run more reform-oriented policies if not supported by the central government, but also the other way around. Hard to read this tea leaf too.
In this context, the reference to China's further opening up to foreign competition in the work report delivered by Premier Li Keqiang to the Party Congress this week sounded empty after what is undoubtedly more important for the future of China – the constitutional amendments.
