What Business Can Expect from China’s Third Plenum
HBR.org 2013-11-07
Beijing’s business circles are buzzing this week about what the Communist Party of China (CPC) is cooking up for the Third Plenary Session of the 18th Party Congress, scheduled to start on November 9, 2013. This meeting of the extended CPC leadership may prove to be exceptionally important; China’s new leaders are likely to announce an economic blueprint for the next decade at the conclave. Expectations are soaring, and comparisons have been made to the historic Third Plenary of the 11th Party Congress in 1978, which resulted in the opening up of the Chinese economy.
Over the last year, China’s new leaders have made no secret of their desire to refocus the economic model on efficiency and productivity and to get away from quantity and speed alone. Many of the reforms needed to ensure that have been discussed publicly for months. However, it might be best to look at this plenary as the starting-point of a change process that will take many years to implement. Decisions at such meetings typically provide general guidance, which is open to interpretation, so CEOs should lower their expectations in terms of the announcement of measures as well as the policy direction.
China’s new leaders face unprecedented challenges in terms of the complexity of policy measures and their implementation. Resistance, or in the best case, lack of cooperation can be expected from entrenched interest groups, particularly from the leaders of state-owned enterprises and local officials. So it will be in the leadership’s interest to implement several reforms in phases and, in some cases, to experiment and find out what measures it should build on later. For instance, reforms of the state owned enterprises-dominated sectors and the opening up of the government-monopolized sectors will both be launched gradually or delayed to an opportune moment because of the political resistance it will spark.
The announcement of the creation of the Shanghai Free Trade Zone, a measure that is likely to focus on financial reforms, seems to be an experiment, for instance. It’s a major announcement in principle that has wide repercussions, such as the further opening up of the financial sector, but its implementation will be announced gradually.
After the plenum, there will be some more clarity about where the leadership wants to take China in the medium and long terms, and the policy direction on financial and tax reforms, land reforms, urbanization, etc. will become clearer too. Don’t expect to get a picture of how all that will hang together or what it all means exactly. That’s going to be a trial-and-error process which will last several years, and in true Deng Xiaoping style, it will entail “crossing the river by touching the stones,” with the added difficulty being the presence of crocodiles in the water.
At the same time, look at the bigger picture. The CPC’s third plenum is the first step in a change process that started around a year ago with the appointment of the new leadership at last year’s plenary session. Before that, there was no discussion about reforms in China; in fact, the pro-reforms faction in the CPC had been sidelined and silenced. There was skepticism about whether the then leadership-in-waiting would even embark on the reforms that China required.
The situation has changed since then; there’s now a consensus about the necessity to make a shift to efficiency, innovation, productivity, and, ultimately, consumption. Furthermore, there’s an awareness of the urgency; most leaders admit that pursuing the current model will increase the risk of a major economic or social crisis. The current discussion is only about what to reform, how to do so by getting the right people in place, and figuring out how to overcome key obstacles. That’s a huge and hopeful shift.
The policy environment will provoke considerable uncertainty in the business environment in China in the future. There will be new opportunities for foreign companies as the economy transforms itself, but they have to learn how to handle an environment of uncertainty and volatility in order to take advantage of them. That will require the development of new corporate capabilities and resources. What worked in China in the past will no longer suffice to succeed in future — and even the CPC’s Third Plenum will not be able to change that.
