Bill Bishop: A Plenum is a meeting of the Communist Party’s Central Committee. This Central Committee has 205 full and 167 alternate members, chosen at the First Plenum of the 18th Party Congress in November 2012. Each Party Congress lasts for 5 years, and with the exception of the first year there is usually one Plenum held per year. The Politburo, comprised of 25 members, meets more regularly, and the Standing Committee, made up of 7 members, meets even more frequently. Xi Jinping is the General Secretary of the Party and also holds the top posts in the State (President) and Military (Chairman of the Central Military Commission)
Third Plenums are seen as important because the First Plenum introduces the new leadership, the Second Plenum tends to be personnel- and Party construction-focused, while the third one is usually seen as the first plenary session at which the new leadership has basically consolidated power and can introduce a broader economic and political blueprint.
BI: Why is it significant?
BB: Not all Third Plenums are that significant, and plenty of reforms have happened outside of a Third Plenum, But, the Third Plenum of the 11th Party Congress in December 1978, held just two years after the death of Chairman Mao, the end of the Cultural Revolution and the arrest of the gang of Four, launched “reform and opening” and put China on its current path.
The Third Plenum of the 14th Party Congress, held in November 1993, formally endorsed the concept of “Socialist market Economy”, which provided the theoretical foundation and political cover for a more aggressive set of economic reforms pushed by then-Premier Zhu Rongji
BI: What reforms should we expect at the 3rd Plenary Session of the 18th CPC?
BB: The top leadership has recently repeatedly said that the Third Plenum will introduce comprehensive and unprecedented reforms. The hope is that the Plenum will introduce land ownership and transfer reforms, broader financial reforms, changes to the household registration system that give rural residents greater rights and social protections, changes to the center-local fiscal relationships, more trade liberalization to increase openness, policies designed to try to spur innovation, factor price reform that may weaken State-Owned Enterprises (SOE), reduction of administrative interference in the economy, and a 5 year plan to combat corruption.
I expect a fairly ambitious report to be issued at the end of the Plenum, but it will take years and many bureaucratic battles and permutations before all of the effects are felt.
BI: What reforms do you think will be sidelined?
BB: There may be some SOE reforms but we will not see talk of privatization. More likely there will be reforms that will weaken many of those SOEs, such as factor price reform. There will be political reform but not in the Western, liberal sense. The goal will be to make the party more efficient, responsible and accountable, all to ensure continued single Party rule.
Some people argue that China’s can not truly transform its economy without broader, liberal political reforms that unleash a “marketplace of ideas”, creativity and innovation. The leadership does not seem to agree with that argument.
Effectively combating corruption is key to most of these reforms. if the Party can not get corruption under control—not eradicate it, as that is unrealistic—then much of this will be just talk.
BI: What does this mean for the Chinese economy?
BB: It is unclear. Many of these changes will take years to implement, and some may be thwarted or distorted as they flow from the center down through the bureaucracies. But expect the overarching goal to be the transformation of the economic growth model and the de-emphasis of GDP.
But an aggressive plenum report that lays out sweeping economic reforms may help change perceptions of both the near and medium term prospects for the economy. Xi Jinping believes he is leading China to its great national rejuvenation, and no one paying attention, especially the top leadership, thinks the current economic structure and growth model is sustainable.
BI: Why should investors care?
BB: If the leadership gets it right then China should be able to work through many of the current economic problems, albeit very painfully. If they do not, the country may be headed to severe distress in the next few years.
As for individual stocks, there are lots of local analysts putting out recommendations on stocks that could benefit and some have run up significantly ahead of the Plenum. At least in the short-term you may see smart investors “buying on the rumor and selling on the Plenum”, as there are so many expectations built into this upcoming meeting that it is hard to see how there will not be disappointment in the near-term. And expect many of the pundits and economists to express “disappointment” with whatever is in the report, so there may be a shift back toward more negative sentiment about China in overseas discourse.
But smart investors and entrepreneurs and executives know that there will be plenty of money-making opportunities for those who can understand what the report is really saying.
BI: Anything else you think our readers should know?
BB: Some of the most important reforms in China are not mandated from Beijing, either in Third Plenums or other meetings, but happen at the local levels and then are adopted in other areas around the country. So while the Plenum Report will be important, it will be far from the end of what reforms may occur in the country over the next few years.
