China's Third Plenum: Key issues

On Saturday, China's leaders will hold their Third Plenum, where priorities for reform over the next decade will be discussed.

China's Third Plenums, which refer to the third time new leaders of China lead a plenary session of the Central Committee, are closely watched as they tend to be the meeting where important reforms are announced.

At the Third Plenum in 1978, former leader Deng Xiaoping announced the opening-up of China's economy, spearheading major market-oriented reforms.

In 1993, former leader Zhu Rongji announced the "socialist market economy" and dismantled a large part of China's state-owned sector.

Top Chinese leader Yu Zhengsheng has said that "unprecedented" reforms will be discussed at 9 November's plenum. The BBC looks at the key issues.

Key issues

Areas for reform Challenges

Financial sector liberalisation

File photo: welcome sign of Shanghai Free Trade Zone, 25 September 2013

Opening up its financial sector is arguably one of the biggest issues. The key areas to be liberalised are the interest rate policy and tight control over the yuan's convertibility. China says it will experiment with these moves in a new free-trade zone in Shanghai. It said it will allow interest rates to be set by markets inside the zone and allow the yuan to be swapped freely for other currencies.

So far China has relaxed its tight grip in a slow and controlled manner, and in a small geographic and economic area. Implementing reforms at national level makes the economy vulnerable to sharp movements in capital markets. As for the free trade zone, some observers have urged caution about the extent to which liberalisation may take place because detailed rules about exactly what will and won't be permitted are not yet known.

State-owned enterprises

File photo: employees spray water to cool down oil tanks at a storage facility, which belongs to one of China's biggest state-owned firms PetroChina oil, in Suijing, Sichuan Province, 13 August 2010

State-owned firms dominate key sectors such as banking, telecommunications and oil and gas. Many argue these firms are riddled with excess capacity and poor governance. There are also concerns these firm have created monopolies and hampered growth. Some allege they get easy access to financing - as the four major banks are all state-owned - at the cost of smaller private firms. Analysts have long argued that China needs to reform these firms and increase competition to improve productivity and boost growth.

To date there has been talk of reform but little action - something attributed to resistance from vested interests. These firms have been among the biggest beneficiaries of China's growth over the past few years. A key focus area is likely to be the large state-owned banks. They have lent record sums of money in recent years and there are now fears over rising levels of bad debt. And if the role of state-owned banks is diluted, the government will be less able to pump cash into the economy in case of a slowdown.

"Hukou" household registration system

File photo: migrant workers carrying their luggage through a street in Beijing, 25 March 2009

Under China's hukou system, everyone is registered in their home town and can only access education, housing and welfare there. It prevents rural migrants and their children from accessing social services in the cities, limiting the movement of China's workers, or creating an underclass in major cities. Many in China have called for the system to be abolished.

Hukou reform would be popular with China's 260 million migrant workers. Some individual cities, such as Chengdu, have already begun to reform their hukou systems. However others, including Beijing, still have tight controls in place to limit population growth and avoid the costs associated with providing additional social services to migrants.

Land reform

File photo: a farmer harvests paddy in a farmland on the outskirts of Shenyang, Liaoning province, 9 October 2008

Rural land is owned collectively, so farmers cannot buy or sell their homes or their farmland. This enables local governments to appropriate land used by farmers and sell it to developers. This issue is a key source of rural discontent and periodic social unrest. The lack of land rights also keeps rural consumption down, and makes it harder for rural workers to relocate to cities.

A plan circulated by a government-linked think tank (called the "383 plan") has advocated "giving both rural and urban land equal rights, having a unified land market, and sharing the rise of land value fairly". However, any reform could potentially face opposition from local governments who benefit from the status quo, where they are able to force demolitions and evictions, and sell land to raise revenue.

Local government funding

File photo: Chinese Yuan notes

Local governments have serious debts - amounting to a total of $1.8tn in the most recent audit. They cannot borrow directly from banks, so have used government-backed conduit companies to raise money for infrastructure and property projects. Experts expect China will start to allow them to issue municipal bonds, so they can raise funds directly and more transparently. There has also been talk of tax reform at local level, such as a move from a production-based tax to a consumption-based levy.

Analysts describe this as one of the most pressing areas for reform. Tackling it seems to be a priority - Li Keqiang has promised "pertinent measures" to address the issue, and China ordered a nationwide audit of all government debt earlier this year. But implementation of any tax at local government level is easier said than done, especially in the property sector, and some fear a consumption tax could hit domestic growth.

The environment

Smoke rises from chimneys and facilities of steel plants on a hazy day in Benxi, Liaoning province, 3 November 2013

Some of China's largest protests in recent months have been triggered by environmental concerns linked to rapid development, including water, air and soil pollution. In October, air pollution levels soared 20 times above WHO-recommended levels in Heilongjiang province. There have also been high-profile protests over construction of plants that residents fear will harm their local environment.

China has introduced measures to curb pollution, including subsidies for electric cars, and targets to reduce the use of coal. However, demand for energy is still growing and officials have been reluctant to address the issue in the past. Central orders are not always filtered down and environmental regulations can be poorly enforced at a local level, where officials are keen to promote economic growth and hit development targets.

Energy prices and utilities

An employee checks on Sinopec natural gas transmission facilities in Xuanhan county, Sichuan province, 29 April 2011

Coal-powered plants generate most of the power in China. For years, the government has got coal suppliers to sell to power firms at contract prices, which are generally lower than market rates, in order to keep costs in check and electricity prices stable. But China's dependence on coal is a major factor in its pollution problem.

China has already started to reform pricing mechanisms - it says it will allow the market to determine the price of coal supplied to power plants. But that means power firms will be vulnerable to price fluctuations. Any sharp rises could hurt household incomes or profits of commercial users - but higher prices may force users to save electricity and help reduce pollution.

Innovation

File photo: Employees work at a production line inside a factory exporting cameras used in mobile phones in Shenyang, Liaoning province, 18 October, 2013

While China's companies are developing fast, awareness of Chinese brands and products appears to be relatively low. The dominance of state-owned companies in China's economy, and China's poorer intellectual property protection rights, are thought to have deterred some from creating new products.

A prominent government-linked think tank has called for reform to "expand competition" and give companies "equal access... [to] resources for innovation". However, some experts argue that without a relaxation of censorship rules, and a greater emphasis on creativity in China's education system, innovation will still lag behind.

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