China Center Quick Note: China’s “Elections” and the Future of Reform

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This members-only China Center Quick Note examines the policy imperatives for China’s new, recently “elected” leading group. The key takeaways are as follows:

  • While there has been much analyst speculation in recent months about the will and intention of China’s new leadership to “act” on reform imperatives, there has been little focus on what they need to act on.
  • Two critical policy challenges will, more than all others, shape China’s destiny: (1) bringing credit markets under control, and (2) forcing State Owned Enterprises (and State-vested national champions) to compete on the basis of market factors.
  • There is arguably little time, or room, left to “kick the can down the road” on these two issues, or for incremental tinkering at the margins. Recent statements from China’s top leaders regarding the challenges to China’s successful economic transition underscore this reality.
  • Potential solutions are many, and China’s toolkit is arguably robust; however most, if not all, conceivable solutions require that the Party give up some traditional levers of control. Powerful vested interests stand in the way of such reforms.
  • The policy leanings, much less the intentions, of China’s new leadership remain unknown as of now. But MNCs should pay special attention to monitoring policy developments related to financial/credit market reform and State Owned Enterprise reform, as outcomes in these two areas will have profound impact on the business environment for foreign investors in China.

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