China’s third plenum shows its reform era has entered a new phase

China’s economic system is founded on the reforms carried out in the 1990s. With the unification of dual exchange rates in 1994, markets became the main tool to set prices. Many state-owned enterprises were either privatised or went bankrupt. Since then, privately managed businesses have consistently gained ground.

The conventional formula to describe the role of private businesses now is the so-called 56789: the private sector contributes 50 per cent of tax revenue, 60 per cent of gross domestic product, 70 per cent of innovations, 80 per cent of urban employment, and 90 per cent of registered businesses. The Chinese economy is no longer one that is dominated by state-owned enterprises but one that features a mixture of private and public ownership.

Other reforms were no less important, such as policies that replenished China’s financial system by successfully removing its non-performing loans. The tax reform of 1994 created a fiscal federal system that is believed to be one of the secrets for China’s economic success as it gave local officials strong incentives to grow local economies.

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This move will hopefully make local debts transparent and thus easier for the public as well as the central government to monitor. Just like the overhaul of the hukou system, the tax reforms are expected to be finished in five years. It will become the ultimate tool to control local debts.

In conclusion, the Communist Party’s third plenum laid out a grand plan for China. The proposal to build a high-level socialist market economy system is an affirmation of the reforms carried out in past decades, cementing their results into the party’s theoretical framework.