Reform drive fuels ‘two-Chinas’ revolutionBy Asia Sentinel Dec 19, 2013 4:13PM UTC
3rd Plenum sets financial and societal upheaval in motion, writes Asia Sentinel’s Steve Wang
The pace of China’s financial reforms put in place since the 3rd Plenum in mid-November has confounded those who said at the time that nothing exciting would emerge from the meetings. In fact, Beijing has been pouring out new measures at a dizzying rate that looks likely to match the 1987 Big Bang that liberalized London’s financial markets.
Beijing has just concluded the first-ever National Urbanization Work Conference, setting out six rules that are designed to put the market in the driver’s seat as opposed to government’s overriding role.
Taken with other measures over the past two months, in relative terms, the reforms could be even bigger than the City’s, given that some of them introduce historic investor protections that have never been in place in China’s financial markets or for control of property. These are changes that are taking place across a wide range of Chinese society including land reform, electronic commerce and reform of the inefficient State-Owned Enterprise behemoths that dominate the industrial landscape.
In effect, these changes are almost creating two Chinas – an old one that prevailed for decades that is giving away to a new, truly market-oriented one. All of this is in marked contrast to the decade of relative stasis under the government of former President Hu Jintao and Premier Wen Jiabao.
And well there needs to be. According to the Chinese Academy of Social Sciences, the number of annual protests has grown steadily since the early 1990s, from approximately 8,700 “mass group incidents” in 1993 to more than 90,000 today. Some social scientists say the numbers are far greater. Mass incidents are defined broadly as “planned or impromptu gatherings that form because of internal contradictions,” and can include public speeches or demonstrations, physical clashes, public airings of grievances, and other group behaviors that are seen as disrupting social stability.”
In addition, there has been massive capital flight. Over the decade starting in 2002, according to the non-governmental organization Global Financial Integrity in its report released last week, Illicit Financial Flows from Developing Countries: 2002-2011, a staggering US$1.08 trillion was illegally spirited out of China over those 10 years.
A major part of it was through trade mispricing in Hong Kong, where Chinese authorities cracked down dramatically earlier this year. Trade mispricing refers to trade between related parties at prices meant to deceive tax authorities or hide capital flight. For instance, it was estimated in a 2009 study for the Department of Economics at Oslo University that 2009 trade with Norway, using China’s statistics, was only US$2.67 billion. However, using Norway’s statistics, the same trade was valued at US$5.349 billion.
It is important to note that any system, including the best, faces the dangers of insider trading and manipulation – witness the arrests in the United States over the past year of some of the country’s biggest hedge fund managers.
But since President Xi Jinping and Prime Minister Li Keqiang took over the government, it has been showing its teeth by a vast cleanup of corruption unlike anything seen since the days of Prime Minister Zhu Rongji from 1993 to 1998.
Hundreds of party officials have been arrested or disciplined, and two of the biggest ministries – railways and oil and gas – have seen their top leaders cashiered. The wholesale catering trade and high-end liquor sales, particularly of Maotai, the de rigueur toast at lavish banquets, have both taken dramatic hits. The market appears to be taking notice of the government’s campaign against extravagance. And, although no names have been given, this massive home, for sale in Australia, is thought to have belonged to one of those arrested, and now must be liquidated.
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