Part 2 in our series looking at the implications from China’s Third Plenary session. This edition focuses on the reform blueprint that the Chinese leadership team released on the 15th November. The blueprint provides significant additional detail over the original communiqué issued on the 12th November. More than 300 reforms are outlined in the blueprint across 60 clauses in 15 chapters. The reforms are more aggressive than some thought would be released and are being compared in their significance to the reforms launched in 1978 that led to the opening up of the country. This latest edition focuses on some of the reforms that will have notable impact on foreign investors in China and also the overall operating environment.

1. CHINA & THE THIRD PLENUM
Part 2: Analysis of the Decision on Major Issues Concerning Comprehensively Deepening Reform
20th November, 2013
China Issues Framework to Deepen Reform
Deepening economic liberalisation and enhancing the role of market forces
BACKGROUND
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On 12 November the Central Committee of the Communist Party of China (“CCCPC”) issued
its communiqué marking the end of the Third Plenary meeting. The communiqué provided
an overview of reforms aimed at supporting sustained economic growth and addressing core
societal concerns.
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During the evening of Friday 15 November the CCCPC released the more detailed Decision
on Major Issues Concerning Comprehensively Deepening Reform (the Decision) – an extensive
list of more than 300 reform measures in 60 clauses across 15 chapters that will have far
reaching implications for doing business with or in China over the coming years.
This is the second part in our series looking at the Third Plenum. This edition focuses on the
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details of the Decision. Our 13 November analysis of the communiqué is available online .
THE DECISION ON MAJOR ISSUES CONCERNING DEEPENING REFORM
The reform blueprint issued in the
People’s Daily on Saturday
16th November, 2013
For more information
MEI Yan
Senior Partner
ymei@brunswickgroup.com
St. John MOORE
Partner
smoore@brunswickgroup.com
Rose WANG
Partner
rwang@brunswickgroup.com
Gordon GUO
Director
gguo@brunswickgroup.com
The detail contained in the Decision reaffirms the importance of Third Plenums as a platform
for instituting significant change. The Third Plenum in 1978 served as Deng Xiaoping’s
platform to launch China’s opening up and reform. This latest Third Plenum may prove to be
an equally important juncture in China’s development and will have far reaching implications
for those inside China and those doing business with China.
This Plenum put any questions on whether Xi Jinping would genuinely push reform to rest.
According to State media, Xi personally oversaw the working group that led the drafting
process for the reform blueprint. The process started in April this year, involved more than
60 experts and officials, and dealt with more than 2,500 suggestions from more than 100
organisations. The reform plans are characterised by a pragmatic approach that pays respect
to the past while introducing important new concrete goals and actions. Gradualism will
continue to define the overall process, and there will be no overnight break from current
policy frameworks.
The blueprint does not specify timelines for the proposed reforms beyond setting 2020 as a
deadline for achieving “decisive results”. Given the nature of the blueprint and the fact its
originating body is the CCCPC, this is not surprising. The government, with oversight from
the newly established Central Party Leading Group on Comprehensively Deepening Reform, is
now tasked with creating detailed and actionable plans to move the objectives forward. The
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2020 timeline was first set in 2006 at the Sixth Plenary Session of the 16 CCCPC with the
goal to achieve “a harmonious socialist society” by that time. Over the coming months
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further details will be unveiled and the actions will be incorporated into the 13 Five-Year
Plan (2016-2020) thereby aligning critical state planning development tools and timelines.
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2. Core Principals Underlying the Deepening Reform
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As we noted in our 13 November analysis of the communiqué, the reforms detailed in the
Third Plenum are built on a number of important principals:
 Economic Reform, Not Political: Economic reform remains paramount to transform
China’s economic growth away from exports and fixed investment. Western political
reform is not on the cards.
 Strengthening the Centre: The CPC will act as the paramount designer, coordinator
and supervisor to the proposed reform. The Party will establish the Central Party
Leading Group on Comprehensively Deepening Reform to design reform plans and to
coordinate and supervise the implementation. The Party will continue to play a
leading role in overseeing reforms decided at the Plenum.
 Role of the Market: A greater emphasis will be placed on allowing the market to play
a “decisive” role in the allocation of resources. The core solution to economic reform
lies in defining a proper relationship between the government and the market.
 Role of Public Sector: Equal importance is placed on the development of the public
and non-public sectors. However, the basic economic system depends on public
ownership as a cornerstone of its long-term success.
 Changing Role of Government: The role of government in the economy must adapt
to match the developmental position of the country. The authorities will continue to
reduce bureaucratic red tape and improve coordination between the centre and the
provinces with the support of fiscal and taxation reform. At the same time, the
public should have the ability to scrutinise the use of power and “let power operate
under the full glare of the sun”.
 Balancing Power and Supervision: Many of the policies and directives ultimately
balance the authorities desire to decentralise power regarding day-to-day operations
and management of the country while maintaining a centralised supervisory power.
The basic philosophy embedded in the reform programme is to differentiate and redefine
the roles of government, market and societal entities so that the government can focus on
ensuring fairness, justice, rule of law and providing services. The role of the market can then
be allowed to have greater play in efficiently allocating resources and determining pricing,
while social entities can support dispute resolution and provide stability. The full
implementation of the reform programme will fundamentally change the way the authorities
govern China, accelerating the shift away from a planned economy to one based more
genuinely on market principals.
While easy to set out in words, the change required in the mind sets of long standing officials
and established interest groups will take far longer. In traditionally poetic style, the blueprint
notes that reform has entered a period where it is necessary to storm the established
fortifications and be prepared to pass through an area of deep water – which will challenge
the tested method of crossing areas of water by feeling the stones.
Investment and Foreign Investment
Foreign Investment Catalogue
Foreign investment is currently
governed by the Catalogue for
Guiding Foreign Investment in
Industries. The Catalogue classifies
investment as encouraged,
permitted, restricted, or
prohibited.
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Unified Market Access and the Expansion of Negative Lists
The reform plans call for the creation of a “unified market access system” built on the
development of “negative lists”. The negative list concept governs the Shanghai Free Trade
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Zone, announced on 29 September, and allows investment in any area outside the list on an
equal basis– including foreign investors. Over time it is likely that the negative list system
will replace the Catalogue for Guiding Foreign Investment in Industries which governs foreign
investment currently; however, implementation will take time.
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3. The authorities are also reviewing a new method to manage foreign investment with preentry national treatment, in combination with the negative list concept. At the same time
they are striving to make industry and enterprise registration systems more expedient, while
evaluating investment not just on scale, but on the quality and the comprehensive benefits it
will bring to the local market.
New Liberalised Sectors for Investment
A number of sectors are earmarked for further opening up, including finance, education,
culture and healthcare. At the same time the plan calls for lifting limits on foreign
investment in childcare, care for the elderly, architectural design, accounting and auditing,
commerce and logistics, e-commerce and general manufacturing (including, for example, the
manufacture of iron, steel, chemicals and vehicles). The reforms will include a loosening of
restrictions on registered capital, equity stakes and business scope.
Special Economic Zones
The Special Economic Zone model
was created in 1980 by Deng
Xiaoping with the establishment of
the Shenzhen SEZ. This expanded
over the following five years to
approx. 20 additional locations.
The SEZ model was a pragmatic
method to support economic
reform in the face of internal Party
disagreement and is attributed as
one of the important steps that
ushered in the reform era.
Continued Levelling of Playing Field
In recent years the authorities have been working to remove a number of policies that were
perceived to be creating a market biased in favour of foreign investors at the expense of
local competitors – for example the standardisation of corporate income tax in 2006 that
launched the equalisation of former preferential tax policies towards “non-resident” or
foreign enterprises. The latest round of reform plans call for further unifying regulation over
domestic and foreign capital, including further standardising preferential taxation policies
and improving national and local taxation collection mechanisms.
Creation of Multiple Free Trade Zones – The New Special Economic Zones
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On 29 September the Shanghai Municipal Government announced the establishment of the
Shanghai Free Trade Zone. At the time of the launch some questioned whether it had the
genuine backing of the leadership team given the absence of members of the Politburo or
State Council at the opening ceremony. However, the latest reform package notes that its
establishment is “a major measure to move reform and opening up forward” and encourages
the establishment of additional free trade zones. The Free Trade Zone initiative is an
important testing platform for further reform and may be as critical as the use of Special
Economic Zones in the early 1980s that ushered in broader reform.
Operating Environment
Financial & Market Liberalisation
The authorities intend to further liberalise financial markets and once stronger supervision
mechanisms are in place will move forward with allowing domestic private capital to
establish financial institutions (i.e. no commitment to foreign investors).
In addition, the plan calls for the liberalisation of a range of important financial mechanisms
including accelerating renminbi convertibility, interest rate liberalisation, facilitating crossborder capital flows and trading, establishing a national deposit insurance system, and
developing and standardising bond markets. Currency convertibility is expected to come in
phases with a gradual widening of the renminbi’s daily trading band.
The blueprint aims to reform share issuance systems and procedures. Plans include the
development of a new registration system for initial public offerings to replace the current
administrative system, reforming the securities law, creating a compensation mechanism for
investors and improving the delisting system to remove unprofitable companies from the
stock market. Comments by the chairman of the China Securities Regulatory Commission in
the days since the conclusion of the Plenum have indicated a desire to raise the quota for
Qualified Foreign Institutional Investors (QFII). He also indicated that it is still not the right
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4. time to establish the long discussed international board in China that would enable foreign
companies to issue stock locally.
Local Protectionism and the Role of the State Owned Enterprise Sector
The communiqué and the Decision both make it clear that state ownership must still play a
key economic role. The blueprint recognises the equal importance of both state and nonstate ownership – a shift from previous formulations which always gave primacy to the state
sector – meaning that under the new era private capital will be granted easier access to
state-sector investment. Moreover, the blueprint also calls for a shift from managing state
assets to managing state capital by establishing and restructuring qualified SOEs into stateowned investment companies, which will serve national strategic goals and industries as well
as public services.
Managing Local Protectionism
The reform of the judicial system
to create greater independence is
not just designed to increase
fairness, but simultaneously
reduce local protectionism.
The Bo Xilai Case – Open Trials
On 25th October 2013 the high
court in Shandong rejected the
appeal of Bo Xilai, the powerful
former Party Secretary of
Chongqing and Politburo member,
upholding his life sentence for
bribery, embezzlement and abuse
of power.
Bo’s case gripped political
watchers and his court hearing
surprised many due to the
unprecedented level of public
disclosure, including the court
authorities “live blogging” the
proceedings.
The authorities have committed to
expanding the use of open trials,
ensuring all court proceedings are
recorded, and promoting
openness of court judgements.
Complementing this is an edit that 30 per cent of gains from state-owned capital should in
the future be turned over to the public purse to be used to replenish social security funds, to
“guarantee and improve people’s livelihoods”. This continues a recurring theme around
what the government should be accountable for (public services, social stability and welfare),
and what the market should be responsible for (prices, competition and realising
productivity).
At the same time, the authorities have clearly stated a desire to address local protectionism,
monopolies and unfair competition.
Law Enforcement Reform
All the reforms that have been set in motion will be undone without confidence in a just legal
system that protects individuals and also commerce. The authorities have outlined a number
of legal reforms designed to enhance the structure of law enforcement, the management of
central and local judicial bodies, and the link between administrative law enforcement and
the criminal judiciary. Ultimately the plan has set a goal of building a fair legal system that
safeguards people’s interests.
In addition to reducing law enforcement complexity, the plan aims to strengthen local legal
enforcement in certain areas – including food, drugs, production safety, environmental
protection, labour protection and maritime issues.
Survival of the Fittest – Enhancing the Bankruptcy System
As part of the commitment to enhancing the role of the market, the plan repeatedly returns
to the role of survival of the fittest and the creation of a system that allows the efficient exit
or withdrawal of those not suited for the market. The plan mentions the withdrawal
mechanism broadly, but also in relation to two specific industries – financial institutions and
the cultural sector. As a result, the authorities will enhance the bankruptcy system.
Innovation
Another focus is on deepening reforms on government funded science and technology
research and innovation projects to encourage more original innovation. The plan avoids
calling out indigenous innovation, given the consternation these policies caused among
foreign businesses in the past, but instead discusses creating an environment that
encourages and protects innovation in both State enterprises and small and medium sized
enterprises. It notes that private business has an important role to play in stimulating
innovation and points to the market to determine the success of technological innovation,
the allocation of funding and the value of specific inventions or discoveries.
At the same time, however, the State does not intend to entirely withdraw from playing an
active role in encouraging and supporting basic, strategic and pioneering scientific research.
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5. Foreign Investors and Innovation
Foreign investors are encouraged
to invest in technology platforms
that encourage greater innovation
– such as supporting innovation
incubators and productivity
centres.
Price Reform
The blueprint calls for accelerating
price reform of natural resources
and utilities, such as oil, gas,
electricity, water, transportation
and telecoms.
Value Added Tax
VAT trials started in Shanghai in
January 2012 and covered the
local transportation and shipping
industry and six other modern
service industries.
Approval was granted in August
2012 for VAT trials to expand to
ten other provinces and
municipalities, including Beijing
and Tianjin. In August this year,
the national transportation and
modern service industry was
subject to the new VAT system.
In addition, the plan notes the importance of attracting more young and mid-career
professionals engaged in the field in order to support innovation.
Also aimed at supporting innovation is the emphasis in the plan on strengthening intellectual
property rights use, enhancing intellectual property and copyright protection, and exploring
the establishment of intellectual property rights courts.
Environmental Protection
The environment remains high on the government’s agenda as the country continue to
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battle the effects of significant historic environmental degradation. The current 12 FiveYear Plan (2011-2015) already built in robust commitments to enhancing environmental
protection. The blueprint has placed the same weight on ecological system reform as other
priorities including economic, political, cultural and social agendas. The output from the
Third Plenary builds on this with a desire to achieve a “harmonious society and ecological
civilization”, drawing an explicit connection between a harmonious society and China’s
environmental conditions. Achieving this will require the implementation of stringent
protection mechanisms, stronger penalties for violations, and the strengthening of China’s
expertise in environmental rehabilitation via centres of excellence.
Taxation reform (see below) will also be used to incentivise a change in operating conduct –
in particular by levying higher tax on high-energy consumption and high-pollution products
and industries. This will be complemented by the implementation of a new user-pays
resources system that will significantly increase the cost of operations that are not
environmentally friendly in China. Those that pollute will be punished to the full extent of
the law. The current punitive thresholds, which are often criticised as being too low to act as
any genuine deterrent, are also likely to be strengthened.
Tax Reform
Significant work has been taken in recent years to reform the tax system. That commitment
continues. The authorities will further expand the rollout of value added tax system and
raise the proportion of direct taxation, while also refining the local taxation system and the
overall tax collection system.
For individuals, the authorities aim to establish an individual income tax system that is more
sophisticated than the current regime. In the real estate sector, a critical source of local
government income, there is a commitment to accelerate property tax legislation as part of
market-oriented measures to control the property price.
Societal Issues
The One Child Policy
Many have noted the fundamental change to China’s one-child policy with reforms allowing
families to have two children if either the husband or wife is an only child (currently families
are eligible to have a second child if both parents are from one child families). Many
businesses serving children and young families saw an immediate jump in their share price
after the announcement. As China is facing serious issues related to aging, labour shortages,
gender imbalances and social constraints as a result of one-child families, relaxing the one
child policy will gradually reduce these pressures and support a future aging population.
Urbanisation, Hukou Reform, Land Reform and Migrant Rights
The reforms of the household registration ("hukou") system for rural residents will ensure
equal access to public services, including social security, education and healthcare. These
reforms help address significant urbanisation challenges. At the end of September
approximately 270 million rural residents – or half the country’s total rural labour force –
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6. were working in non-agricultural industries and many of them were working beyond their
hometowns in urban areas.
National Security Council
One of the few concrete actions
announced at the conclusion of
the Third Plenum was the creation
of a National Security Council.
In part reflecting China’s growing
confidence on the global stage, it
also points to a determination to
ensure a focused and robust
response to issue of domestic or
foreign security.
Despite the deepening reforms
across the economy, foreign
companies in sectors such as
networks or telecoms may find the
operating environment in China
could become more challenging.
At the end of the day, domestic
concerns will always trump foreign
interests.
Reform of the hukou system will facilitate a greater level of urbanisation in China. This is
being backed up with reforms that will ensure equal access for urbanised rural hukou holders
to social services, such as healthcare, and also land reforms that will give rural residents
greater ability to leverage their land.
The core concept behind the land reform plans is to protect and grant more property rights
to farmers, which is the precondition for the national urbanisation process in China. The
blueprint calls on creating “fair open and transparent market rules” and establishing marketoriented trading schemes and a unified market for construction land in rural and urban
areas. The blueprint attributes the same land rights in rural areas as in urban ones, which is
a significant step forward from the previous dual-structure system for urban and rural land.
As well as facilitating the modernisation and scalability of Chinese’ agricultural sector, the
changes aim to increase farmers’ income and narrow the rural-urban income disparity.
These are fundamental changes to long-standing policies that will change the make-up of
China’s land and residential demographics. However, the government is keen to ensure
urbanisation is managed gradually, given the immense size of China’s rural population.
Labour Re-Education
The reform plan also announced the abolishment of re-education via labour systems thereby
ending a system established in the mid-1950s. The system typically allows police to detain
individuals for between one to three years for minor crimes (e.g. petty theft) without a legal
charge and were used by the police as an administrative measure.
These are significant changes to long-standing policies and demonstrate the strength of the
current leadership team in that they have been able to achieve this break with historical
institutions.
Engaging in the New Environment
Understand Your Stakeholders – Evaluation Methods
The Third Plenary has reinforced the importance of creating evaluation metrics for China’s
officials that are significantly more diverse than measuring performance based on the rate of
economic growth. The new appraisal system for officials will evaluate against not just simple
GDP growth, but also resource conservation, environmental protection, technological
innovation, employment, residential income levels, social security and healthcare.
As companies engage in China it will be critical that they consider the increasing diversity in
officials’ evaluation metrics and calibrate engagement programmes and narrative according
to the new diversity seen in the Third Plenary objectives and goals.
Understand the Local Value Proposition
The goals and principals laid out in the Third Plenary blueprint provide clear insight into the
objectives of the leadership and should be reviewed carefully against corporate development
plans in China. Opening up and reform will continue – and foreign investment will continue
to have a role to play – but, it is critical to articulate a company’s local value proposition
clearly and consider how it can complement or support critical national goals or even
incorporate politically important language into company’s narrative locally.
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7. Implications Beyond China
Going Global 2.0
Chinese companies continue to receive encouragement to “Go Global” and the latest Plenum
stresses the importance of doing this better than before. Chinese companies will be allowed
to go abroad to whatever country or region they deem fit for their business, with whatever
investment structure they deem appropriate, and based on their own assessment of risk. In
the years ahead, one can anticipate a further increase in the role of Chinese investment
overseas.
Culture and Soft Power
An entire section of the Decision details the importance of enhancing the cultural sector –
including increasing the presence of Chinese culture internationally as a form of soft power.
The plan calls for the opening of more Confucius Institutes and overseas cultural centres
while also exporting greater amount of Chinese culture.
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8. POLITICAL BACKGROUNDER
THE COMMUNIST PARTY OF CHINA
The Communist Party of China (“CPC”) was founded in 1921 and today has a membership of
approximately 82.6 million citizens including government officials, military officers, state
owned enterprise workers, private business people, farmers and students. Membership has
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grown from less than 40 million members at the 12 Party Congress in 1982 to 66 million
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ten-years ago when Hu Jintao and Wen Jiabao took the helm of the Party at the 16 Party
Congress. Over the last decade more than 17 million members were added.
CENTRAL COMMITTEE OF THE COMMUNIST PARTY OF CHINA
The Central Committee of the Communist Party of China (“CCCPC”) is responsible for
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managing the Party’s affairs for a five-year term. As of the 18 Party Congress, the Central
Committee is composed of 205 permanent members and 171 alternate members; 184 new
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members were introduced in to the 18 Party Congress. Permanent and alternate members
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were elected during the 18 Party Congress meeting that concluded on 14 November, 2012
by the delegates who attended the Party Congress. Appointees to the top Party and
government positions, including the leaders of China’s provinces, are drawn from the
members that make up the Central Committee. One of the key functions performed by the
Central Committee is electing the Politburo (currently 25 people) and in turn the Politburo’s
Standing Committee (currently seven people).
THIRD PLENARY SESSION OF THE 18TH CPC CENTRAL COMMITTEE
The Central Committee (中国共产党中央委员会), considered the highest ranked organ
within the Party, holds plenary sessions that gather all members of the CCCPC and special
guests to discuss and approve major policy decisions.
The Third Plenum traditionally focuses on economics while other sessions deal with areas
such as ideology and propaganda or specific tasks such as electing members of the Politburo
and Standing Committees. Over the last 30+ years the Third Plenum has been the launch
pad for many of China’s major reforms. One of the most significant Third Plenums took place
in December 1978 and marked the beginning of market reform. In 1993, the Third Plenum
endorsed the “socialist market economy”, which laid the foundation for fiscal, state-owned
enterprise and banking sector reforms that were driven by former Premier Zhu Rongji.
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Third Plenary Session of the 18 CPC Central Committee
Date:
Participants:
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9 November to 12 November, 2013
204 Central Committee members and 169 Alternate
Central Committee members
POLITBURO AND THE STANDING COMMITTEE
The CCCPC is led by the 25-person Political Bureau or “Politburo” (中国共产党中央政治局)
and the seven-person Standing Committee which sits at the top of the Politburo. The CCCPC
is responsible for appointing the General Secretary, members of the Politburo, the Standing
Committee, and members of the Central Military Commission.
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9. BRUNSWICK GROUP
Brunswick is the global leader in financial and corporate communications, providing senior
counsel to clients around the globe on critical issues that affect reputation, valuation, and
business success.
BRUNSWICK PUBLIC AFFAIRS
Brunswick works with its clients to monitor and respond to the business environment, build
understanding among key groups, address public policy issues, mitigate negative changes to the
operating environment, and ensure business continuity. We advise our clients on the most
effective messages they can use to communicate their case, whom they should target, and how
they should engage. We work closely with in-house government affairs teams to broaden public
support for our clients’ positions and build a better understanding of their businesses amongst
relevant policy-making audiences.
Our approach combines government relations, media relations, issue management, and
corporate citizenship strategies to influence public policy, build a strong reputation and find
common ground with stakeholders.
The Brunswick team is available to provide additional guidance on issues addressed in this report.
FOR MORE INFORMATION
MEI YAN
SENIOR PARTNER
+86 (10) 5960-8650
ymei@brunswickgroup.com
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ST. JOHN MOORE
PARTNER
+86 (10) 5960-8603
smoore@brunswickgroup.com
ROSE WANG
PARTNER
+86 (10) 5960-8606
rwang@brunswickgroup.com
GORDON GUO
DIRECTOR
+86 (10) 5960-8661
gguo@brunswickgroup.com
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