WASHINGTON, November 21, 2013 – In China, after a year of new leadership, a conference is always held to give guidelines of the policies that will define the goals of the leadership. This conference is known as the third plenary session or “third plenum.” The most recent third plenum ended on November 12, 2013 and set the vision of the new leadership led by the partnership of President Xi Jinping and Premier Li Keqiang.
The third plenum is always held with high anticipation. A few days before the conference, Xi called for “innovation driven development strategy” and Li talked of “strictly controlling the total size of government staff”.
Ideologically all this means the triumph of the philosophies of Lao Tzu, Adam Smith, Hayek, von Mises and others who have advocated for less government as key to sustainable growth. However, China has a long way to go to fully achieve those ideals.
In practical terms, the Chinese leadership believes there is a firm foundation for China to move away from a cheap labor and an exporting country to become a country that has its own brands. By stressing innovation, Xi was practically saying it is time not for Apple or Sony to find cheap labor in China, but China’s time to create competition for the likes of Sony and Apple.
On 12 November, 2013, the major communiqué from the Chinese government was that the market will be opened. According to the communiqué, the ruling party of China acknowledges the decisive role of markets in the economy, “Under a modern market system, businesses should be allowed to operate independently and compete fairly while consumers should be free to choose and spend. Also, merchandise can be traded freely and equally.”
Can there be clearer tidings of more free market reforms coming? The freer an economy is, the more people are able to use their knowledge to create products and services with less government intervention which is a good thing.
This should have been expected as the Chinese government had already set up the Shanghai Free Trade Zone, (SFTZ). The current government is hoping this will do for financial services and innovation what the Shenzhen zone did 30 years earlier. The success of Shenzhen ultimately led to China’s present economic standing in the world. The world will likely see private financial institutions with no ties to the big 5 banks.
Government communiqués are meant to give guidelines of the direction of government. How will China achieve this creation of brand? The answer comes from Huang Shuhe, vice chairman of the State-owned Assets Supervision and Administration Commission who on the day before third plenum ended suggested private enterprises will be allowed to form partnerships with state owned companies. Essentially these Cash laden companies could end up acting like venture capital and private equity funds of Western countries.
These reforms are meant to create a sustainable future for China. There is the realization that things cannot continue as things are, being a factory for the world, there are rising wage pressures and China will not always be an attractive low cost country in the future. These reforms have significant implications on the global economy and political sphere.
First and foremost, as China wants to be more innovation driven, this will spur other country to be more innovative, thus more competition. This is not a bad thing. In the 80’s, Japan was synonymous with top quality electronics. Today Apple products are hailed as superior. Who would have thought that two decades ago? The entrance of China will spur others to create better.
The entrance of China into innovation and technology should not be taken lightly. China has been making computers and having computer programmers since the time of Mao Zedong.
As China moves away from dependence on being a low cost manufacturer for foreign firms to a more sustainable economic model driven by innovation and technology, the Chinese currency will become more important. This means that in the coming decade, serious global currency talks will have to be considered and a compromise reached on a global currency that must be a win for all nations. The dollar will decline in relative terms, the question is, will the currency that replaces it be neutral like gold, or controlled by a government like the renminbi?
As China enters its next phase expect more scientists and more research which is a good thing. This will allow the world’s knowledge base to grow at a greater rate. Expect new technologies in the coming years from China. For them to find a market they must be an improvement on what already exists and resources will have to be used more efficiently.
Banking reforms means that Shanghai will become a major competitor to New York and London in the global finance arena, if not for the simple fact there is lots of cash in China. There will be more banks and they will be seeking customers in China and globally.
An obvious result of sustainable Chinese growth is greater demand for basic commodities like oil, gold, wheat, and the like.
More than the defeat of the USSR, a sustainable Chinese economy will send the message to the world of the need for less government and greater rights for choice and to use one’s knowledge. Using one’s knowledge increases the knowledge of the society.
The Chinese people have made great sacrifices by thinking for tomorrow, but they must not forget the West too made great sacrifices. Many jobs were lost to China as factories relocated, yet politicians kept their cool and refused protectionism all in the name of a better tomorrow.
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