China - Go on, bet the farm!

At a crucial gatering, China’s leader must push for bold change, particularly in the countryside

WHEN colleagues complain that meetings achieve nothing, silence them with eight leaden words: “third plenary session of the 11th central committee”. This five-day Communist Party gathering in December 1978 utterly changed China. Two years after the death of Mao Zedong, it put the thrice-purged Deng Xiaoping at the helm, raised the importance of livelihoods above class struggle, loosened state controls and led to the opening of China to foreign trade and investment. In a nod to the left it still clung to the “people’s communes” in the countryside that had led to mass starvation under Mao; but with Deng in charge, they soon unravelled. The consequences affected a large chunk of humanity. Annual incomes were then $200 a head; today they are $6,000. For the rest of the world, everything the plenum accomplished is contained in the shorthand “China’s rise”.

On November 9th China’s party chief and state president, Xi Jinping, convenes another conclave in Beijing, this time the third plenum of the 18th central committee (such plenary sessions take place at least every year, whereas central committees, containing the country’s top 370-odd apparatchiks, are chosen at a five-yearly party congress, the latest in 2012). This meeting, at an army-run hotel in the capital, will be as secret as ever. As in 1978, it will be months or even years before the full import of the plenum becomes clear. But Mr Xi has been saying to foreign leaders that the coming session will be the most important for China since 1978, dropping hints of momentous change. It will certainly prove momentous if Mr Xi is radical in two areas that are crying out for reform: the state enterprises, with the financial system that underpins them; and the countryside, where farmers still lack clear rights to their land.

Deng’s reforms—and further ones in 1993 that led to China’s joining the WTO—were powerful, but they have run their course. China no longer has boundless cheap labour. Mighty but inefficient state enterprises stifle competition and hog financial resources. A vast misallocation of capital disadvantages private business and ordinary savers.

This imperils China’s robust economic growth. That matters to a party whose legitimacy since 1978 has rested on delivering the goods. So when Mr Xi talks of a “master plan” for reform and of a “profound revolution”, he is probably serious. He and the reformist prime minister, Li Keqiang, have assembled an impressive bunch of market-oriented advisers (see article). Further, having crushed the forces of Bo Xilai, another (leftist) aspirant to power now languishing in jail, Mr Xi appears to have more authority than any leader since Deng.

When it comes to the state-owned enterprises (SOEs), privatisation is regrettably not on the agenda. Still, Mr Xi should make them more commercial and accountable. Best would be to hand ownership to the National Social Security Fund, set up to serve a rapidly ageing society. The fund could then appoint directors to govern the SOEs in the interests of future pensioners. He should also force greater competition by cutting SOEs’ preferential access to cheap finance. As well as cutting the SOEs’ perks, Mr Xi should take further steps to liberalise interest rates, exchange rates and capital flows. This would pave the way for China’s currency eventually to become fully convertible—vital if it is to be a mature economic power.

The second area for profound change—the countryside—is, in the long run, even more important. This is partly because just under half of China’s 1.4 billion people still live there. But the immediate problem is that lack of rural reform is connected to a crisis in local-government financing. The central government has devolved ever more spending responsibilities to local governments, especially after a huge fiscal stimulus ordered in 2008 in the wake of the global financial crisis. Yet they have meagre means of raising revenues. Hence the need for a property tax to create a stable source of revenue.

For too long, local party bosses have relied for their finances—and their personal enrichment—on requisitioning farmers’ land and selling it to developers. The beneficial effects (such as a surge of country folk seeking a better life in the cities) are threatened by the harmful ones. Migrant workers in the cities are treated as second-class citizens, working in the least-safe jobs and denied proper housing, schooling and health care. Farmers who stay on the land remain at the mercy of local party tyrants (see article). Inadequate compensation and the lack of clear land title are farmers’ biggest gripes.

Playing to the provinces

Mr Xi should give China’s peasants the freedoms the Communists supposedly fought a revolution for. Land reforms following the 1978 plenum freed peasants from the communes but denied them other rights. They cannot sell their fields or, except to fellow villagers, their homes. They cannot mortgage land or home. In contrast, millions of registered city dwellers have become proud homeowners thanks to the sweeping privatisation of urban housing in the late 1990s.

Giving farmers full rights to their land and housing would have big positive effects. More of them would move to the city—especially if the restrictions on urban household-registration were also abolished—boosting the hopes of shifting an investment-heavy economy towards consumption. Those who stay behind would enjoy the relative freedom from party interference in their daily lives that city dwellers do.

It would be a deep and popular revolution, but can Mr Xi face down the opposition? In 1978 Deng overcame the champions of the command economy by turning the provinces into champions of economic growth. Decentralisation is responsible for some of today’s local problems, including the fiscal mess. Thus Mr Xi cannot enlist the provinces for this revolution without absolving them of their debts once and for all. Even then, today’s reactionaries are powerful, and include such beneficiaries of the system as SOE bosses and the corrupt members of many of the most powerful Communist families in the land. But overcome them Mr Xi must, if he and his plenum are not to go down in history for all the wrong reasons.From the print edition: Leaders “The Economist”