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China’s Economy at the Fifth Plenum

HONG KONG – The Chinese government’s intervention in the stock market and devaluation of the renminbi this summer provided a loud reminder that economic developments in China affect everyone. Now, China is set to take some more world-shaping decisions at this month’s Fifth Plenary Session of the 18th Communist Party of China Central Committee.

Two years ago, at the Third Plenum, China’s leaders committed to pursue far-reaching reforms, declaring that markets must “play a decisive role in allocating resources.” While the state sector would continue to play the leading role in the provision of public goods and services, policymakers would “unwaveringly encourage, support, and guide the development of the non-public sector, and stimulate its dynamism and creativity.”

Last year, the Fourth Plenum focused on leveling the economic playing field – in terms of rights, opportunities, and regulations – by strengthening the rule of law and improving the accountability, transparency, and legitimacy of government decision-making. Specific reforms included establishing circuit courts to reduce local governments’ control over the legal system, and a larger role for the National People’s Congress Standing Committee to ensure official compliance with China’s constitution.

This year, the Party must agree on the direction of China’s 13th Five-Year Plan, which is to be launched in 2016 and is supposed to enable the country to graduate from middle-income status by 2020. The question is how to balance the need for continued growth with the imperative for reforms that disrupt traditional pro-growth incentives.