The Third Plenary Session: from the experts

Shao Yu, chief economist at Orient Securities Co Ltd

Q: What would be your most expected reform in China? Why?

A: The Chinese economy should require additional impetuses to supplement the existing driving forces, such as investment, exports and consumption. The new "three horses of the troika" hauling China are in-depth urbanization, consumption upgrading and the internationalization of the renminbi.

In contrast to previous urbanization processes when migrant workers failed to accommodate themselves into the city, in-depth urbanization should aim to address key issues including the reform of the hukou system, the supply of residential apartments as well as an increase in purchasing power. The aim is to create a genuine "middle class", indicating the overriding goal of the reform is to create an urbanized population.

The upgrade of consumption ranges from the branding of traditional merchants to a wider coverage of healthcare services. It also includes technological drivers that fuel new types of purchasing, such as the burgeoning Internet finance and the fast takeoff of the 4G mobile network.

The internationalization of the renminbi indicates that China will move from lower-end exports such as shoes and socks, to exporting projects, services and even the currency. Internationalization of the RMB will help the country achieve a comprehensive economic upgrade and provide sustained growth momentum. When the annual GDP per capita doubles to $13,000 from the current $6,500, it suggests China will have avoided the middle-income trap.

Q: In which areas do you think reform would be carried out at the upcoming Third Plenary Session of the 18th CPC Central Committee? And on what scale?

A: It's hard to make detailed policy projections. But I believe the three new driving forces (which are mentioned above) should be achieved with corresponding reforms in the following seven areas: the financial system, the hukou system, State-owned enterprises, the land system, fiscal revenue and tax distribution system, the administrative system as well as factor price reform.

For instance, the reform of the hukou system is closely related to in-depth urbanization. More effective investments are encouraged to consolidate public transportation, infrastructure and the building of satellite cities. These will benefit both the economic output and people's welfare. Real urbanization can effectively prolong the duration of residents in the city, whose productivity will therefore be better unleashed as they get to improve their capabilities under better conditions.

Q: What would be the biggest challenges and risks for carrying out reforms?

A: All I can see are two potential risks in the short run, or next year.

The first is inflation. The Consumer Price Index is likely to rise to 3.4 to 3.5, but it will still remain at a manageable level. Besides, the Producer Price Index has been contracting for a long time. So a price hike may be heartening news to manufacturers.

The other problem is local governments' debt problems. Recent estimates suggest that all levels of government bear a combined debt burden totaling 29.5 trillion yuan. In the foreseeable future, the debt servicing ratio will hit 100 percent. Given that net assets of the governments amount to 33 trillion yuan, the major concern remains liquidity issues.