The Tentative Rise of China’s Reformists

The Tentative Rise of China’s Reformists

As Beijing prepares for a once-in-a-decade change of leadership, the ouster of Bo Xilai and a series of significant financial reforms have been widely seen as signs that reformist elements within the Chinese government are in the ascendency. This analysis may be correct, but it needs to be tempered with a broader look at the Chinese political and policy landscape, which shows that reforms still lag in multiple key areas and that progressive signals are so far limited to the financial sector. The position of the army, a key political constituent, also remains unclear.

The political intrigue surrounding the removal of Bo from the Chinese Communist Party (CCP) and the arrest of his wife on suspicion of involvement in the murder of a British businessman has captivated the global media. As significant, it has been accompanied by a series of encouraging and previously delayed financial market reforms that point to a more progressive position emerging in government.

These reforms include an unprecedented expansion of the Qualified Foreign Institutional Investment (QFII) scheme as well as its renminbi-denominated equivalent, RQFII, which give foreign institutions access to A-share equity markets. There was also a widening of the Chinese yuan's daily trading band currency-market innovations. We have heard comments from senior officials, including Premier Wen Jiabao, in support of ending the state monopoly in the banking sector. Officials have even mentioned moving toward interest-rate marketization, arguably China's most important but potentially disruptive financial reform, given that the guaranteed net interest margin (NIM) -- the differential between benchmark lending and deposit rates, which is fixed under the current system -- accounts for more than 80 percent of Chinese bank profits.

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