The third plenum of the 18th Party Congress issued an ambitious reform program to transform China’s economy by 2020 into one that relies on market forces rather than government to allocate resources. Launching the program, however, is hampered by the fragile nature of the economy today. Since 2008 China has depended on a vast property bubble to fund fixed asset investment that leads the economy. Ambitious structural reforms usually involve a period of economic slowdown. Doing so amidst a bubble economy may trigger a deep downturn. This is why financial markets have been focusing on the downside from bursting of the bubble rather than the upside from successful implementation of the reform program.

Reform without pain is possible if businesses increase investment in anticipation of more demand in future. That force could more than offset the retrenchment from the reform. When China revamped state-owned enterprises, privatized housing, and decided to join the WTO in late 1990s, the business response was massive, which soon absorbed all the downside from the economic restructuring. The bad loans, most property and mining assets from the previous cycle of over-investment, soon became good assets due to the rapid economic growth. Many are hoping the same response could boost the economy and make the reforms less painful.

I suspect that China won’t be able to repeat its experience from a dozen years ago. No significant investment response is likely before the reforms have been carried out and the bubble economy deflated. In the late 1990s, China had a massive labour surplus and low export market share. Foreign direct investment was waiting for a signal to pour in to take advantage of the situation. China joining the WTO was the signal that multinationals were waiting for. Today China’s export market is saturated, and overcapacity is widespread across most industries. Hence, even if the government manages to shift the economy to consumption from investment, there is no urgency to expand capacity now. Waiting for a better economy to begin reform is likely to be a long one.