BEIJING Oct 22 China's top leaders have asked
policy think-tanks to draw up their most ambitious economic
reform proposals in decades that could curb the power of state
firms and give more freedom to the setting of interest rates and
the yuan currency.
But after almost 10 years of delay to painful structural
reforms by the outgoing leadership, some of the authors of the
proposals told Reuters they fear a nascent rebound in economic
growth could derail the recommended agenda.
"China is approaching a stage when the government must
embrace more fundamental reforms," said Shi Xiaomin, vice
president of the China Society of Economic Reform, a think-tank
under the National Development and Reform Commission, the top
economic planning body.
China's once-in-a-decade leadership change will be finalised
next month at the ruling Communist Party's 18th congress. Vice
President Xi Jinping is set to take over from Hu Jintao as
president and Li Keqiang will replace Wen Jiabao as premier at
the meeting, which opens on Nov. 8.
The congress convenes as the economy heads for its weakest
annual growth rate in at least 13 years after three decades of
near 10 percent annual expansion in the wake of sweeping reforms
launched by former leader Deng Xiaoping.
Reuters interviewed five policy advisers involved in drawing
up the reform proposals. They said the order for the agenda came
from members of the State Council, or cabinet, although they
declined to give specifics for fear of repercussions.
Significantly, planning sources said cabinet members had
signalled an interest in seeing proposals from policy advisers
outside Beijing, in the provincial hinterland, implying that a
nationwide consensus is being sought on the content and
timetable for painful structural reform.
High on the list drawn up by the advisers is how to contain
the government's meddling in the economy and clip the wings of
more than 100,000 state-owned enterprises (SOEs) which enjoy
enormous privileges, including preferential access to bank
lending and government contracts.
Other reforms include allowing the market to set the cost of
bank credit, land and various natural resources.
Credit is currently basically allocated by the central
government. It tells state-backed banks how much to lend and
when - mainly to other big state-controlled businesses and
projects. Meanwhile all land and basic resources are owned by
the state, with private ownership limited to temporary leased
rights to usage.
Analysts say reform of these two areas would bring
fundamental change to China's economic structure, even more so
than making the yuan currency more convertible - also on the
table as part of a package of proposals to liberalise capital
markets and boost the yuan's use in global trade settlement.
Reform to China's complex tax structures, under which the
central government commands the lion's share of receipts while
local governments do most of the spending, is needed if serious
progress is to be made cleaning up local government debt that
stood at 10.7 trillion yuan ($1.7 trillion) at the end of 2010.
"I think a consensus on reforms has been formed at the
central level, even though people may have different
considerations on when and how to implement reforms," said Wang
Jun, senior economist at the China Centre for International
Economic Exchanges, a top government think-tank in Beijing.
Experts say Chinese leaders must unlock fresh growth
potential and put the economy on a more sustainable path to
avoid the "middle-income trap", where wealth creation stagnates
as market share is lost to lower cost competitors and the
attainment of high-income country status stays out of reach.
The World Bank says China's GDP per capita was $5,500 last
year, versus $22,400 in South Korea, $34,500 in Hong Kong and
$46,200 in Singapore, which all avoided the middle-income trap.
There has been soul searching among Chinese academics about
the 4 trillion yuan ($640 billion) stimulus package unveiled in
late 2008, which led to excessive investment in white elephant
projects, created mountains of local government debt and sent
house prices rocketing in big cities.
The stimulus helped state-owned firms stage a comeback at
the cost of private businesses.
SOEs have repeatedly fought off Beijing's plans to get them
to pay higher dividends to state coffers and have sought to
delay reforms on income distribution systems, which could imply
capping hefty wages in monopoly sectors, government sources say.
The reforms aim to require SOEs to pay more dividends to the
government to meet a funding shortfall in social welfare.
"We could see serious problems if we don't reform," said Zuo
Xuejin, head of the Institute of Economics at the Shanghai
Academy of Social Sciences, which advises the local government
in China's financial hub.
Still, some government advisers fear signs of a recovery in
the economy could ease the pressure to act.
China's annual economic growth slowed to 7.4 percent in the
third quarter from 7.6 percent in the second - the seventh
consecutive quarter of slower expansion, but government
officials have flagged signs of a modest rebound in September.
Industrial production, retail sales and investment data were
all slightly ahead of forecasts in September and
quarter-on-quarter GDP growth was strong, suggesting the worst
may be over and the world's No.2 economy will pick up in the
"They may have to change if there is an economic crisis, but
they may choose to muddle through if the economy recovers," said
an economist with a top government think-tank in Beijing, who
requested anonymity due to the sensitivity of the issue.
TRAJECTORY OF CHANGE
Past changes tend to support the anonymous economist's view.
Deng Xiaoping launched economic reforms in the late 1970s to
rescue an economy on the verge of collapse after Mao Zedong's
disastrous Cultural Revolution.
He made his famous tour of southern China in 1992 to
jumpstart the second stage of reforms when the economy nosedived
in the aftermath of the 1989 Tiananmen Square crackdown. And
sweeping market measures spearheaded by former Premier Zhu
Rongji were introduced after the Asian financial crisis in the
Chinese leaders have acknowledged that three decades of 10
percent average annual GDP expansion are over and that the
economy needs fresh drivers, analysts say.
In February, the World Bank said in a report with the
cabinet think-tank, endorsed by presumptive-premier Li, that
Beijing must implement deep reforms to avert a crisis.
The World Bank said China's annual economic growth may slow
to 5 percent a year by 2026-2030, from 8.5 percent in 2011-2015.
The mainstream view in Beijing is to blame the global
financial crisis for China's slowdown, which also reflects
diminishing gains from past reforms and market opening spurred
by China's entry into the World Trade Organisation a decade ago.
Even fresh reforms may not deliver a swift turnaround.
"The easiest part of the reforms were carried out in the
past 30 years, so we don't have many areas where reforms can
deliver quick results," said Zuo at the Shanghai think-tank.