As China faces growing calls for major reforms to prevent its slowing economy from derailing and keep its living standards rising, the response from Chinese leaders appears to be: “Not yet.”
In speeches, news conferences and meetings in the past 11 days during the annual session of the national legislature, Cabinet ministers have promised only gradual steps to help entrepreneurs and curtail the state companies that crowd out private business.
The response seems far below the challenge that even some senior Chinese leaders say the country faces: an urgent need to build a productive, self-sustaining economy or risk seeing growth stall, trapping China at middle-income levels. The World Bank, Chinese economists and the government’s own researchers have urged a drastic restructuring to curb the dominance of state industries, overhaul a wasteful banking system and promote consumer spending to reduce reliance on slowing exports.
“Given the amount of pressure from the weak external environment and internal pressure to rebalance, they don’t have much choice,” Societe Generale economist Wei Yao (姚煒) said. “They don’t have room to delay much more.”
Behind the foot-dragging lies politics.
The Communist Party leadership is in the midst of a transition to a younger generation of leaders and there was little talk during the past week’s ceremonial events of any political reforms that might erode the party’s monopoly on power.
However, it also remained unclear how committed the new leaders are to economic reform, whether they can agree on its future course and, if they do, whether they will summon the will to overcome vested interests from party factions to local leaders who get patronage by cosseting state industries.
It’s China’s version of the gridlock that hits Washington every four years as parties gear up for presidential elections.
Chinese leaders are not elected, but their political calendar — with once-a-decade handovers of power instituted in the 1990s to avoid Soviet-style stagnation — leads to similar distraction.
Chinese Vice President Xi Jinping (習近平) is in line to become the top leader, but the leadership has many other posts. As politicians move up, spots open at key ministries and important provinces. Factions are distracted by the haggling.
Even after the transition is complete, major reforms could take still longer, analysts say.
“Anyone with any political capital will spend it on positioning themselves, rather than arguing for some disruptive change in policy that could make enemies,” said Patrick Chovanec, an associate professor at Tsinghua University’s School of Economics and Management in Beijing.
Xi, former party boss of the export-driven Zhejiang Province, is known for nurturing private business, a possible plus for reform. Other possible leadership candidates have ties to banks and state industries that might hamper reforms.
That means policy is drifting and the government is continuing unsustainable strategies, such as relying on investment to drive growth, possibly making the transition to a consumer-led economy more difficult, Chovanec said.
“There is a real risk of a hard landing,” he said.
Already, the ruling party faces public anger and frequent protests throughout the country over strains ranging from unemployment and seizures of farmland for redevelopment, to chronic corruption and a yawning wealth gap between a tiny elite and the poor majority.
China’s leaders have repeatedly pledged to rebalance their governnment-dominated economy by reducing reliance on exports and investment, boosting consumer spending and helping entrepreneurs who create new jobs and wealth.
However, government-backed companies still control industries from oil to steel to telecoms and receive the bulk of loans from banks, most of which are state-owned, too.
The World Bank and a Cabinet think tank, in a high-profile report, called for far-reaching reforms to promote free-market competition and reduce the dominance of these state-owned national champions. The report — issued just ahead of the legislative session — seemed timed to influence the agenda for the impending leadership transition and landed in the midst of a debate among Chinese academics and the media about the need for reform.
“China’s economy has reached its limits under this outdated model of development,” the prominent business magazine Caixin said in an editorial this month. “Whether or not the country can engineer a new path of growth and avoid the middle-income trap will depend on its determination to transform itself.”
Chinese Premier Wen Jiabao (溫家寶) repeated promises of change in a televised speech at the opening of the largely ceremonial National People’s Congress. Wen and other leaders pledged tax cuts for businesses and more social spending.
Wen gave no commitments, though, to basic changes many say are critical to any transformation. High on that list is restructuring the banking system so that households no longer receive low government-set deposit rates, in effect subsidizing cheap loans to state companies.
Chinese Commerce Minister Chen Deming (陳德銘) said last week that the World Bank recommendations “could be incorporated into a master plan.” However, he made clear the political limits to diminishing Beijing’s role in the economy.
“China’s basic economic system in which public ownership is dominant is unshakable,” he told reporters. “This is written into the supreme law, the constitution.”
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