Beijing Plans to Reduce the State's Role in the EconomY
Workers at a construction site of a residential project in Rizhao, China. Beijing has signaled that, even though the economy is weakening, there is unlikely to be a major government stimulus package this year.
By DAVID BARBOZA and CHRIS BUCKLEY
Published: May 24, 2013 42 Comments
SHANGHAI — In a major policy shift, the Chinese government is planning for private businesses and market forces to play a larger role in its economy, the world's second-largest after that of the United States.
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Mark Ralston/Agence France-Presse — Getty Images
The People's Bank of China issued a statement that repeated promises made by Beijing's leaders to speed up efforts to liberalize interest rates and loosen foreign exchange controls.
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In a speech to party cadres containing some of the boldest pro-market rhetoric they have heard in more than a decade, the country's new prime minister, Li Keqiang, said this month that the central government would reduce the state's role in economic matters in the hope of unleashing the creative energies of the nation.
On Friday, the Chinese government also issued a set of policy proposals that appeared to be intended to show that Mr. Li and other leaders were serious about reducing government intervention in the marketplace and giving competition among private businesses a bigger role in investment decisions and setting prices. The overhauls, if successful, could also make China an even stronger competitor on the global stage by encouraging innovation and expanding the middle class.
Whether Beijing can restructure an economy that is thoroughly addicted to state credit and government directives is unclear. But analysts see such announcements as the strongest signs yet that top policy makers are very serious about revamping the nation's growth model.
"This is radical stuff, really," said Stephen Green, an economist at the British bank Standard Chartered and an expert on the Chinese economy. "People have talked about this for a long time, but now we're getting a clearly spoken reform agenda from the top."
The broad proposals, developed by the National Development and Reform Commission, an agency that steers many areas of economic and industrial policy, include expanding a tax on natural resources, taking gradual steps to liberalize bank interest rates and developing policies to "promote the effective entry of private capital into finance, energy, railways, telecommunications and other spheres," according to a directive issued on the government's Web site.
Foreign investors will be given more opportunities to invest in finance, logistics, health care and other sectors. "All of society is ardently awaiting new breakthroughs in reform," the directive said.
For years, Western governments, banks and companies have complained that the China government has impeded foreign investment in banking and other service industries, despite promising to open up. The latest directive did not give details about what specific changes to foreign investment rules that policy makers in Beijing might have in mind.
China's leaders are also promising to speed up efforts to liberalize interest rates and loosen foreign exchange controls, changes that are likely to reduce price distortions in the economy and allow the market to determine the value of the Chinese currency, the renminbi. On Friday, the central bank, the People's Bank of China, issued a statement that repeated such vows.
The push does not signal the end of big government in China, experts say. The Communist Party is unlikely to abandon the state capitalist model, break up huge, state-run oligopolies or privatize major sectors of the economy that the party considers strategic, like banking, energy and telecommunications.
But analysts say a more market-oriented economy in which government has a smaller role in business outcomes could have far-reaching consequences for the global economy and bolster the prospects of foreign investors, multinational corporations operating in China and Chinese entrepreneurs.
Beijing seems to be pressing ahead because it has few alternatives. The economy has slowed this year because of fewer exports to Europe and the United States and slower investment growth. Rising labor costs and a strengthening currency have also reduced manufacturing competitiveness.
China's leaders seem to believe that more government spending could worsen economic conditions and that the private sector needs to step in.
"There are quite a number of messages coming from these new leaders that they realize that if we continue to delay reforms, the economy could be in deep trouble," said Huang Yiping, chief economist for emerging Asia at the British bank Barclays.
This month, manufacturing activity contracted for the first time in seven months, according to HSBC's preliminary purchasing managers' index. Economists are lowering their growth forecasts and weighing the risks associated with high levels of corporate and government debt that have built up over the last five years.
China is also facing significant changes in its demography and drivers of economic growth. The population is rapidly aging, and the number of young people entering the work force has begun to decline.
Those shifts are likely to force China to upgrade its industrial operations and compete using something other than inexpensive goods and low-cost labor, analysts say.
The economic boom that raised China's profile over the last decade, after the country's entry into the World Trade Organization, seems to have masked underlying problems in its formula for growth.
Nicholas R. Lardy, a senior fellow at the Peterson Institute for International Economics and an authority on the Chinese economy, said government controls on interest rates, the exchange rate and the price of energy had resulted in a huge misallocation of capital and imbalanced growth. Making those prices more market-driven would help rebalance and improve the economy, he said.
"These reforms would raise household income and reduce savings, providing a double-barreled boost to private consumption, helping to offset the drag of moderating investment expenditure," Mr. Lardy said.
To succeed, China's leaders will have to fend off powerful interest groups, as well as corrupt officials who have grown accustomed to using their political power to enrich themselves and their families through bribes and secret stakes in companies.
The previous administration, led by President Hu Jintao and Prime Minister Wen Jiabao, also promised to deepen economic overhauls and strengthen the private sector. But analysts say they lacked the political clout needed to succeed, and during their two five-year terms, the state's role in the economy seemed to expand.
The new leaders, who took office in March after a once-in-a-decade leadership transition, seem more determined to change course. In his speech this month, delivered to party officials nationwide by teleconference, Mr. Li, the prime minister, used what some experts say was bold pro-market rhetoric they haven't heard in more than a decade.
"If we place excessive reliance on government steering and policy leverage to stimulate growth, that will be difficult to sustain and could even produce new problems and risks," Mr. Li said. "The market is the creator of social wealth and the wellspring of self-sustaining economic development."
The prime minister talked about deregulation and slimming down the role of government, saying China should "streamline administration and delegate powers" to encourage investment.
He also warned of risks to the economy because of overcapacity and misallocation of capital, suggesting that government intervention was partly to blame.
"Li Keqiang thinks like an economist," said Barry J. Naughton, a professor of Chinese economy at the University of California, San Diego. "He wants the government to get out of the way. And although the growth outlook is getting worse, he says, 'We don't want to rely on stimulus; we want private-sector participation.' This is what economists want."
Behind Mr. Li and President Xi Jinping is a group of pro-market bureaucrats who seem to have gained in the leadership shuffle this year, including the central bank chief, Zhou Xiaochuan; Finance Minister Lou Jiwei; and Liu He, who is a vice chairman of the National Development and Reform Commission and director of the Office of the Central Leading Group on Financial and Economic Affairs, a body that advises party leaders on the economy. Mr. Liu is part of a team working on proposals for economic changes that could be announced in the autumn at a meeting of the Communist Party Central Committee.
The State Council, the Chinese cabinet, took action this month by releasing a list of administrative items that no longer need central government approval, part of an effort to delegate power and to ease the burden on business.
Beijing has also signaled that even though the economy is weakening, there is unlikely to be a major government stimulus package this year, like the one announced in late 2008, as the global financial crisis deepened. The central government worries, in part, about mounting local government debt and the possibility of a huge increase in nonperforming loans at state-owned banks.
Yet moving ahead with changes that reduce government spending — and rely on the private sector — could weaken the economy in the short run and lead to a rise in unemployment. That is the challenge facing China's new leaders as they promise some of the boldest economic overhauls in a decade.
"China is at an inflection point," said Shen Minggao, an economist at Citigroup. "Will they push ahead with reform or follow the old model of stimulus? The kinds of reform they want are growth-negative, so they'll have to tolerate lower growth for a while. We'll see if they can do that."
Chris Buckley reported from Hong Kong.
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