The Washington Post

Change fundamental for China’s future growth, report says

China will face increasing challenges to sustain growth over the next two decades without substantial, structural changes to its economy, financial system and society, according to a voluminous report presented here Monday by the World Bank and one of China’s main government research units.

The report, “China 2030,” lays out a comprehensive blueprint for how China needs to restructure itself as the country shifts to high-income status. Specifically, the report says China must reduce the power of the state-owned enterprises, allow more competition in the banking and financial systems, give more support to innovation, and allow its population greater mobility by easing current residency restrictions.

China must create “equality of opportunity” and a system that allows its citizens and communities to become more involved in decisions that affect them, the report says, and China’s institutions, including the legal system, must be strengthened.

The fact that the report was co-written by the Development Research Center — the policy think tank of China’s State Council, or cabinet — would seem to lend extra weight to its proposals.

But many of the steps outlined would probably encounter stiff resistance from China’s entrenched interests — including the ruling Communist Party, the government bureaucracy and powerful state-run industries — that would see their power reduced if many of the reforms were adopted.

Some independent analysts familiar with the report’s recommendations said reform-minded elements within the State Council’s think tank could be laying down an early marker and preparing for an ideological battle over the shape and pace of China’s reforms in the next decade and beyond.

World Bank President Robert B. Zoellick said the report was conceived two years ago when he met in China with Vice Premier Li Keqiang, who is widely expected to become China’s next prime minister.

“Currently, China relies on a mix of market and non-market measures to shape incentives for producers and consumers, and there is a lack of clarity in distinguishing the roles of government, state enterprise and the private sector,” Zoellick said in a speech announcing the report. “China needs to resolve these issues.”

The study “offers directions, recognizing that these ideas need further debate within China before the details of precise policies, laws, regulations and guidelines can be drafted and implemented,” Zoellick said.

But he acknowledged the likely opposition to the proposals.“Reforms are not easy. They often generate pushback,” he said. “We have tried to identify obstacles to reform, suggest sequencing and quick wins — steps that can make reforms easier to implement.”

Another call for reform

The report acknowledges that the proposed reforms are so far-reaching — and would so fundamentally change the way China’s economy runs — that they must be addressed gradually. But the authors also say that without such reforms, China risks a dramatic slowdown in growth in future years.

This latest report is the widest-ranging in a series of studies, reports and policy proposals from Chinese and outside sources that in recent months have pointed to the need for reform as the country begins a wrenching shift from a three-decade-old growth model built on high exports and high government investment to a more modern, high-income economy driven by consumer demand.

Thursday, the People’s Bank of China, the country’s central bank, released a report that said China’s leaders should take advantage of “a period of strategic opportunity” to free up capital markets, allow foreigners to invest in Chinese financial and property markets, allow Chinese capital to move abroad more freely and let interest rates fluctuate according to the markets.

The central bank report said all of those changes are needed before the Chinese currency — the renminbi, also called the yuan — could become a freely convertible currency traded on international markets.

China exercises strict capital controls, including tightly restricting the flow of money out of the country. The controls have been credited with helping to insulate China from the worst effects of the 2008-09 global recession. But those controls have also sharply limited the flow of capital abroad and held back Chinese foreign investment while allowing the government to amass a stockpile of $3.2 trillion in foreign exchange reserves.

A Feb. 6 International Monetary Fund report on China’s global outlook said that the country still faces risks from a possible recession in the euro zone and that China needs to take further steps to shift away from its heavy reliance on exports and government-led investment.

Leadership in transition

China is undergoing a transition of leadership this year. President Hu Jintao and Premier Wen Jiabao are preparing to step aside for a new generation of leaders, led by Vice President Xi Jinping, who is widely expected to succeed Hu. Although not explicitly saying so, many recent reports seem timed to serve almost as policy recommendations for Xi and the other incoming leaders.

But close watchers of China’s internal policy struggles say that even with the backing of the State Council’s think tank, the recommendations are far from reflecting a consensus within China’s sprawling leadership and may be setting the stage for struggles ahead.

Many of the proposals carry huge risks and challenges to vested interests. For example, the proposal to break the power of state-owned enterprises and open the economy to more competition runs counter to Communist Party doctrine, which says that despite the openness of the past three decades, the state should “control the commanding heights” of the economy and maintain ownership of “strategic industries.”

Also, reform of the banking system — including commercializing the banks and allowing interest rates to be set by the markets — would have the government and party relinquish much of their control over the financial sector and would potentially expose the balance sheets of state-owned banks, many of which are believed to be in need of capitalization because of huge debts.


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