Wednesday, November 7, 2012

Chinese Cabinet Mandates Reform Plan





 This request for reform comes just as a new regime is expected to take over and may be wishful thinking.

What China needs now is staged privatization of the SOEs over a likely twenty years combined with urban private ownership on newly built structures and the underlying land. This can shove vast amounts of real property into the hands of the nascent middle class.

All this will also create creditable lending to individuals and the private sector can be expected to shoulder a greater share of the national economy.

Dealing with the SOEs has been put off for thirty years and many today are fairly robust and can attract buyers. In fact this plan calls for the sale of say five percent a year and that of been the the best run and marketable. That easily puts the balance of SOSs on notice and focuses their minds on tightening up operations in order to participate in a future Beauty contest.

China cabinet seeks ambitious economic reform agenda: advisers

October 21, 2012|Kevin Yao | Reuters


BEIJING (Reuters) - 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 finalized 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 November 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 signaled 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 liberalize 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.

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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.

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