MCLC: reduce state role in the economy

[Denton, Kirk]

MCLC LIST
From: kirk (denton.2 at osu.edu)
Subject: reduce state role in the economy
***********************************************************

Source: NYT (5/24/13):
http://www.nytimes.com/2013/05/25/business/global/beijing-signals-a-shift-o
n-economic-policy.html

China Plans to Reduce the State’s Role in the Economy
By DAVID BARBOZA and CHRIS BUCKLEY

SHANGHAI — The Chinese government is planning for private businesses and
market forces to play a larger role in its economy, in a major policy
shift intended to improve living conditions for the middle class and to
make China an even stronger competitor on the global stage.

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 a nation with the world’s second-largest economy
after that of the United States.

On Friday, the Chinese government issued a set of policy proposals that
seemed 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. 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 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.”

China’s leaders are under greater pressure to change as growth slows and
the limitations of its state-led, investment-driven economy are becoming
more evident. This month, manufacturing activity contracted for the first
time in seven months, according to an independent survey by HSBC.
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.

“There are quite a number of messages coming from these new leaders,” said
Huang Yiping, chief economist for emerging Asia at the British bank
Barclays. “They realize that if we continue to delay reforms, the economy
could be in deep trouble.”

The broad proposals include expanding a tax on natural resources, taking
gradual steps to allow market forces to determine 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
<http://www.gov.cn/zwgk/2013-05/24/content_2410444.htm> issued on the
government’s Web site. “All of society is ardently awaiting new
breakthroughs in reform,” the directive said.

Foreign investors will be given more opportunities to invest in finance,
logistics, health care and other sectors. 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, however, did not give details
about the specific changes to foreign investment rules that policy makers
in Beijing have in mind.

China’s leaders are also promising to 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. The Communist
Party, experts say, 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.

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, including a group of pro-market bureaucrats who seem to
have gained in the leadership shuffle this year, seem to think that more
government spending could worsen economic conditions and that the private
sector needs to step in.

China is also facing significant changes in its demographics 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 forcing China to upgrade its industrial operations and compete using
something other than inexpensive goods and low-cost labor, analysts say.

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 unbalanced
growth. “These reforms would raise household income and reduce savings,
providing a double-barreled boost to private consumption,” 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. During their two five-year terms, the state’s role in the economy
actually expanded.

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, said, “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.”

“The market is the creator of social wealth and the wellspring of
self-sustaining economic development,” he said.
He spoke of deregulation and slimming down the role of government.

“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.”

Chris Buckley reported from Hong Kong.