China is poised to launch its most serious economic reform drive since the 1990s after a series of top appointments at the weekend put the architects of Zhu Rongji‘s clash with state owned enterprises in charge of key economic agencies.
Vice Premier Ma Kai, Finance Minister Lou Jiwei and central bank governor Zhou Xiaochuan were all Zhu lieutenants at the State Commission for Restructuring the Economy, which drew up the blueprint to sever the army’s ties with business and make millions jobless as state-owned enterprises (SOEs) were reformed.
They headline a clutch of officials in Premier Li Keqiang’s new line-up, who are broadly considered pro-business economic reformers able to finish the work started by arch-reformer Zhu when he was premier in a way that meets the different economic conditions of today.
“China is about to bring on the structural reforms that will ultimately reduce the old SOEs to ashes,” Paul Markowski, President of New York-based MES Advisers and a long-time adviser to China’s financial authorities, told Reuters.
“This is changing the economic policy team in a way that would be akin to bringing back the Clinton economic team to run President Obama’s economic initiatives,” said Markowski, who met with senior officials – including those at the central bank and the powerful planning agency the National Development and Reform Commission (NDRC) – during China’s annual parliamentary meeting this month.
Zhu was credited with getting China into the World Trade Organisation in a move that required shutting thousands of inefficient businesses and ultimately set the nation’s exporters on course to become the world’s most prolific, driving the economy to No.2 spot behind the United States in the process.
The pace of reform hasn’t been matched since, allowing SOEs to expand their share of economic activity and retain their preferred borrower status at the nation’s banks, which critics say starves the private sector of capital and chokes innovation.
The need for an energetic push on economic reform is acute, not least because easier reforms have been done and China’s economy, now more than five times the size it was when Zhu left the stage, will respond in more muted fashion.
In his first news conference since taking charge of the world’s second-largest economy, Premier Li pledged on Sunday to take on vested interests in order to ensure the economic restructuring needed to recalibrate China’s growth engine and keep it ticking over smoothly for the long term.
PRODUCTIVITY GAINS NEEDED
China has set a 7 percent annual economic growth target in its five-year plan that runs until 2015 and has pledged to double household income over the coming decade, implying the growth target will stay for 10 more years.
Economists say China must raise economic productivity massively to do so, especially as it plans to spend 40 trillion yuan ($6.4 trillion) in the next phase of urban development, which envisages shifting 400 million people from the countryside to cities over the next decade.
Li mentioned reform more than two dozen times when answering journalists’ questions, leaving little room for doubt about his policy emphasis at the start of his anticipated decade in power.
It will likely be autumn when the initial reform program is unveiled at a high-level meeting of top officials from China’s ruling Communist Party.
Until then, the best guess is Li’s agenda will be focused on fiscal changes that redistribute income and promote private consumption, cutting China’s reliance on investment-led, export-oriented growth while pursuing the next phase of urbanisation that is designed to drive domestic economic activity.
Ting Lu, chief China economist at Bank of America/Merrill Lynch in Hong Kong, cautioned against playing down the reforms since the end of the Zhu era even if the pace of change clearly slowed.
“I’m relatively confident that they will speed up reforms. That’s not an overstatement. Re-start is an overstatement. There might not have been much reform in the last 10 years, but there has been some reform. Zhou Xiaochuan has done quite a lot of financial reform,” Lu added.
Zhou, who took control of the People’s Bank of China (PBOC) in 2002, is the architect of broad financial reforms that have spawned fledgling capital markets, liberalised some interest rates and broken the peg between China’s yuan and the U.S. dollar – a step along the path to turning it into a global currency on a par with the greenback.
Keeping him in the job is seen as a clear statement of intent that work started must now be finished.
Lou, the new Minister of Finance, said in an interview with Reuters in November that China’s easier reforms had already been accomplished and only harder ones remained, including tax reform and for more freedom of movement and convertibility for the yuan currency, though at a pace that fosters capital market strength.
“Right now, Chinese banks are pretty strong, but the capital markets are pretty weak. Just opening up the capital account without developing the capital markets would lead to problems, so there is much reform to do,” said Lou, who at the time was head of the sovereign wealth fund China Investment Corp.
NO ROOM FOR COMPLACENCY
Xiao Gang, named China’s top securities regulator on Sunday, will have a big hand in making those reforms happen.
“The financial industry should not be complacent. Instead, it must seize the opportunity to continue its reforms and restructuring,” Xiao, a former PBOC deputy governor under Zhou, wrote in a February article in the state-run China Daily, for which he frequently writes.
That sets a worrying tone for the vested interests at state-backed banks – one of which Xiao used to run – that have earned fat margins from China’s fixed deposit and lending rates on largely risk-free loans to SOEs.
According to one analyst with ties to the powerful NDRC’s State Information Centre think-tank, the Party views economic reform as vital to its ability to remain in power for the long term and while not political reforms as such, the economic agenda is being designed to ensure political survival.
“Delegates (to the National People’s Congress) were clearly agreed that their biggest risk was doing nothing,” said the analyst on condition of anonymity.
That’s why competent administrators have been stacked into key financial positions, including the NDRC – itself born in the aftermath of the Zhu reforms – to ensure that skilled people with hands-on experience are running the system.
Whether enlightened self-preservation or not, St. John Moore, a director of communications and lobby firm, Brunswick, is telling his clients the latest drive for reform is encouraging.
“I’m optimistic that they’ve at least put the right leadership team in,” Moore said. “Execution is now going to be the challenge.”Source: Reuters – “Analysis: China heads back to the ’90s in economic reform drive”
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