Chinese leadership politics delay major reforms

Associated Press + More

By CHRISTOPHER BODEEN and JOE McDONALD, Associated Press

BEIJING (AP) — As China faces growing calls for major reforms to prevent its slowing economy from derailing and keep its living standards rising, the response from Chinese leaders appears to be: "Not yet."

In speeches, news conferences and meetings in the past 11 days during the annual session of the national legislature, Cabinet ministers have promised only gradual steps to help entrepreneurs and curtail the state companies that crowd out private business.

The response seems far below the challenge that even some senior Chinese leaders say the country faces: an urgent need to build a productive, self-sustaining economy or risk seeing growth stall, trapping China at middle income levels. The World Bank, Chinese economists and the government's own researchers have urged a drastic restructuring to curb the dominance of state industries, overhaul a wasteful banking system and promote consumer spending to reduce reliance on slowing exports.

"Given the amount of pressure from the weak external environment and internal pressure to rebalance, they don't have much choice," Societe Generale economist Wei Yao said.

"They don't have room to delay much more," Wei said.

Behind the foot-dragging lies politics.

The Communist Party leadership is in the midst of a transition to a younger generation of leaders, and there was little talk during the past week's ceremonial events of any political reforms that might erode the party's monopoly on power.

But it also remained unclear how committed new leaders are to economic reform, whether they can agree on its future course and, if they do, whether they will summon the will to overcome vested interests from party factions to local leaders who get patronage by cosseting state industries.

It's China's version of the gridlock that hits Washington every four years as parties gear up for presidential elections.

Chinese leaders are not elected, but their political calendar — with once-a-decade handovers of power instituted in the 1990s to avoid Soviet-style stagnation — leads to similar distraction.

Vice President Xi Jinping is in line to become the top leader but the leadership has many other posts. As politicians move up, spots open at key ministries and important provinces. Factions are distracted by the haggling.

Current party leader Hu Jintao is expected to retain influence through the military after stepping down, and even after the transition is complete in early 2013, analysts say, major reforms could take still longer.

"Anyone with any political capital will spend it on positioning themselves rather than arguing for some disruptive change in policy that could make enemies," said Patrick Chovanec, an associate professor at Tsinghua University's School of Economics and Management in Beijing.

Xi, former party boss of the export-driven coastal province of Zhejiang, is known for nurturing private business, a possible plus for reform. Other possible leadership candidates have ties to banks and state industries that might hamper reforms.

That means policy is drifting and the government is continuing unsustainable strategies such as relying on investment to drive growth, possibly making the transition to a consumer-led economy more difficult, Chovanec said.

"There is a real risk of a hard landing," he said.

Already, the ruling party faces public anger and frequent protests throughout China over strains ranging from joblessness and seizures of farmland for redevelopment to chronic corruption and a yawning wealth gap between a tiny elite and the poor majority.

Communist leaders have pledged repeatedly to rebalance their governnment-dominated economy by reducing reliance on exports and investment, boosting consumer spending and helping entrepreneurs who create new jobs and wealth.

But government-backed companies still control industries from oil to steel to telecoms and receive the bulk of loans from banks, most of which are state-owned too.

The World Bank and a Cabinet think tank, in a high-profile report, called for far-reaching reforms to promote free-market competition and reduce the dominance of these state-owned national champions. The report — issued just ahead of the legislative session — seemed timed to influence the agenda for the impending leadership transition and landed in the midst of a debate among Chinese scholars and media about the need for reform.

"China's economy has reached its limits under this outdated model of development," the prominent business magazine Caixin said in an editorial this month. "Whether or not the country can engineer a new path of growth and avoid the middle-income trap will depend on its determination to transform itself."

Premier Wen Jiabao, the top economic official, repeated promises of change in a nationally televised speech at the opening of the largely ceremonial National People's Congress. Wen and other leaders pledged tax cuts for businesses and more social spending.

Wen gave no commitments, though, to basic changes many say are critical to any transformation. High on that list is restructuring the banking system so that households no longer receive low government-set deposit rates, in effect subsidizing cheap loans to state companies.

"Wen's report was very disappointing, very short on policies that will be adopted to achieve the rebalancing goals," said Nicholas R. Lardy, a researcher at the Peterson Institute for International Economics in Washington, in an email.

Beijing should find it easier than debt-burdened European countries to carry out reforms because economic growth is still strong, analysts say. The rapid expansion has eased as Beijing tightened lending and imposed investment curbs to cool overheating, but the government set a 7.5 percent growth target for this year.

The World Bank compared the scale of change required to China's radical overhaul of state industry in the late 1990s, which wiped out millions of jobs but set the stage for a decade of rapid growth.

The changes in the 1990s were aimed at making state industry, one segment of the economy, competitive and profitable, while the latest reform proposals are aimed at making the overall economy more efficient, which their advocates say requires scaling back the dominance of those government companies.

The commerce minister, Chen Deming, said last week that the World Bank recommendations "could be incorporated into a master plan." But he made clear the political limits to diminishing Beijing's role in the economy.

"China's basic economic system in which public ownership is dominant is unshakable," he told reporters. "This is written into the supreme law, the constitution."

(This version CORRECTS year 2012 to 2013 in 12th paragraph.)

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