Chinese leaders face pressure for economic change

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By JOE McDONALD, Associated Press

BEIJING (AP) — Facing pressure to overhaul a worn-out growth model, China's leaders are promising dramatic changes at a weekend meeting that reform advocates hope will make history by unleashing a new wave of economic transformation.

The Communist Party has yet to announce an agenda for the gathering that starts Saturday but one leader has promised "profound" changes. China's press and a Cabinet think tank point to possible areas for reform ranging from giving farmers more control over land to forcing state industry to compete with entrepreneurs.

The scale of possible change is daunting. So is potential resistance from factions including state companies that see threats to their privileges.

Because of that, analysts say the four-day meeting is just the start of a long thorny process. They say leaders are likely to agree on changes in a few areas such as finance but leave the rest, and all the details, for later.

"You don't propose a whole package of reforms and tell people to do everything at once," said Tao Ran, director of the Brookings-Tsinghua Center for Public Policy in Beijing. "You have to study the system and interest groups very well and create packages to compensate those who lose to reduce their resistance."

Three decades after Deng Xiaoping's reforms launched China's boom, even party leaders agree a growth engine based on exports and heavy industry is running out of steam. They want to shift to cleaner, self-sustaining growth driven by domestic consumption and technology.

The leadership under President Xi Jinping that took power last year has issued a flurry of piecemeal changes including easing controls on bank lending and announcing a free-trade zone in Shanghai. But Beijing has yet to tackle fundamental reforms the World Bank and other advisers say are critical to keeping growth strong.

That would require politically difficult upheaval of a system that spent the past decade building up state-owned corporate giants in energy, finance and other industries. Their monopolies, access to low-cost credit and other privileges would have to be cut to improve conditions for private industry that creates China's new wealth and jobs.

"They have to make room for entrepreneurs," said Sun Dawu, chairman of a conglomerate with interests in agribusiness, education and food processing in Baoding, 150 kilometers (100 miles) southwest of Beijing.

Sun's career highlights the hurdles facing China's private business pioneers. Once lauded by the state press for his success, he received a suspended jail sentence in 2003 on charges of improperly raising money from investors after he was unable to get bank loans.

"The obstacles are systemic — the ideology of public ownership," Sun said. "They think state-owned companies are the foundation of the country's economy."

Pressure for change has mounted as China's expansion slowed following a decade when growth peaked above 14 percent in 2009. That has raised the risk of politically dangerous job losses or discontent among entrepreneurs and professionals. They are the biggest winners from reform and a key base of support for the ruling party.

Slow growth in consumer spending has forced Beijing to set aside its reform goals and shore up the economy by building more railways and other public works. Analysts say more than half of the latest quarter's growth of 7.8 percent was due to government spending, rather than trade or consumption.

This weekend's meeting is the 205-member Central Committee's third plenum — or annual full meeting — of the party's 18th congress. That tedious title hides symbolic significance: Meetings at this point in the party's five-year political cycle are seen as a launching pad for changes in economic direction after Deng used a third plenum in 1978 to unveil market-style reforms.

"The reforms this time will be broad, with major strength, and will be unprecedented," said Yu Zhengsheng, the No. 4 member of the party's ruling Standing Committee, according to the official Xinhua News Agency.

This weekend's meeting will be an opportunity for Xi and Premier Li Keqiang, the country's top economy official, to make clear their overall economic vision.

The scattered changes already announced point toward more liberalization.

In July, regulators removed controls on interest rates charged by banks on commercial loans as part of injecting more market forces into lending that now is used mostly to subsidize state companies. The change might eventually channel more money to productive private companies.

In September, the government launched a new free trade zone in Shanghai, an echo of the Special Economic Zones that were used in the 1980s to test market-oriented reforms that later were rolled out nationwide. Few details have been released, but authorities promise a bigger role there for private business in previously closed industries.

A proposed roadmap for reform issued by a Cabinet think tank, the Development Research Center, calls for changes including allowing private companies into state-dominated industries such as railways, oil and electric power. The think tank represents only the most pro-free market stream of official thinking.

State-owned banks, oil companies and steelmakers are criticized by reform advocates as a drain on the economy, consuming billions of dollars a year in subsidies. But they also serve political goals, paying to develop poor areas and providing a flow of jobs and revenue for party leaders to buy loyalty.

In China's last major bout of reform in the 1990s, then-Premier Zhu Rongji forced state industry through a painful shakeup. Companies were forced to compete or close. They shed millions of workers.

That set the stage for the past decade of explosive growth but also created the rich, entrenched state companies that could be the biggest obstacles to change.

"The corporatization of China's state-owned sector created the powerful individual vested interests that oppose reform now," said Lombard Street researcher Diana Choyleva in a report.

In the '90s reforms, "China's politicians had much less to lose individually," said Choyleva. "This time around both their personal wealth and their own political power are on the line."

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AP researcher Fu Ting in Shanghai contributed.

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