China promises sweeping economic change

China’s government is promising an economic overhaul that would raise the status of consumers and entrepreneurs but has given no sign how it will tackle its politically volatile reforms.

Beijing wants to nurture self-sustaining growth driven by consumption and develop service and high-tech industries, Premier Wen Jiabao said in a weekend speech outlining goals for 2011. That will require reining in elite state industry and other changes that might trigger a backlash within the party — hurdles Wen avoided mentioning.

“It looks great on the surface but it isn’t clear whether they have the political capital or will to push through those changes,” said Alistair Thornton, China analyst for IHS Global Insight.

Changes outlined by Wen could drive the evolution of the world’s second-largest economy from low-cost factory into major consumer market. That might help to narrow a yawning wealth gap between China’s elite and its poor majority and ease tensions over its trade surplus by boosting consumer demand for imports.

But to achieve its goals, Beijing has to cut subsidies and low-cost bank loans to state companies, real estate developers and other vested interests that have allies in the Communist Party and might fight back.

Wen promised unspecified “interest rate reforms” — a suggestion Beijing might give entrepreneurs a more level playing field by allowing the market to set interest rates — but he gave no timeline. The government has announced similar changes in past years but done little toward carrying them out.

The government also will have to clamp down on growth driven by investment, which might alienate local leaders whose development plans call for more spending on new factories and public works.

The plan is in line with goals approved by communist leaders in a five-year development plan in October. It calls for shifting from the investment- and export-led growth of China’s three-decade-old boom to promote efficiency and household spending.

Wen said Beijing will encourage consumer spending, including giving subsidies to the rural poor to buy home appliances.

“We will focus on the establishment of a long-term mechanism to boost domestic demand,” Zhang Ping, the chairman of the Cabinet’s planning agency, the National Development and Reform Commission, told a news conference Sunday.

“In the past five-year plan period, we focused on growth. In the next five-year plan period, we will focus on improving people’s livelihood,” Zhang said.

Wen promised to promote technology industries from software and new energy vehicles to environmental protection. That could create higher-paid jobs but also might fuel strains with Washington and other governments that complain Beijing is hampering access to its markets in its efforts to promote Chinese technology companies.

To narrow the wealth gap, Wen promised more social spending, a higher minimum wage and taxes on real estate.

New social spending could be financed by requiring major state companies to hand over more of their profits to the government, a step a Cabinet official said last month Beijing plans to take.

But that, combined with changes in access to credit and resources, could conflict with Beijing’s campaign to create “national champions” in a range of industries from banking to oil to airlines. Regulators who oversee China’s top companies say they are less competitive than their foreign counterparts, raising questions about how they will function without continued government support.

A Chinese think tank, the Unirule Institute of Economics, said in a report this month that major state companies are so inefficient that if subsidies are factored out, their return on equity — a measure of profitability — was an annual loss of 6 percent from 2001 to 2008.

“It’s a question of stopping that,” said Thornton. “A lot of it is economic — changes in interest rates, cheap land and so on. But a lot of it is political and tackling those vested interests.”
Source: AP

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