China cabinet seeks ambitious economic reform agenda – advisers

Chinas top leaders have asked policy think-tanks to draw up their most ambitious economic reform proposals in decades that could curb the power of state firms and give more freedom to the setting of interest rates and the yuan currency.But after almost 10 years of delay to painful structural reforms by the outgoing leadership, some of the authors of the proposals told Reuters they fear a nascent rebound in economic growth could derail the recommended agenda.China is approaching a stage when the government must embrace more fundamental reforms, said Shi Xiaomin, vice president of the China Society of Economic Reform, a think-tank under the National Development and Reform Commission, the top economic planning body.Chinas once-in-a-decade leadership change will be finalized next month at the ruling Communist Partys 18th congress. Vice President Xi Jinping is set to take over from Hu Jintao as president and Li Keqiang will replace Wen Jiabao as premier at the meeting, which opens on November 8.The congress convenes as the economy heads for its weakest annual growth rate in at least 13 years after three decades of near 10 percent annual expansion in the wake of sweeping reforms launched by former leader Deng Xiaoping.Reuters interviewed five policy advisers involved in drawing up the reform proposals. They said the order for the agenda came from members of the State Council, or cabinet, although they declined to give specifics for fear of repercussions.Significantly, planning sources said cabinet members had signaled an interest in seeing proposals from policy advisers outside Beijing, in the provincial hinterland, implying that a nationwide consensus is being sought on the content and timetable for painful structural reform.High on the list drawn up by the advisers is how to contain the governments meddling in the economy and clip the wings of more than 100,000 state-owned enterprises (SOEs) which enjoy enormous privileges, including preferential access to bank lending and government contracts.Other reforms include allowing the market to set the cost of bank credit, land and various natural resources.Credit is currently basically allocated by the central government. It tells state-backed banks how much to lend and when - mainly to other big state-controlled businesses and projects. Meanwhile all land and basic resources are owned by the state, with private ownership limited to temporary leased rights to usage.Analysts say reform of these two areas would bring fundamental change to Chinas economic structure, even more so than making the yuan currency more convertible - also on the table as part of a package of proposals to liberalize capital markets and boost the yuans use in global trade settlement.Reform to Chinas complex tax structures, under which the central government commands the lions share of receipts while local governments do most of the spending, is needed if serious progress is to be made cleaning up local government debt that stood at 10.7 trillion yuan ($1.7 trillion) at the end of 2010.I think a consensus on reforms has been formed at the central level, even though people may have different considerations on when and how to implement reforms, said Wang Jun, senior economist at the China Centre for International Economic Exchanges, a top government think-tank in Beijing.UNFINISHED BUSINESSExperts say Chinese leaders must unlock fresh growth potential and put the economy on a more sustainable path to avoid the middle-income trap, where wealth creation stagnates as market share is lost to lower cost competitors and the attainment of high-income country status stays out of reach.The World Bank says Chinas GDP per capita was $5,500 last year, versus $22,400 in South Korea, $34,500 in Hong Kong and $46,200 in Singapore, which all avoided the middle-income trap.There has been soul searching among Chinese academics about the 4 trillion yuan ($640 billion) stimulus package unveiled in late 2008, which led to excessive investment in white elephant projects, created mountains of local government debt and sent house prices rocketing in big cities.The stimulus helped state-owned firms stage a comeback at the cost of private businesses.SOEs have repeatedly fought off Beijings plans to get them to pay higher dividends to state coffers and have sought to delay reforms on income distribution systems, which could imply capping hefty wages in monopoly sectors, government sources say.The reforms aim to require SOEs to pay more dividends to the government to meet a funding shortfall in social welfare.We could see serious problems if we dont reform, said Zuo Xuejin, head of the Institute of Economics at the Shanghai Academy of Social Sciences, which advises the local government in Chinas financial hub. Still, some government advisers fear signs of a recovery in the economy could ease the pressure to act.Chinas annual economic growth slowed to 7.4 percent in the third quarter from 7.6 percent in the second - the seventh consecutive quarter of slower expansion, but government officials have flagged signs of a modest rebound in September.Industrial production, retail sales and investment data were all slightly ahead of forecasts in September and quarter-on-quarter GDP growth was strong, suggesting the worst may be over and the worlds No.2 economy will pick up in the final quarter.They may have to change if there is an economic crisis, but they may choose to muddle through if the economy recovers, said an economist with a top government think-tank in Beijing, who requested anonymity due to the sensitivity of the issue.TRAJECTORY OF CHANGEPast changes tend to support the anonymous economists view.Deng Xiaoping launched economic reforms in the late 1970s to rescue an economy on the verge of collapse after Mao Zedongs disastrous Cultural Revolution.He made his famous tour of southern China in 1992 to jumpstart the second stage of reforms when the economy nosedived in the aftermath of the 1989 Tiananmen Square crackdown. And sweeping market measures spearheaded by former Premier Zhu Rongji were introduced after the Asian financial crisis in the late 1990s.Chinese leaders have acknowledged that three decades of 10 percent average annual GDP expansion are over and that the economy needs fresh drivers, analysts say.