Thursday, December 19, 2013

December 1, 2013 3:44 pm

Beijing must pull off a mix of Mao and markets

By Robert Zoellick
The plenum sets out a bold agenda and makes clear who is in charge, writes Robert Zoellick
©Bloomberg
The plenum in Beijing may be a landmark. Most early commentary has focused on its economic reforms. But it has been little noted that the political signal is a mix of Mao and markets.
The good news is that China’s leaders recognise that the country needs to make a structural shift in its growth model – from export and investment-led growth to increased consumption and a stronger service sector. No one should underestimate the plenum’s boldness. After 30 years of almost 10 per cent annual growth, it is no small matter to change plans. Most countries dither until crisis or slowdowns compel change. Of the 101 economies that the World Bank considered middle-income in 1960, only 13 were high-income by 2008.

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The not so good news is that the previous leaders also said the country needed to change. Vested interests resisted. So President Xi Jinping seems to have concluded that he needs a political plan to reverse the dissipation of Communist party and central power.
The economic building blocks of the plenum’s conclusions can be found in last year’s China 2030report that the World Bank prepared with the Development Research Center of China’s State Council. Premier Li Keqiang was the prime internal sponsor of the report and Mr Xi, then vice-president, welcomed it.
The plenum’s agenda is impressive, although its vagueness on timing will make details of implementation important. The decisive role of markets is supposed to limit the visible hand of special interests and cut the misuse of resources. Combined with anti-pollution priorities, markets will be used to clean up the environment and improve health. Changes in rural property rights, along with greater social support and freedom of movement, address inequities.
Policies to boost innovation and protect intellectual property are designed to help China’s workforce to move up the value added chain. Expanded financial markets, with more market pricing, will lead to a more efficient allocation of capital and remove subsidies for favoured enterprises. New fiscal powers will better align revenues with social spending without reliance on socially explosive land grabs.
Mr Li will unify the reforms through a push for urbanisation. Historically, urbanisation has been associated with boosts in income and an expansion of knowledge and service industries. The China 2030 report forecast that the urban population would jump from 50 to 70 per cent of the total by 2030. The McKinsey Global Institute points out that China’s movement to the cities is at 100 times the scale and 10 times the speed of the first mover – Britain.
The plan also praises the powerful state-owned enterprises, while chipping away at their advantages. The dividends paid by the SoEs to the government will be increased. Market prices for inputs will cut into implicit subsidies. So will the move to market prices for savings, loans and other sources of capital.
Yet Mr Xi has also reminded his countrymen that the Communist party is in charge – and that he leads it. Party members have been ordered to write “self-criticism”, an echo of past disciplinary directives. When combined with a vigorous anti-corruption campaign, it opens new avenues for power politics.
Mr Xi also chairs a smaller, seven-member, Standing Committee of the party. Reportedly, Hu Jintao, his predecessor, did not always sway his eight colleagues. The charismatic Mr Xi is moving in the other direction: He will lead a new National Security Council and a new Leading Small Group on Comprehensively Deepening Reform. Crackdowns on netizens suggest Mr Xi has no intention of permitting dissent at a time of possibly disruptive economic reforms. Mr Xi has studied the priorities of Deng Xiaoping and the methods of Mao.
Outsiders who believe the plenum’s economic reforms are important should recall one other star in the Chinese firmament: Zhu Rongji. In the 1990s, Premier Zhu used China’s World Trade Organisation accession to achieve internal reforms. Now reformers are asking how negotiations for bilateral investment treaties, WTO talks on services competition, and even eventual free trade deals could help implement the design sketched by the plenum. The US, EU and others need to translate technical negotiations into a decade of Chinese economic transformation. Then we will see whether a policy of Mao and the market proves internally consistent.
The writer is a former World Bank president, US trade representative and deputy secretary of state

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December 10, 2013 11:56 am

China seeks way to marry reform and growth

By Simon Rabinovitch in Shanghai
A woman does embroidery as waits for customers outside her furniture shop in Shanghai©AFP
When China suffered a sharp cash crunch in June, many analysts and investors concluded that Beijing was ready to tolerate the “short-term pain” of slowing growth as it pushed through reforms to obtain the “long-term gain” of a better-balanced economy.
Yet with China cruising through the second half of 2013 with barely a bump on its economic road, a debate has begun about just how much pain is necessary after all. Can the Communist party implement an ambitious financial reform agenda and transform the country’s economic model at the same time as keeping growth chugging along at a rapid clip?
That was the view put forward this week by the China Securities Journal, an official financial newspaper. “Prioritising reforms over growth does not signify acceptance of a ‘hard landing’,” it wrote in an article that drew much attention.

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“Policies to stabilise growth can be used in the short term to mitigate the economy’s downside pressure. There is a high possibility that the economy’s growth target will again be set at 7.5 per cent,” it said.
The suggestion of a 7.5 per cent target flew in the face of what was beginning to become conventional wisdom: that China’s leadership would lower their growth aim to 7 per cent next year as a symbol of their reformist intentions.
At an important Communist party meeting in November, the country’s leaders agreed they would give market forces a “decisive” role in allocating resources in the economy. The likely results of those reforms – higher prices for energy, land and capital – are expected to drag on growth, and a lower economic target would give the government more leeway to press on with its agenda.
Some of those reforms are already in train. The incremental deregulation of interest rates has played a role in the nearly 150 basis point jump in bond yields in recent months, increasing the cost of capital for many companies. Petrol-pricing reforms have also led to more volatile and generally higher prices of energy.
However, data released on Tuesday confirmed thatChinese growth momentum remains robust, with investment slowing but retail sales picking up. The economy is believed to be growing roughly on par with the 7.8 per cent year-on-year pace it notched up in the third quarter.
This has put Lu Ting, an economist with Bank of America Merrill Lynch, in the camp that believes there need not be a trade-off between growth and reforms.
“Reforms can also support growth, especially those reforms that make growth more efficient. So I don’t understand why people think reforms have to be negative for growth,” he said.
I don’t think it’s realistic to think that you can both implement these reforms and sustain high-speed growth
- Zhu Ning, Shanghai Advanced Institute of Finance
Wang Tao, an economist with UBS, counters that the current strength of the Chinese economy in part reflects the sequencing of reforms. Measures to weaken the clout of state-owned enterprises and rein in local government debts will inevitably weigh on growth, she says. Yet Beijing has started with easier reforms that contribute to growth such as speeding up project approvals and lessening investment controls.
“In next 12 to 18 months, the initial reforms tend to be more pro-growth, while the more painful ones are likely to be delayed,” she says.
There is no question that China’s top leaders are less fixated on growth than they had been for much of the past three decades.
The lead article in Tuesday’s People’s Daily, the main newspaper of the Communist party, said the government “could not exclusively rely on” gross domestic product in its evaluation system for local officials. The paper said achievements in protecting the environment and controlling debt levels would gain more weight in these assessments that can make or break a cadre’s career.
Changing mindsets at the local level is tougher, however. “The central government can set a growth target, but when it’s passed on to local governments, 1 percentage point will be added to the target by provinces and another percentage point will be added by cities,” said Niu Li, an economist with the State Information Center, a government think-tank.
Even if China’s strong growth momentum runs into the start of 2014, Beijing faces a tall order if it is to eliminate excess capacity in heavy industry, deflate a property bubble and rein in government debt, all while contending with an ageing population.
“Personally I don’t think it’s realistic to think that you can both implement these reforms and sustain high-speed growth. The risks come from the growth pattern behind this high-speed growth,” says Zhu Ning, deputy director of the Shanghai Advanced Institute of Finance.
“To switch the growth model and address the risks, you’ll have to siphon off the excess liquidity from the system and that process cannot be comfortable.”
Additional reporting by Emma Dong
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December 17, 2012, 3:20 pm

Changing China’s Growth Model

By BILL BISHOP
China’s Central Economic Work Conference concluded Sunday. The annual meeting sets economic goals for the year ahead and usually includes a grab bag of policy prescriptions.
In keeping with the 18th Party Congress report’s emphasis on shifting to a more sustainable growth model, the official statement from the conference vowed that China would focus on the quality and efficiency of economic growth in 2013, deepen economic reforms, further urbanization and maintain strict property controls. The conference did not publicly provide an economic growth target for 2013 but most analysts believe the government is aiming for at least 7.5 percent.
Some argue that China is sending a strong signal on economic reforms but not everyone is convinced. FT Alphaville told readers:
Don’t be misled by the proclamations of “reform” or “quality growth” from China’s central economic work conference at the weekend. It’s more of the same, at least for the time being.
The economy appears to have bottomed out, as evidenced by recent data and the fact that in November China power consumption grew at the fastest pace in nine months. But the growth is still heavily weighted toward investment over consumption and last week the China Academy of Social Sciences published a report warning that that the economic imbalance has significantly worsened over the last 10 years.
The government is aware of the problems and has promised repeatedly to change the growth model. Xi Jinping, in power for barely a month, has raised expectations for reforms, as Xinhua noted in “China Awaits More After Xi’s New Moves“:
Now that the public’s expectations have been raised, the challenge lies in living up to these expectations..
People are also wondering whether monopolies will be broken up or at least weakened, whether more opportunities will be given to the private sector, and whether gaps can be narrowed between different industries and state-owned and private companies.
ONE OF THE KEYS TO WEAKENING MONOPOLIES and strengthening the private sector might be the long-awaited income distribution reform plan. Premier Wen Jiabao has talked about such a plan since 2004 and over the last several months there have been repeated promises in the Chinese press that a plan would be delivered before the end of the year.
Last week, The Wall Street Journal wrote in “China Tries to Shut Rising Income Gap” that:
Now, the plan is finally set to be released this month after a push by Mr. Wen, in the 11th hour of his tenure. But after at least a half-dozen drafts, some of the most significant proposals have been watered down, or dropped completely, after opposition from state-owned firms, researchers involved in the project say. The result is a general set of principles rather than a practical road map with specifics on how to redistribute wealth, they say.
Caijing, one of China’s top business magazines, on Monday reported that the plan would be delayed past the end of the year because of opposition by special interest groups.
This is potentially bad news, though the income distribution reform plan is Wen Jiabao’s initiative and he is a lame duck. It is possible that Mr. Xi and Li Keqiang, Mr. Wen’s successor, want to introduce their own plan sometime in 2013, though if you believe in “seeking truth from facts” this new delay is both a worrisome sign of the power and intransigence of Chinese special interests and a risk for Xi Jinping, as raising expectations can be dangerous if you do not deliver.
China has also raised expectations in its dispute with Japan over the Diaoyu/Senkaku Islands. Last week China conducted aerial reconnaissance of the disputed Diaoyu/Senkaku Islands, a move that prompted Washington to “raise concerns” with Beijing. The New York Times reports that the overflight is part of a strategy to regain effective control of the islands that was set three months ago and overseen by Mr. Xi, before the 18th Party Congress.
The Chinese government has repeatedly stated that the islands are Chinese territory and any retreat from the more assertive position it has taken over the last several months could be very damaging to the government’s credibility.
On Sunday Japan elected Shinzo Abe as Prime Minister in a landslide victory for his Liberal Democratic Party, whose “manifesto maintains Japan should step up control over the disputed islands and consider stationing officials there permanently.”
OCCUPATION OF THE ISLANDS by either side would be an explosive move. At a conference in Sanya over the weekend, former President Jimmy Carter called for Japan and China to reach a “no occupation” consensus over the Diaoyu/Senkaku Islands.
The United States, whose top two foreign holders of its debt are Japan and China, is in a difficult position. Last week Mr. Carter was in Beijing and his meetings with Mr. Li and Mr. Xi received top billing in state media. During his meeting, Mr. Xi called for more “positive energy” for the China-U.S. partnership. It appears that Mr. Xi is signaling that he wants a good relationship with the United States, in spite of the growing tensions with Japan.
Given the highly public assertiveness of the last several months however, China will not ignore moves by Mr. Abe to fulfill his campaign pledges to step up control over the disputed islands. Conflict is unlikely, but continued tensions and a growing arms race in the region appear inevitable.
 
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The New York Times

May 10, 2012

China’s Growth Slows, and Its Political Model Shows Limits

By
CHONGQING, China — After the economies of Western nations imploded in late 2008, Chinese leaders began boasting of their nation’s supremacy. Talk spread, not only in China but also across the West, of the advantages of the so-called China model — a vaguely defined combination of authoritarian politics and state-driven capitalism — that was to be the guiding light for this century.
But now, with the recent political upheavals, and a growing number of influential voices demanding a resurrection of freer economic policies, it appears that the sense of triumphalism was, at best, premature, and perhaps seriously misguided. Chinese leaders are grappling with a range of uncertainties, from the once-a-decade leadership transition this year that has been marred by a seismic political scandal, to a slowdown of growth in an economy in which deeply entrenched state-owned enterprises and their political patrons have hobbled market forces and private entrepreneurship.
“Many economic problems that we face are actually political problems in disguise, such as the nature of the economy, the nature of the ownership system in the country and groups of vested interests,” said Zhang Ming, a political scientist at Renmin University in Beijing. “The problems are so serious that they have to be solved now and can no longer be put off.”
On Thursday, China released data that showed its economy was continuing to weaken. Many economists have been urging the government to loosen controls over the financial system, to support lending to private businesses while reining in state-owned enterprises, to allow more movement in exchange rates and interest rates, and to improve social benefits.
Such changes would curb the state’s role, lessen corruption and encourage competition. But making them would involve a titanic power struggle. Executives of Chinese conglomerates, army generals, Politburo members, local officials and the “princeling” children of Communist Party elders have little incentive to refashion a system that fills their coffers.
Another significant aspect of the China model is the growing security apparatus. Its heavy-handed tactics in pursuit of social stability have been called into question by, among other things, more than 30 self-immolations by disaffected Tibetans and a diplomatic crisis between China and the United States precipitated by the plight of a persecuted dissident, Chen Guangcheng. A well-documented uprising last winter against corrupt officials in the southern village of Wukan ignited a debate about how protests should be addressed: by the sword of the security forces, or through mediation by senior officials.
But it is the scandal over Bo Xilai, until recently a member of the party’s elite Politburo, that has most humbled those who previously praised the well-oiled nature of China’s political system and its appearance of unity.
Before the charismatic Mr. Bo lost his party chief post in Chongqing, other leaders were already starting to view him as an increasingly intolerable maverick. After arriving in Chongqing in late 2007, Mr. Bo began what was billed as a crackdown on crime, along with a revival of Mao-era singalongs and welfare policies, aimed at generating populist backing and winning political support from the “new left,” or hard-core socialists, for his bid to join the top-level Politburo Standing Committee, which is scheduled to turn over this year.
Mr. Bo’s bid veered sharply from the traditional route of ascension, which since the era of Deng Xiaoping has been one of back-room patronage and shadowy negotiations among party elders. The problem now in China is that the powers of those elders have diminished with each generation — the current president and party chief, Hu Jintao, is weaker than his predecessor, Jiang Zemin, who was much weaker than Mr. Deng.
With the dissolution of power, a multitude of factions and alliances are emerging under one-party rule, with no one voice able to impose order.
“China needs a system in place more than ever,” said Wang Kang, a liberal writer from Chongqing. “Only a system can guarantee stability.”
Some say that the purge of Mr. Bo was a correction in the political system, and that the system has returned to normal. But many others argue that given the growing incoherence at the top, and the diversity and reach of mass media in China, it is inevitable that more politicians will adopt Mr. Bo’s populist methods. Cheng Li, a scholar of Chinese politics, noted that at the annual National People’s Congress in March, several rising sixth-generation leaders gave prominent news media interviews, a form of self-promotion that was a break from tradition.
“There are no clear and steadfast rules,” said Wu Si, chief editor of Yanhuang Chunqiu, a journal of politics and history. “In this confused state, there is bound to be someone like Bo Xilai who deploys various methods to compete to enter the standing committee.”
Mr. Bo’s policies also helped expose another fault line in the China model: the priority placed on economic growth through investment projects carried out by state-owned enterprises, with generous loans from state banks. This is the framework propping up the Chinese economy.
Flush with infrastructure projects, Chongqing, with a population of 31 million, had an economic growth rate of 16.4 percent last year, the highest of any municipality. But the municipal government and local state-owned companies have accumulated $160 billion in debt, according to an estimate by Victor Shih, who studies China’s political economy. Many of those loans might never be repaid.
Policy makers pushing for a different model across China, one that relies more on consumer spending and encourages private enterprise, insist that long-stalled structural overhauls must be restarted. Some see an opening in the coming leadership transition. But the biggest hurdle may be the fact that both departing and incoming leaders have close ties to state-owned enterprises, which are keen to preserve the status quo.
The hesitancy over the next step is heightened by China’s cooling economy. The growth rate slowed to 8.1 percent in the first quarter of this year, and Prime Minister Wen Jiabao in March cut the forecast for the year to 7.5 percent. The property market is deflating. The data released on Thursday showed that domestic demand is weakening and exports are flagging.
China warded off the global financial crisis with a $580 billion stimulus package and a loosening of bank lending. Its leaders could fall back on that government-led, investment-driven approach if the economy cools too much.
One thing keeping them in check, however, is fear of rampant inflation, which could increase social unrest. Discontent among the poor and middle class is a major source of anxiety for Chinese leaders, yet there are no easy solutions to the widening wealth gap, as long as rapid growth is the priority.
The surging number of protests arising from this gap is another stress point in the China model. Officials rely heavily on domestic security forces to quell what they call “mass incidents,” which one sociologist, Sun Liping, estimated at 180,000 in 2010. In March, the government announced that it planned to spend $111 billion on domestic security this year, a 12 percent increase over 2011, and $5 billion more than this year’s military budget.
During the uprising in Wukan last winter, which began because of what villagers called illegal land seizures by local officials, police units surrounded the village, but backed off after Guangdong Province officials negotiated with the residents. Wang Yang, the provincial party chief, took credit for the peaceful settlement and has proposed that that strategy be more widely adopted, in an implicit criticism of the militant tactics used in “stability maintenance.”
The weakness of those tactics was exposed once again when Mr. Chen, the activist put under house arrest in 2010, made his nighttime escape from village guards who had beaten him and his wife. Mr. Chen, who is blind, fled to the United States Embassy in Beijing. That such brutality could set off a diplomatic crisis between the world’s superpower and its rising rival is as obvious a sign as any of the deep flaws in China’s security methods.
“From the few times I’ve engaged with them,” Mr. Chen said, “I know they have the intention of reforming, of slowly initiating the rule of law. But I don’t know how soon.”
Jonathan Ansfield contributed reporting, and Li Bibo and Edy Yin contributed research.


 
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March 27, 2013, 10:00 am

The Limits of China’s Market Model

By DAVID BARBOZA
In his book “No Ancient Wisdom, No Followers,” the author James McGregor delivers a sharp critique of China’s recent development path, and what he calls “authoritarian capitalism.”
In Mr. McGregor’s China, the government plays too large a role in the economy, and big state-owned entities dominate because of government subsidies and preferential treatment. Private entrepreneurs and multinational corporations are at a distinct disadvantage, one that he argues is likely to damage China’s prospects in the long run. With China determined to create its own global brands, he says, the government is putting rules and regulations in place that seem increasingly protectionist.
A former reporter for The Wall Street Journal who has spent more than 20 years in China, Mr. McGregor now works as a senior counselor for APCO Worldwide, a global communications consultancy. His book, in paperback and e-book format, was published late last year. He talked about it in an e-mail interview, which has been edited for style.
Q.
How did you come to write this book?
A.
My interest in this book was fueled by the 10th anniversary of China’s joining the World Trade Organization and seeing China heading in a much different direction than had been anticipated. Instead of pursuing further market reforms and expanding the role of private enterprise, China had turned back to state-owned enterprise and begun strong-arming multinationals to hand over their most advanced technology to their state-owned business partners. I wanted to dig deeper into this situation while stepping back to look at the overall picture of where China had come from and where the country is headed as a political-economic entity.
Q.
One interesting aspect of your book is the description of how huge, powerful state-owned companies in China benefit from state subsidies, low-interest loans and favorable policies that help them maintain dominance, and yet don’t really result in capable, well-managed and innovative companies. Doesn’t this mean that China won’t be able to compete in the global marketplace over the long run and that multinationals — operating more on their wits — will always be able to beat out the Chinese competitors, in the global marketplace, at least?
A.
In the long run the United States doesn’t need to worry about Chinese state enterprise taking over the world. They are simply too political and inefficient. But as these state-owned enterprises go out into the world fueled by huge subsidies and favorable policies, they will be able to destroy quite a few good companies that are simply efficient businesses. Look at what we’ve seen with solar and wind companies in the United States and Europe already.
Q.
If the situation is so troubling, why do global brands seem to be scrambling to get into China or expand their presence here?
A.
It is a different story for different sectors. Technology and advanced industrial companies are having an ever more difficult in China. China’s long-term goal is to learn from them, and then replace them with Chinese technology created by absorbing and re-innovating. But many retailers and consumer goods companies are doing well. China needs to expand consumption to reduce dependence on exports and government infrastructure spending for growth. Getting good quality products at reasonable prices to Chinese consumers through efficient retailers helps with the party’s economic and social stability goals. When your business is in China’s interest, your business can do well.
Q.
Apple sold more than $20 billion worth of goods in China during the last year. Starbucks, General Motors, Coca-Cola and General Electric seem to be thriving in China. Is your argument that these are exceptions, or that many of the multinationals would be doing far better were it not for China’s restrictive trade and investment policies?
A.
Manufacturing for export by foreign companies in China is quite open. But penetrating the domestic market is a challenge. If China had more open trade and investment policies, United States exports to China would skyrocket as Chinese people trust the quality of American goods. American manufacturers would quickly expand their operations in China for products to be sold in China. No doubt about that.
Q.
If the Chinese government forces global companies into unfair joint ventures and even allows such vast intellectual-property theft, why do the multinationals put up with that?
A.
Simple answer: growth. China has been the only significant global growth market since the global financial crisis. The country is spending trillions of dollars on infrastructure, including bullet trains, subway systems, nuclear power plants, airports, seaports, refineries, electric grid — the list goes on and on. If you are in the business of transportation, power generation, aviation, telecommunications, computing or logistics, among others, if you don’t make it in China you won’t make it anywhere.
Q.
What are some of the solutions? What can United States or global companies do to improve the situation in China, or could the United States government be doing more?
A.
The answer is to vigorously enforce World Trade Organization rules and hold China to the bilateral agreements it has made. At this point China is winning through intimidation on the trade front. Countries and companies that threaten to file W.T.O. cases are quietly informed that the retribution will be fierce. At the same time, we should welcome Chinese investment in the United States and push for reciprocal treatment. China has the upper hand because of the fiscal irresponsibility of American politicians. The best thing the United States can do to deal with China is get our own house in order.
Q.
Westerners doing business in China are often advised not to engage in public fights with the Chinese authorities; that negotiating quietly, behind closed doors, is the better option. Is that still the case, or is your book suggesting that bolder, more confrontational tactics are necessary?
A.
Companies that individually and publicly take on China face the wrath of China Inc. But those who band together behind trade associations and government forums stand a better chance. It is always better to try to work out things behind closed doors. But only if China is willing to listen. Today, that is often not the case. The global financial crisis caused a significant shift in thinking by many in the government. For many years, foreign companies that invested in China were looked at as friends who were helping China. There are many in China now who believe that the foreigners need China more than China needs the foreigners. So they often don’t feel a need to engage even behind closed doors.
 
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