China has yet to walk the talk on economic reform

Despite lots of talk, the central government's leadership is not pushing through economic liberalisation as fast as it is needed

PUBLISHED : Monday, 28 July, 2014, 10:41am
UPDATED : Monday, 30 May, 2016, 5:01pm

The mainland's economic statistics provoke a lot of debate. This is a bit odd, since Premier Li Keqiang seems to have previously settled the matter.

Not only did Li famously dismiss Chinese national income accounting as "man-made", he demanded reform like "cutting a wrist".

He thereby provided the context in which to understand the endless announcements of success from the National Bureau of Statistics.

Li is right: bureau communiqués mean far less than the direction and progress of economic policy. Unfortunately, policy has made very little progress.

The Communist Party plenary meetings in November promised sweeping reforms that were endorsed not only by state-controlled media but by many foreign observers.

Previous reform was not gradual – the Communist Party has shown it can make abrupt changes

Financial liberalisation, land and labour reform and a greater role for the market and private sector were all heralded.

What has resulted to date, instead, is continued obsession over macroeconomic management - growth in gross domestic product and the monetary policy needed to support it. Reform has been largely absent.

Start with the institutional leader of the reform camp - the People's Bank of China.

Several private banking licences have just been granted, but the state still controls more than 90 per cent of banking assets. Unless some of these assets are sold off, promised interest rate reform will mean little, since still-dominant state banks will collude to rig rates.

In external finance, the Shanghai free-trade zone has received much attention, but no timetable has been provided for the indispensable step of opening the capital account, leaving it barely distinguishable from the old era.

Land reform seemed to start with a bang. Anhui, the original provincial leader in accepting greater rights for farmers, announced plans to finish land use registration and unify the rural and urban land markets by the end of next year.

But other provinces have been passive, and the national target for unified land registration is 2020.

Registration is supposed to enable stronger ownership rights for farmers. This second, more important process, will not start for six years. In the meantime, farmers' land rights will remain as weak as in 2011.

Perhaps the most famous term of the plenum was the granting of a "decisive role" to the market.

For the market to be decisive, the state must give up control of prices. In most industries, nothing has happened here.

This failure follows from how reform addresses the state sector as a whole. State firms should face more genuine competition. The reform programme is delivering the exact opposite.

It has been made easier to register private firms, leading to a boost in numbers. And private participation has been invited in sectors previously reserved for the state. Unfortunately, participation is possible only under tight state direction.

Private firms are to provide capital, either investing in projects or becoming minority stakeholders in state-owned enterprises, while state companies remain dominant. This is not competition.

An obvious response to criticism is that reform is proceeding gradually, as in previous decades. But previous reform was not gradual.

When Zhao Ziyang won the party's endorsement of the independent sale of surplus crops by farmers, the change was allowed to spread like wildfire.

When Deng Xiaoping reignited reform with his 1992 southern tour, the initial steps were not scheduled to take six years.

Even when Hu Jintao unbalanced the economy with an explosion in investment, reversing market reform, the process began very quickly.

The party has shown it can make abrupt changes if desired. President Xi Jinping clearly does not desire deep market reform, at least not yet.

But the clock is ticking. Owing chiefly to the inefficient state sector, mainland corporate debt is now perhaps the world's most burdensome. Aggregate national debt is rising sharply.

Debt breeds stagnation, as the example of Japan painfully attests. The statistics bureau will say what it pleases, but stagnation is the endgame for Beijing unless reform words turn much more quickly into actions.

Derek Scissors is a resident scholar at the American Enterprise Institute