China's old and new leaders should seize moment for economic reform

Hu Shuli says with the Chinese economy stabilising, now is the perfect time to move towards a more market-oriented system

PUBLISHED : Thursday, 22 November, 2012, 12:00am
UPDATED : Monday, 30 May, 2016, 5:00pm

From an economic perspective, the 18th party congress closed at just the right time. New data shows that growth benchmarks in the industrial, investment, export and consumption sectors have been rising for two months, reversing the short-term downward trend.

Policymakers have been more objective in tackling this downturn than they were in the 2008 financial crisis. They have been more cautious in rolling out a new round of stimulus measures and have also continued with reform efforts while trying to maintain growth. This is a good sign.

But a stabilising economy does not mean that economic reform efforts should slow down. On the contrary, it is a good time to expedite change.

The new leaders responsible for economic matters will only assume office next year, after the National People's Congress and the Chinese People's Political Consultative Conference in March. Therefore, reform opportunities loom now. But whether the incumbent and incoming leaders can actually push ahead with reform will be a test of their capacity to govern and their sense of mission and responsibility.

China has achieved major breakthroughs in economic reform over the past three decades as a result of the leadership seizing opportunities, for example, the 1994 banking and tax reforms and at the beginning of the new millennium, before China entered the World Trade Organisation in 2001.

As far back as 1996, the five-year plan included an intention to alter the nation's growth model and adjust the structure of the economy.

But 16 years down the road, despite minor progress, there has still been no major breakthrough.

The issue of balancing growth and reform has always been a daunting challenge. It is hard to see the need for change in times of robust growth. But when the economy slows, the pressure for, and cost of, reform increase exponentially.

Policymakers, fearing social instability as a result of soaring unemployment due to business closures, tend to strengthen old policies, thus missing the chance for reform time and again. As a result, the government finds itself facing more dilemmas while structural problems that cause unbalanced, unco-ordinated and unsustainable development become more prominent.

Policymakers have to understand there is no better time for reform than when the economy is improving. They have to realise that China's rapid economic development over the past 30 years has been largely thanks to market reforms, China's "demographic dividend" and globalisation. But, these favourable factors will not last forever.

With a sound economy and stable employment rate, the government should seize the chance to finally change China's growth model or risk a total economic collapse when the next crisis hits.

Hu Jintao's report to the 18th party congress attached much importance to speeding up changes to the economic growth model; the first chapter was all about "the comprehensive deepening of economic reform". The report says the key to achieving this is to correctly handle the relationship between the government and the market; I agree.

China will eventually have to switch from a low-cost production economy to a highly efficient, innovation-driven one. As other countries can attest, a market-driven economy is the only way to boost efficiency and innovation. But, even after years of reform, the government still controls a vast amount of resources and continues to play an important and growing role in the country's economic activities.

This should not be the case; the government has to clarify and balance its relations with the market.

As Hu's report points out, if reforms are to succeed, it is vital for government functions to be kept separate while guaranteeing fair competition and legal protection for all.

This, however, is much easier said than done. The public is fearful that the government's policies will continue to focus on short-term measures and move away from the basic principles of a market economy.

Take, for example, the solar power industry that is now in the doldrums.

If, as has been rumoured, the government is planning to roll out measures to save only the big players while abandoning the small ones, that would be a case of excessive government intervention.

The industry is suffering not because the market is malfunctioning, but because the "invisible hand" is efficiently regulating the market.

Those currently suffering from domestic overcapacity, such as the solar power and wind-turbine manufacturing industries, were created during the financial crisis and government departments offered preferential policies to these projects, thus drawing in a large number of investors.

If the government continues to focus on such short-term measures, it will create a vicious circle, making reform even harder than it already is.

As the economy stabilises, China must seize the opportunity to kick off reform in the business sector. Both old and new leaders should work together to open channels for more private investment. It is, after all, their duty to carry out reform.

After all, a new chapter in Chinese history began on November 15, 2012.

This article is provided by Caixin Media, and the Chinese version of it was first published in Century Weekly magazine.