Market reform in China must continue

PUBLISHED : Sunday, 05 July, 2015, 5:53am
UPDATED : Sunday, 05 July, 2015, 5:53am

Of all the plans for change unveiled after Xi Jinping took the helm of the Communist Party, the one that stood to make the biggest difference was market reform. Despite decades of stellar growth, inefficiency and misallocation of resources remained a drag on the economy's full potential. Market reform would address this by opening up key sectors previously dominated by huge state-owned enterprises to competition from private firms, the principal engine of growth. At the same time party leaders pledged to raise efficiency at SOEs, while curbing officials' meddling in micro management, which would be left to business professionals.

Then President Xi's crackdown on official corruption began to bite, discouraging initiative and stalling reform.

But analysts are still puzzled by the message from a leading small group on economic reform, chaired by Xi, earlier this month. It said the party must strengthen its leadership in SOEs, which suggests party influence and control is set to deepen.

For years Beijing has been talking about SOE reform, including separation of the party from operations of SOEs to allow them to run on business principles, and identifying a few that would be allowed to have mixed ownership.

But little has happened, and not just because of the anti-corruption campaign. The government has also been reacting to the rise of nationalism and populism. The former has resulted in increased political rather than economic emphasis, such as fighting for influence and preventing foreign business from taking stakes. Populism has resulted in pay cuts for top SOE executives because they were deemed to be earning too much for running monopolies. That too has stifled incentive to take initiatives, which does nothing to help China address the economic challenges it is facing. Vested interests that benefit from monopolies and their inefficiencies have prevailed.

There are strong arguments for the party to maintain macro control over strategic sectors like telecoms, as other countries do. But if Beijing accepts the need for micro reform and a level playing field for the sake of efficiency and competitiveness, it need only push ahead with a plan already in place. Now that China's population dividend of a supply of cheap labour is diminishing, it cannot afford to put off for much longer the separation of corporate and management power in inefficient monopolies that dominate the country's economic life.