China sees wider role for private business

  • Updated: May 24, 2013 - 10:19 PM

New leaders signal economic policy reforms that one expert says could be “radical stuff.”

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Chinese Prime Minister Li Keqiang reacts at the end of a press conference after the signing ceremony of several agreements between Switzerland and China, in Kehrsatz near Bern, Switzerland, Friday, May 24, 2013. Chinese Premier Li Keqiang is in Switzerland to seal a free trade pact with the Alpine nation � the first comprehensive agreement his country has reached with a major western economy. Li met with Swiss officials in Zurich on Friday to conclude three years of negotiations. Switzerland is the first European stop on Li's inaugural trip abroad since taking office in March.

Photo: Peter Klaunzer, Associated Press - Ap

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– The Chinese government is planning for private businesses and market forces to play a larger role in its economy, in a major policy shift intended to improve living conditions for the middle class and to make China an even stronger competitor on the global stage.

In a speech to party cadres containing some of the boldest pro-market rhetoric they have heard in more than a decade, the country’s new prime minister, Li Keqiang, said this month that the central government will reduce the state’s role in economic matters in the hope of unleashing the creative energies of a nation with the world’s second-largest economy after that of the United States.

On Friday, the Chinese government issued a set of policy proposals that seemed to show that Li and other leaders were serious about reducing government intervention in the marketplace and giving competition among private businesses a bigger role in investment decisions and setting prices.

Whether Beijing can restructure an economy that is thoroughly addicted to state credit and government directives is unclear, but analysts see such announcements as the strongest signs yet that top policymakers are serious about revamping the nation’s growth model.

“This is radical stuff, really,” said Stephen Green, an economist at the British bank Standard Chartered and an expert on the Chinese economy. “People have talked about this for a long time, but now we’re getting a clearly spoken reform agenda from the top.”

China’s leaders are under greater pressure to change as growth slows and the limitations of its state-led, investment-driven economy are becoming more evident. This month, manufacturing activity contracted for the first time in seven months, according to an independent survey by HSBC. Economists are lowering their growth forecasts and weighing the risks associated with high levels of corporate and government debt that have built up over the last five years.

“There are quite a number of messages coming from these new leaders,” said Huang YiPing, chief economist for emerging Asia at the British bank Barclays. “They realize that if we continue to delay reforms, the economy could be in deep trouble.”

The broad proposals include expanding a tax on natural resources, taking gradual steps to liberalize bank interest rates and developing policies to “promote the effective entry of private capital into finance, energy, railways, telecommunications and other spheres,” according to a directive issued on the government’s website.

“All of society is ardently awaiting new breakthroughs in reform,” the directive said.

Foreign investors will be given more opportunities to invest in finance, logistics, health care and other sectors. For years, Western governments, banks and companies have complained that the Chinese government has impeded foreign investment in banking and other service industries, despite promising to open up.

China’s leaders also are promising to speed up efforts to liberalize interest rates and loosen foreign exchange controls, changes that are likely to reduce price distortions in the economy and allow the market to determine the value of the Chinese currency, the renminbi. On Friday the central bank, the People’s Bank of China, issued a statement that repeated such vows.

Beijing seems to be pressing ahead because it has few alternatives. The economy has slowed this year because of fewer exports to Europe and the United States and slower investment growth. Rising labor costs and a strengthening currency also have reduced manufacturing competitiveness.

China’s leaders seem to believe that more government spending could worsen economic conditions and that the private sector needs to step in.

China is also facing significant changes in its demography and drivers of economic growth. The population is rapidly aging, and the number of young people entering the workforce has begun to decline. Those shifts are forcing China to upgrade its industrial operations and compete using something other than inexpensive goods and low-cost labor, analysts say.

To succeed, China’s leaders will have to fend off powerful interest groups, as well as corrupt officials who have grown accustomed to using their political power to enrich themselves and their families through bribes and secret stakes in companies.

The new leaders, who took office in March after a once-in-a-decade leadership transition, seem determined to change course. In his speech this month, Li, the prime minister, said, ““The market is the creator of social wealth and the wellspring of self-sustaining economic development.”

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