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China needs new economic strategy, World Bank and Chinese researchers say

BEIJING — China needs a new economic strategy after three decades of rapid growth, and must reduce the dominance of state companies and promote free markets to achieve its goal of becoming a high-income society, the World Bank and Chinese researchers said Monday.

The recommendations in a report on development of the world's second-largest economy through 2030 come amid debate in the ruling Communist Party over the future course of reform as a new generation of leaders prepares to take office this year.

The report's emphasis on curbing state industry clashes with Beijing's strategy over the past decade of building government-owned champions in fields from banking to technology and is likely to provoke opposition.

"As China's leaders know, the country's current economic growth model is unsustainable," World Bank president Robert Zoellick said at a conference about the report, co-authored with a Chinese Cabinet think tank, the Development Research Center.

China has reached a "turning point" and needs to "redefine the role of the state," Zoellick said.

The report highlights the fact that after three decades of reforms allowed Chinese entrepreneurs to become world leaders in export-driven manufacturing, state companies still control domestic industries from steel to airlines to oil to telecommunications.

Government companies are supported by low-cost credit from state banks. Business groups complain that regulators shield them from foreign and private competitors despite Beijing's market-opening pledges.

China's leaders have promised repeatedly to support entrepreneurs who create new jobs and wealth. But most bank lending still goes to state companies, and Beijing's huge stimulus in response to the 2008 crisis set back reforms by pouring money into government industry while thousands of private companies went bankrupt.

Market forces

The 468-page report calls for Beijing to open state-dominated industries to private competition, including areas deemed strategic such as energy. It says market forces should play a bigger role in bank lending decisions and interest rates. It recommends changing a household registration system that limits the ability of rural migrants to work in cities.

The report refrains from recommending major state companies be privatized — an option that would be politically unacceptable.

It says Beijing should allow local governments to start collecting property taxes to reduce their reliance on revenue from land sales, a practice that has led to urban sprawl and triggered protests over seizures of farmland for development.

"As a high-income society, China's aspiration is to enjoy a per capita income on par with advanced economies," the report says. "Realizing China's vision for 2030 will demand a new development strategy."

Adding urgency to the need for change, the researchers expect China's rapid growth to slow from 9 percent a year to about 5 to 6 percent by 2015.

"In the next 20 years, even with reforms, China's growth is expected to slow. But managing the smooth slowdown to a sustainable path in the medium-term will be challenging, and a key risk could be if growth suddenly slows," said Vikram Nehru, a former World Bank chief economist for East Asia and one of the report's lead authors.

Nehru cited the need to support an aging population, competition for natural resources and potential environmental damage.

Zoellick contrasted China's ability to make changes with the difficulties faced by crisis-hit Italy and Spain in restructuring their economies amid little or no growth.

"What I am picking up from discussions, not only in Beijing but with provincial party secretaries, is a recognition that it is better to undertake structural reforms while the economy is growing," he said.

China needs new economic strategy, World Bank and Chinese researchers say 02/27/12 [Last modified: Monday, February 27, 2012 8:45pm]
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