Caution on reform, growth remains key objective

Updated: 2016-03-07 08:05

By LOUIS KUIJS(China Daily)

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The discussion of reforms suggests a cautious approach on this front. But the government rightly stresses the need for progress in "new" urbanization-enabling migrants to live and spend as full urban citizens, which requires access to public services in urban areas. The aim is that by 2020 urban residents comprise 60 percent of the population, up from 55 percent in 2015, and that 45 percent of the total population is registered as permanent urban residents.

This can only be accomplished if reforms take place in the intergovernmental fiscal system to enable local governments to provide public services to newly urbanized migrants. The government is taking some steps in this regard. In 2016 it plans to boost the sources of local government revenues by handing over to local governments suitable taxes. But substantially more is needed on this front.

The discussion of "supply side reform" focuses on streamlining administration and cutting red tape, boosting innovation, cutting overcapacity in sectors such as steel and coal mining, upgrading manufacturing, SOE reform, and stimulating private business by means such as removing barriers to private sector involvement in sectors such as electricity, telecommunications, transport, petroleum, natural gas and utilities.

Regarding cutting overcapacity, the government commits to addressing the issue of "zombie enterprises". However, it has tempered expectations about the intensity of these efforts by noting that this will be done "proactively yet prudently". While prudence is in principle understandable, in the context of the ambitious GDP growth targets, progress in this area, which is crucial for both China and the rest of the world, may be compromised. Indeed, the specific plans in the steel sector, cutting between 100-150 million tons of capacity in the next five years, 10-15 percent, are modest, given the extent of structural overcapacity there.

On SOE reform, the stated emphasis is "to promote their development", "upgrade" them and "improve their performance". Structural adjustments are meant to include reorganization, mergers and exits, while pilots will start this year with regard to executive recruitment, mixed ownership and employee equity stakes. Going back to the levelling of the playing field between SOEs and other companies that should be a key priority, the relaxation of restrictions on entry by private companies in markets previously preserved for SOEs is welcome. However, the approach with regard to SOE reform seems otherwise cautious.

The author is head of Asia economics at Oxford Economics.

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