China needs to restrain state firms, World Bank report says

BEIJING - The Associated Press

Customers visit a booth at a jewelry Fair in Hong Kong on Feb 26. ‘China’s aspiration is to enjoy a per capita income on par with advanced economies,’ says a World Bank report. AP photo

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 yesterday.

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 prepare 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,” said World Bank president Robert Zoellick at a conference on the report, co-authored with a Chinese Cabinet think tank, the Development Research Center.

A turning point

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

The 468-page report recommends an array of politically thorny changes that might hurt state companies and ruling party factions that rely on them for patronage.

It 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 as an option that would be politically unacceptable.

Zoellick said work on the report began 18 months with an endorsement by President Hu Jintao and Vice President Xi Jinping. Xi is due to succeed Hu as China’s paramount leader.

Early drafts were discussed with a wide range of Chinese officials, he said.

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.

“There will be many risks and challenges going forward, especially if China is unable to change its current pattern of growth,” 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.