China can reform its economy and grow at the same time

Boosting GDP

China can reform its economy and grow at the same time


Beijing bureaucrats are all exhausted just by chasing a sputtering economy and trying to keep it moving. Some fine-tuning here, a bit of state spending there – all with the aim of meeting a GDP growth target. But if they want to stop fixing problems on the fly and see development move onto a self-sustaining track they will need to run a lot faster for now.

Last week the State Council announced further steps in their plan to revitalize the economy by opening up key areas to non-state participation. The government will cut more corporate red tape, allow private capital in 80 investment projects in key industries ranging from pipelines to solar and start working on opening up strategic sectors such as oil exploration to non-state players. Some analysts see this as a sign that Beijing is making good on its reform pledges.

At the Third Plenum policy meet last November the government promised to push ahead with change. In March, the annual Government Work Report to China’s parliament said that top planners will open up investment projects in finance, petroleum, electricity, railway, telecoms, resources and public utilities. Implementation is happening faster than most expected.

The latest plans can kill two birds with one stone: Support an economy that slowed from 7.7% growth in 2013 to 7.4% in the first quarter without making the fiscal headache worse. “Opening up more attractive investment areas for private capital will help to invigorate the economy and avoid a further build up of government debt,” Barclays Research said in a note.

Local authorities and state-owned enterprises have accumulated debts of more than US$3 trillion. These are the entities responsible for most of the investment in infrastructure in China that has kept economic development on track with government goals. Asking them to borrow more to fund a new round of construction would go against current efforts to deleverage the economy.

Beijing is luring private capital to replace state cash, but investors from the private sector need convincing. They chase commercial returns, not promotion at government entities. Officials also need to avoid a state-asset fire sale akin to the one that put Russia's best-connected businesspeople at the helm of its most-valuable assets upon the fall of the Soviet Union.

Private sector enterprises find working on state-directed projects challenging on the rare occasions that they are allowed in. Approvals are slow and the decision-making process is opaque. Such projects can also be very lucrative. China is spending tens of billions of dollars on railways, energy, ports and IT infrastructure – the very sectors the government is opening up.

The State Council said it would give more autonomy to firms in making their investment decisions while more clearly delineating the boundary between market and government. Project approvals will be sped up and non-state firms will be able to invest directly in sectors that are not included on a “negative list” instead of needing a bureaucrat to review every investment.

Such measures will “help to adjust the structure of the economy and make investment a more effective driver of growth,” HSBC economists said in a note. Eventually, private capital could even be allowed into the most valuable state-controlled sectors such as utilities, oil and gas exploration, water reserves and airports.

Yet the voice of doubters remains loud, and can even be heard in loyal state media. Some say that previous opening up pledges have not been honoured; others argue that powerful vested interests at state-backed firms refuse to budge. Their scepticism is well-founded.

“The Chinese government has pledged to allow a large role for market forces in sectors that are dominated by state-owned firms, but this pledge has been made many times before and the reality has historically fallen short of the promise,” Bill Adams, senior economist at PNC Financial Services Group, told China Economic Review before last week’s announcement.

Top leaders must do more to prove that they are genuinely open to private capital otherwise the market will just dismiss these latest plans as inconsequential talk. They can start by providing more details. No timeframe has been given for the 80 projects; no value has been assigned to them either. There was also no official mention of whether foreign firms can participate; this is not just a question of tapping deeper capital pools but also of bringing in external expertise.

China Economic Review has long argued that the economy needs to slow so that important reforms can take root. One of the key tenets of this is to improve resource allocation and prevent waste and overcapacity. Introducing private investment into state-monopolized sectors can address this. China might even be able to reform and keep growing at the same time, so long as those bureaucrats in Beijing are willing to put in that extra mile.