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Tuesday, March 13, 2012

China in need of new Deng

Special to The Japan Times

HONG KONG — Where is the new Deng Xiaoping, a man of vision for China's new times as it struggles to become the once and future economic megapower?

I thought of this when I saw the gray suits at China's National People's Congress robotically applauding premier Wen Jiabao as he announced the target of 7.5 percent economic growth for this year.

That is much lower than China's much-vaunted three decades of double-digit growth, but the clear message is that growth is going to become slower and lower — some economists predict that it may drop to a 3 percent crawl — unless and until Beijing adopts radical economic reforms that will bring it into conflict with powerful vested interests created by the great growth and would change the face of China forever.

The reform message was spelled out in detail in a blockbuster 468-page report unveiled in Beijing by World Bank President Robert Zoellick, who stressed the need for more freedom and a renewed commitment to a market economy.

I was going to call it a "World Bank report", but Zoellick went to great pains to stress that the report is a joint effort by the bank and the Development Research Center of China's State Council, with executive vice premier and premier-in-waiting Li Keqiang leading for China.

Zoellick praised the "unwavering commitment" of Li and quoted Vikram Nehru, the bank's team leader on the project, as saying that "at the end of the day, both the Chinese and World Bank teams had truly become one joint team with common objectives and deep friendships." The bank president also summoned the ghost of, as he called him, "China's father of modern development, Deng Xiaoping, to 'learn truth from facts.'"

One intriguing question is who is giving cover to whom. As The Economist cruelly pointed out, "China remains a big deal for the bank, but the bank is not a big deal for China. The bank's outstanding loans (worth $20.6 billion) are equivalent to only 0.6 percent of China's foreign exchange reserves." China's reformers must be hoping that the World Bank's name will give critical catalytic leverage to pleas for reform.

The report is sugarcoated with heaps of praise for China's immense economic achievements since Deng opened its doors, evidence that there will be bitter and powerful resistance to the changes suggested. Even the title, "China 2030: Building a modern, harmonious, and creative high-income society", is full of feel-good buzz words deflecting or hiding the tough political issues that booby-trap the path to change.

The hard facts are, as Zoellick and the report paint them, that China is heading for the economic Great Wall, known in other countries as the middle-income trap.

The dirigiste model that has served China well for 30 years has reached its sell-by date. The report has six strategic pillars:

• Redefining the roles of the state and the private sector, so that China can complete its transition to a market economy.

• Enhancing innovation and adopt an open society system with links to global research and development networks.

• Promoting green development.

• Ensuring equality of opportunity and basic social protection for all Chinese.

• Strengthening the fiscal system and improve fiscal sustainability.

• Ensuring that China, as an international stakeholder, continues its integration with global markets.

There are echoes in the report of China's current five-year plan, but the plan is couched in gentler social terms of tweaking and improving income inequality, environmental protection and energy efficiency — as if the existing growth momentum can carry China forward to solve its problems without too much pain.

Not so. China needs more than fudges, major structural reforms, a changed role for government subjecting itself to the rule of law, diminishing the role and power of the state-owned enterprises (SOEs) and increasing that of private enterprise, releasing innovation, competition and entrepreneurship as the main thrusts of economic growth rather than relying on government.

Just to take the first point, it requires reform of the hukou residency permit system to let workers move more easily, greater protection for farmers' rights over agricultural land and expansion of land registration and rental rights, all of which would cut into the powers of party officials and bosses.

In addition, the government must step back from interfering in the market while at the same time curbing the SOEs.

The blogger China Bystander called the report "a political manifesto disguised as an economic blueprint", and pointed out that it gives influential backing for China's reformers to press on with reviving economic reform that "has slowed to a glacial pace now that it has hit the hardest rocks of vested interest."

Reforms pose challenges to the existence of the Communist Party. It is hard to think of a country that has adopted full market reforms and remained a one-party state. China has to face the fact that the freedoms and equality advocated by the report will infringe the controls that the Communist Party sees as essential to its stable government of the immense and complicated country.

The official English newspaper China Daily carried a cartoon of Robert Zoellick pleading, "Take him off the bottle" to a Mao-suited parent holding an overweight also Mao-suited child labeled "SOE". Its commentary, by Li-Gang Liu, greater China economist for Australia and New Zealand Banking Group, was optimistic that China is well placed to speed up reforms. He cited the "drastic restructuring of [SOEs] and banks in the aftermath of the 1997-98 Asian Financial Crisis" as a good harbinger of China's ability to take tough action.

That is the erroneous tweak and fudge school. The export and massive state investment-led model that has suppressed consumption, now at a mere 35 percent, no longer serves.

This time round, the government has to cut both itself and the SOEs down to size. It must, to quote the report, "focus more on systems, rules and laws" while "redefining the roles of SOEs and breaking up monopolies in certain industries, diversifying ownership, lowering entry barriers to private firms, and easing access to finance for small and medium enterprises."

The report does not suggest privatizing the SOEs, probably seeing that as a red rag to supporters of the old state capitalist regime and their powerful supporters.

If China does not reform, the remorseless contradictions of its rapid growth will catch up with it: Growth will slow as inequality rises and pollution chokes the gains for the privileged. China's population as a whole risks becoming old before it grows wealthy since the labor force in five years time will have more retirees than new entrants.

The changing of the political guard in Beijing later this year and early next is both a challenge and an opportunity, but there are no signs yet of a new Deng, either an individual or a group of leaders, who can lead China through the shadows of crisis to the sunlit uplands of a still developing middle-income country.

But Deng himself is also a divisive figure: It was he who slammed the door on the aspirations of the young for freedom in and around Tiananmen Square in 1989.

Kevin Rafferty is editor in chief of PlainWords Media.

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