China Plans to Reduce the State’s Role in the Economy

The Chinese government is planning for private businesses and the market forces to play a larger role in its economy, in a major policy shift intended to improve living conditions for a middle class and to make China even stronger competitor on the global stage. In a speech to party cadres containing some of the boldest pro-market rhetoric they have heard in more than a decade, country’s new prime minister, Li Keqiang, said this month that the central government would reduce state’s role in economic matters in the hope of unleashing creative energies of a nation with the world’s second-largest economy after that of United States. On Friday, the Chinese government issued a set of policy proposals that seemed to show Mr. Li and other leaders were serious about reducing government intervention in the marketplace and giving competition among private businesses a bigger role in the investment decisions and setting prices. Whether Beijing can restructure an economy that is thoroughly addicted to state credit and government directives is unclear. But analysts see such announcements as the strongest signs yet that top policy makers are serious about revamping the nation’s growth model. “This is radical stuff, really,” said Stephen Green, an economist at the British bank Standard Chartered and an expert on the Chinese economy. “People have talked about this for a long time, now we’re getting a clearly spoken reform agenda from top.” China’s leaders are under greater pressure to change as growth slows, limitations of its state-led, investment-driven economy are becoming more evident. This month, manufacturing activity contracted for the first time in seven months, according to an independent survey by HSBC. Economists are lowering their growth forecasts and weighing risks associated with high levels of corporate and government debt that have built up over the last five years. “There are quite number of messages coming from these new leaders,” said Huang Yiping, chief economist for emerging Asia at British bank Barclays. “They realize that if we continue to delay reforms, the economy could be in deep trouble.” The broad proposals include expanding a tax on natural resources, taking gradual steps to allow market forces to determine bank interest rates and developing policies for “effective entry of private capital into finance, energy, railways, telecommunications and other spheres,” according to a directive issued on the government’s Web site. “All of society is ardently awaiting new break-throughs in reform,” the directive said. Foreign investors will be given more opportunities to invest in finance, logistics, health care and other sectors. For years, Western governments, the banks and companies have complained that the China government has impeded foreign investment in banking and other service industries, despite promising to open up. Latest directive, however, did not give details about specific changes to foreign investment rules that policy makers in Beijing have in mind. China’s leaders are promising to loosen foreign exchange controls, changes that are likely to reduce price distortions in the economy and allow the market to determine value of Chinese currency, renminbi. On Friday, the central bank, the People’s Bank of China, issued a statement that repeated such vows (…..)

Link: http://www.nytimes.com/2013/05/25/business/global/beijing-signals-a-shift-on-economic-policy.html