Sunday October 20, 2019

CHINA TO RAISE PRIVATE INVESTMENT LEVELS

May 23, 2012

As Premier Wen Jiabao addressed a meeting of the Standing Committee of the State Council, his remarks focused heavily on the economy. With China in the midst of an economic slump, the Chinese government is seeking to boost growth by “fine-tuning” economic policy. One of the reforms receiving the most attention was the announcement that China will raise the level of private investment allowed in the energy sector. This is seen as part of an attempt to reduce the dominant role that state-owned companies currently play in the Chinese economy.

A recent study on China’s long-term economic prospects, published jointly by the World Bank and a Chinese think-tank, the Development Research Center, underlined the necessity of reducing the economic role of the state in favor of private companies (for more information, see the USCPF News Brief “World Bank Reports on China’s Economic Prospects“). Recently, as economic growth in China is projected to slow to its weakest pace in over a decade, the Chinese government has begun the slow process of reform as recommended by the World Bank study. Already, the railway and health sectors, traditionally dominated by the state, have opened up to private investment. Premier Wen’s speech coincided with a push to raise private investment in China’s energy sector, including areas such as electricity, natural gas, and oil. A similar move towards the private sector is expected soon in the telecommunications industry.

However, these reforms are complicated and real progress may take years. Many state companies have become powerful vested interests, often with high-level government contacts, which means the SOEs could put up stiff political resistance against efforts to end their near-monopolies. But with state companies losing global brand equity and underperforming financially, the Beijing government has embarked upon a slow path of reform. While the changes thus far have been relatively modest, they may mark the start of a new attitude towards the economy. In fact,some observers compare the recent “fine-tuning” of economic policy to the small changes that heralded the beginning of Deng Xiaoping’s economic “opening up” in 1980.

Whatever the long-term consequences, reform in the short-term will largely be aimed at restoring the rapid economic growth to which China has become accustomed. China saw slower than expected growth in the first quarter of 2012, and the World Bank lowered its forecast for China’s economic growth from 8.4% to 8.2%. China’s economy is suffering from reduced demand for its exports to the U.S. and Europe, especially with the specter of a Greek default dampening global markets. However, part of the slowdown may be by design, as China seeks to rein in the ever-escalating cost of real estate and also tries to begin a slow shift from an export-driven to a consumer-driven economy. Whether expected or not, the pace of the slowdown was a source of concern for China’s leaders, and was at the top of Premier Wen’s agenda as he addressed the Standing Committee.

The outreach to China’s private sector is one of a number of options being pursued in an attempt to revitalize China’s economy. The government has also floated the ideas of tax reform and credit reform, both of which could also boost private industry by decreasing tax burdens and making loans easier to access for non-state owned companies. In addition, the government has lowered the amount of money banks must keep in reserve, in an attempt to promote lending. Premier Wen also suggested that the government should “speed up the pace of construction” on infrastructure projects in an attempt to infuse more capital back into the economy.

Even while suggesting solutions for the current slowdown, Premier Wen emphasized that the Chinese economy as a whole is generally stable, and that growth, while less than normal, has been within the predicted range. The World Bank was also optimistic, predicting that with swift government action, the Chinese economy would rebound in 2013. However, China will likely continue to balance the need for short-term economic relief with the need for long-term reforms of its economy for the next several years.

 

For more information on China’s economic policies, please see the following news sources:

Chicago Tribune – “China says to step up policy fine-tuning to spur growth

China Daily – “World Bank highlights challenges facing China

New York Times – “World Bank Cuts Forecast for Growth in China

Reuters – “China in hardest private-sector push in decade

Wall Street Journal – “China’s ‘State-Owned’ Brand Slips in Value

Xinhua – “News Analysis: China acts cautiously amid slower growth

 

For Chinese-language commentary on China’s economy, please see the following news sources:

People’s Daily (人民网) – “温家宝主持国务院常务会  分析经济形势部署近期工作

Phoenix (凤凰网) – “温家宝:根据形势变化加大预调微调力度

 

Compiled and edited by Shannon Reed.