Sep 03, 2012 11:45 AM

Measuring Vital Signs


(Beijing) – Zhang Wenkui is deputy director of the Enterprise Research Institute under the State Council's Development Research Center. He was one of the authors of the China 2030 report, which was jointly released by the center and the World Bank and which discussed the direction of reform in China. Zhang has taken part in the reform of numerous industries where the state previously had a monopoly, such as railways and civil aviation. He describes himself as somebody that is "constantly saying what others don't want to hear."

Zhang's prescription for the country's sustainable economic growth is market-oriented reform. Since June the economy has begun to show its first signs of slowing and data suggests the downturn is worse than expected. The central bank has launched monetary easing measures, while the National Development and Reform Commission has sped up the approval of investment projects. In the face of economic uncertainty, China has once again returned to the path of investment-led economic stimulus. Reforms of state-owned enterprises (SOEs) advocated by people like Zhang have yet to be announced.

It is not easy for China to break away from old growth models because SOEs have become one of the economy's largest interest groups. Unless policymakers are resolute or SOEs sink into bankruptcy reforms such as decentralized ownership are merely a fantasy.

Zhang recently spoke with Caixin about direction economic reform is travelling.

Caixin: In the 1980s people used to describe reforms as "striding over a barrier." Which barrier will China stride over next?

Zhang Wenkui: I believe that a new round of SOE reform can bring about new growth opportunities for China. Some research has shown that the distorted allocation of resources can be widely attributed to SOEs. So if we wish to maintain strong and stable growth, we must first rectify this resource misallocation and in order to do so we must reform SOEs.

Our research has shown that potential GDP growth rate can be maintained at 8 percent during the current 12th Five-Year Plan period. However, even if such a target can be met, the fall from a double-digit to single-digit growth rate will make an impact on the current development model. We should deal with the impact seriously.

The real challenge will come during the 13th Five-Year Plan, when growth will have clearly slowed and the economy will be fragile. If reforms are not carried out prior to this sensitive period, we will be forced to react later, at which stage economic growth and social stability may be affected.

During the era of fast economic development, no matter how distorted resource allocation became, at least the government's fiscal revenue was growing, banks were operating normally and employment could be guaranteed. However, if in addition to the severe structural imbalances, economic growth slows significantly, then society will enter a precarious state. In order to avoid this, there must be pre-emptive reforms and a significant part of this must be new reform of SOEs.

Caixin: Currently there is a lot of popular support for SOEs. For instance, many believe SOEs have a greater sense of responsibility towards society than private firms. What is your opinion?

Zhang: These ideas are popular on the one hand because of misconceptions among the public and on the other hand because the government is looking to justify its own actions. The illegal behavior and lack of responsibility and morality in some industries should be resolved by strict legal and regulatory measures. Using government ownership as a substitute for these things is a form of selfish neglect of the underlying problems.

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