An exclusive preview of an economic report on China, prepared by the World Bank & government insiders is alarming:
China could face an economic crisis unless it implements deep reforms, including scaling back its vast state-owned enterprises and making them operate more like commercial firms. "China 2030," a report set to be released Monday by the bank & a Chinese government think tank, addresses some of China's most politically sensitive economic issues, according to a half-dozen individuals involved in preparing and reviewing it.
It is designed to influence the next generation of Chinese leaders who take office starting this year, these people said. And it challenges the way China's economic model has developed during the past decade under President Hu Jintao, when the role of the state in the world's 2nd largest economy has steadily expanded.
The report warns that China's growth is in danger of decelerating rapidly & without much warning. That is what has occurred with other highflying developing countries, such as Brazil and Mexico, once they reached a certain income level, a phenomenon that economists call the "middle-income trap." A sharp slowdown could deepen problems in the Chinese banking & elsewhere, the report warns, and could prompt a crisis, according to those involved with the project. It recommends that state-owned firms be overseen by asset-management firms, say those involved in the report. It also urges China to overhaul local government finances and promote competition and entrepreneurship. The Chinese government must decide "whether it wants state-led capitalism dominated by giant state-owned corporations or free-market entrepreneurship."
Current forecasts by the Conference Board, a U.S. think tank, see the Chinese economy growing 8% in 2012 & slowing to an average annual growth rate of 6.6% from 2013 to 2016. Economists argue that China's annual growth rate will begin to "downshift" by at least 2% points starting around 2015. While some reduction in growth is inevitable—China has been growing at an average of 10% a year for 30 years—the rate of decline matters greatly to the world economy. With Europe & Japan fighting recession and the U.S. experiencing a weak recovery, China has become the most reliable source of growth globally. Commodity producers count on China for growth, as do capital goods makers, farmers and fashion brands in the U.S. and Europe.
How much the report will help reshape the Chinese economy is unclear. Even ahead of its release, it has generated fierce resistance from bureaucrats who manage state enterprises, according to several individuals involved in the discussions. China's political heir apparent, Xi Jinping, now vice president, has given few clues about his economic policies. Analysts expect the high-profile report will encourage Mr. Xi and his allies to discuss making changes to a state-led economic model that has alarmed Chinese private entrepreneurs while creating tension between China and its main trading partners, including the U.S.
Currently, state-managed enterprises tower over the Chinese economy, dominating the nation's energy, natural resources, telecommunications and infrastructure industries. Among other things, they have easy access to low-interest loans from state-owned banks.
China needs to restrict the roles of the state-owned enterprises, break up monopolies, diversify ownership and lower entry barriers to private firms. Currently, many state-owned firms have real-estate subsidiaries, which tend to bid up prices for land, and have helped to create a housing bubble that the Chinese government is trying to deflate. The report also recommends a sharp increase in the dividends that state companies pay to their owner—the government. That would boost government revenue and pay for new social programs, said those involved with the report. Chinese and U.S. economists say that dividend money from profitable state-owned firms now is often directed to unprofitable ones by the State-owned Assets Supervision and Administration Commission, or SASAC, which regulates the firms and tries to ensure their profitability.
China is vulnerable to a sharp slowdown, said Jun Ma, a Deutsche Bank China economist, because it relies too heavily on industries that copy foreign technology and doesn't produce enough breakthroughs of its own. South Korea was able to keep growing rapidly after it hit a per-capita income level of $5,000—about where China is today—because it pushed innovation. However, China lags behind South Korea badly in patents produced per capita, he said.
Chinese local governments often draw much of their revenue from the sale of land, rather than from taxes. The report urges that Chinese social spending be funded more by dividends from state-owned firms and by property, corporate and other taxes.
