China’s market reform hopes fade

PresidentXi Jinping’s rule in China has been marked by a muscular stance in manyareas — from corruption to foreign policy — but investors and businessleaders hoping that the nation’s most powerful leader in decades willdrive market reforms are girding for disappointment.As he gears upfor his second term, hoped-for market liberalisation is increasinglybeing viewed as secondary to Xi’s state-centred approach to economicpolicy and his focus on stability.The Communist Party Congressbeginning today in Beijing is expected to see Xi consolidate his powerand is unlikely to see a change in his priorities.Party spokesmanTuo Zhen told reporters at a briefing yesterday that China will persistwith opening up and expanding market access.But foreign executives and analysts question whether these kinds of comments will mean a lot on the ground.“Idon’t see market opening coming. It’s all about discipline andcontrol,” said one senior China-based American executive, who declinedto be identified.China’s State Council Information Office referredquestions on market reforms to the country’s economic planning agency,the National Development and Reform Commission, which did not respond toa faxed request for comment.Some Chinese policy insiders said thatthey don’t expect any significant speeding up. “We will not rush onreforms. The pace of changes will not change dramatically,” said oneadviser to the Chinese government who was speaking on condition ofanonymity.Xi’s sweeping anti-corruption campaign and his move topersonally take charge of economic policymaking had initially been seenby China analysts as early signs that he would use his consolidatedpower to push tough reforms through entrenched bureaucracies.Theparty’s 2013 pledge under Xi’s then-new administration to let the marketplay a decisive role in the economy had also given hope to thosepushing for reform.But many analysts and business leaders now seeXi’s faith in markets as tenuous, and that 2013 reform pledge as a mereholdover from his predecessors.A lack of follow-through over thepast several years on repeated state council vows to open markets to theworld have left foreign businesses with “promise fatigue”, as theEuropean Union Chamber of Commerce in China put it last month.Thosedelays coincide with the passage of a raft of new national security andcyber security laws and regulations that China’s trading partnerscomplain will put them at a disadvantage.“For the past 20 or 30years it was economic development at all costs, and I think we areseeing a new paradigm now where national security is dominant andeconomic issues are channelled through that lens,” said Jude Blanchette,who studies the party at The Conference Board’s China Center forEconomics and Business in Beijing.Blanchette said true marketreforms in Xi’s second term would mean walking back much of the controlhe has fought to acquire, an unlikely prospect.Other painful reforms that many economists say are needed have also moved slowly under Xi.Theyinclude overhauling China’s debt-laden state sector, fixing the fiscalsystem to tackle local government debt, bringing in new property taxesto ward off housing bubbles, and allowing farmers to sell their landmore freely.Capital controls, including restrictions on someoutbound investment deals, have helped stabilise the yuan, but at thecost of hampering China’s ambition to internationalise the currency.Chinesereform advocates say the government has been avoiding potentiallydisruptive changes due to concerns over economic and social stabilityand resistance from vested interests, such as powerful state-runcompanies.“If there are no such reforms, the conflicts will keepaccumulating while risks will be even higher, which could destroy ourprospects to move forward,” said Jia Kang, director of the China Academyof New Supply-Side Economics, a Beijing-based think tank.In 2015,Xi espoused his own state-led “supply side structural reform” doctrine,an effort in part to tame an explosion of debt by cutting capacity inheavy industries, and reduce risk from bad bank loans.While Xi cantout continued robust economic growth — the government had set a 2017GDP growth target of around 6.5% but it now looks like it will be closerto 7% — it is still reliant on credit and investment as opposed to moresustainable consumption.And expanded state control over the economyis at the centre of key Xi initiatives, including the “Made in China2025” plan, which funnels billions of dollars into robotics,semiconductors, and other industries deemed strategic.Despitegovernment talk this year about opening some restricted sectors tooverseas investment, some foreign business groups express scepticism,even as US President Donald Trump is expected to seek some concessionsfor American businesses during his planned visit to Beijing in earlyNovember.“Until we see the equity cap lifted from 49% to 50% orhigher with foreign banks, or until we see foreign insurance companiesable to fully access the market, we’re just having the same conversationwe had five years ago,” said Jacob Parker, vice-president of Chinaoperations at the US-China Business Council.Xi has also reasserted that state-owned enterprises (SOEs) should be the commanding heights of the economy.Foreignexperts on Chinese markets point to government efforts to merge statecompanies into even larger champions as proof of how the state’s visionof reform does not necessarily mean increased use of free markets.Inrecent years, Beijing has required state firms to reassert theirCommunist Party committees’ hold on corporate decision-making.A 2015 blueprint for SOE reform made no mention of the 2013 pledge for the decisive role of the market. Onesenior western diplomat in Beijing said it has become increasinglyclear that the top priority for Xi remains strengthening the primacy ofthe party and stability.“When further opening up comes into conflictwith that priority, the argument for stability tends to win,” thediplomat said. – Reuters