The nation’s lawmakers and advisers are gathering in Beijing to hear what solutions the government might offer for the most difficult parts of the reform agenda. But the market is worried
Reforming state-owned enterprises is key to reducing overcapacity and smoothing China’s transition to a full market economy. But the Communist Party has sent out mixed signals. While it claims to be serious about letting the market play a decisive role in the economy, it also says the party should strengthen its grip on state firms, confusing observers. There has been little progress in several key areas, including adopting market-based recruitment of senior executives rather than having them appointed by the party, matching their pay to private-sector levels and ensuring remuneration is tied to performance.
There have been mergers reported in competitive areas such as travel booking, shipping and railway equipment. But analysts say such tie-ups have yet to generate synergy.
Meanwhile local governments continue to subsidise loss-making state firms, underscoring the pain of laying off workers as overcapacity is reined in.
After years of sluggish progress in tax and fiscal reforms, a growing reliance on fiscal pro-growth policies may push Beijing to make breakthroughs in restructuring the value-added tax scheme as part of its drive to reallocate fiscal resources and responsibilities between central and local governments.
In 2011, the government embarked on an ambitious scheme to shift from a reliance on business tax to VAT. The change has been implemented in several areas, including transport, postal services and businesses operating in the cultural field. But the transition has been slow, with the deadline already delayed. Finance Minister Lou Jiwei has vowed to crack the remaining “hard nuts” – bringing the additional sectors of finance, construction and consumer services under the umbrella this year. A cut in the VAT rate for the manufacturing sector is also expected. The shift, once completed, is expected to see a trillion-yuan reduction in outlays. The momentum behind the introduction of a property tax – a hotly contested issue in previous years – has also stagnated since the downturn in the sector took a bite out of the broader economy.
The tax has been introduced only in Shanghai and Chongqing. On the fiscal side, Beijing wants to seek a more balanced division of revenue between central and local governments, bolstering the independence of the latter. But no details have been released on how this will be accomplished.
The central bank ended the yuan’s soft peg to the US dollar on August 11. The move created strong depreciation pressure of the yuan against the greenback, which in part caused persistent capital outflows. In the aftermath, the bank was criticised for poor communication with the market. It has since aimed to keep the yuan stable against a basket of currencies, deviating from the reform goal of allowing the currency to float more with market forces.
Zhou Xiaochuan, the chief of the People’s Bank of China, implied in a recent interview with Caixin Weekly that reforming the exchange rate and internationalising the yuan might not get a big push until market jitters faded away.
But central bank officials suggested the yuan would continue to be pegged against a more diverse basket of foreign currencies.
The stock market routs last summer and the unsuccessful government intervention underscored the urgent need to improve financial regulation to better ward off systemic risks. Government economists said current talks between the central bank and regulators for banks, securities and insurers were more an exchange of information rather than an attempt to tackle big problems.
There have been suggestions of merging the regulators and giving the central bank a greater supervisory role for the financial sector. But insiders say broad reforms will be difficult due to strong objections from vested interests.
The past year saw Beijing launch the “One Belt, One Road” initiative and get the Asian Infrastructure Investment Bank off the ground. China is also in talks to settle bilateral investment treaties with the United States and European Union. But American business representatives have expressed concern that the negative list, which would restrict foreign companies’ access to the mainland market, is too long.