China plans revolution to head off fiscal crisis

China is drawing up a blueprint for sweeping reforms aimed at averting an economic crisis, sources with close ties to the leadership say.

The reforms are aimed at revitalising the world's second-largest economy amid deepening fears about a trend of rising corruption, wasteful investment and local government debt.

Liu He, who leads the party's Central Leading Group on Financial and Economic Affairs, has been given the task of preparing a seven-point blueprint for the Third Plenum of the 18th Communist Party Congress, which is due in about October, according to a source with close ties to several members of the Politburo Standing Committee.

If executed as intended, the new reform program would go some way to answering doubts about whether China can continue underwriting the Australian economy, including huge gas and other resource investment plans over the next decade.

Some hedge fund managers say China's has reached a "zugzwang" moment, referring to the predicament when a chess player must make a move but prefers to pass.

"In China policy is made when the pain of inaction is higher than the pain of action, and we've reached that point," said David Hoffman, managing director of the Conference Board China Centre for Economics and Business.

Mr Liu has been engaging closely with respected market-oriented economists on seven priority areas, say the sources with leadership ties and others who have been involved with the process.

Yi Gang, a well-regarded deputy governor of the People's Bank of China, has been engaged to advise on a financial system that disadvantages households and entrepreneurs and channels cheap credit to state-owned enterprises.

Mr Yi, backed by bank governor Zhou Xiaochuan, is advising on how to liberalise interest rates and the exchange rate and reduce capital controls.

Wu Xiaoling, a former deputy governor of the central bank, has been asked to advise on fiscal reforms, aimed at adjusting the pattern of central transfers and implement effective property and consumption taxes.

A third reform priority is China's vexed land transfer and usage system, which has been criticised for encouraging violence, bribery and excessive construction.

The fourth priority is to facilitate urbanisation including by reforming a "hukou" permit system that prevents migrant families from the countryside from enjoying normal urban schooling, health and other services.

The other three reform priorities involve reducing inequality of income distribution; slashing administrative red tape and imposing market prices on coal, oil and other resources.

Huang Yiping, chief economist for emerging Asia at Barclays Capital and professor at Peking University, said Premier Li Keqiang and the new leadership team appeared "determined" to shake up the economy because they understood that "the structural issues are so serious that if you don't change there will be no sustainability of growth at all. This looks like a new beginning," he said.

It is not clear, however, whether the new leadership has the political will to attack the privileges of retired leaders who put them in their jobs and whose networks reach deep into the state-dominated economy and have obstructed reforms before.

Sources say the leadership has failed to reach a consensus on how to tackle reforms of state-owned enterprises.

The leadership has also stopped short of examining the kinds of institutions that are necessary for operating effective and transparent markets, according to sources with leadership ties.