China to loosen central planning

The Chinese government is planning for private businesses and market forces to play a larger role in its economy, in a policy shift intended to improve living conditions for the middle class and to make China an even stronger competitor on the global stage.

In a speech to party cadres containing some of the boldest pro-market rhetoric they have heard in more than a decade, new Prime Minister Li Keqiang said earlier this month the central government would reduce the state's role in economic matters in the hope of unleashing the creative energies of a nation with the world's second-largest economy after that of the United States.

On Friday, the Chinese government issued a set of policy proposals that seemed to show Mr Li and other leaders were serious about reducing government intervention in the marketplace and giving competition among private businesses a bigger role in investment decisions and setting prices.

Whether Beijing can restructure an economy that is thoroughly addicted to state credit and government directives is unclear, but analysts see such announcements as the strongest signs yet that top policymakers are serious about revamping the nation's growth model.

"This is radical stuff, really," said Stephen Green, an economist at Standard Chartered. "People have talked about this for a long time, but now we're getting a clearly spoken reform agenda from the top."

China's leaders are under greater pressure to change as growth slows and the limitations of its state-led, investment-driven economy are becoming more evident. This month, manufacturing activity contracted for the first time in seven months, an independent survey by HSBC shows. Economists are lowering their growth forecasts and weighing the risks associated with high levels of corporate and government debt that have built up over the past five years.

"There are quite a number of messages coming from these new leaders," Huang Yiping, chief economist for emerging Asia at Barclays, said. "They realise that if we continue to delay reforms, the economy could be in deep trouble."

The broad proposals include expanding a tax on natural resources, taking gradual steps to allow market forces to determine bank interest rates, and developing policies to "promote the effective entry of private capital into finance, energy, railways, telecommunications and other spheres," a directive issued on the government's website said.

"All of society is ardently awaiting new breakthroughs in reform," the directive said.

Foreign investors will be given more opportunities to invest in finance, logistics, healthcare and other sectors. For years, Western governments, banks and companies have complained that the Chinese government has impeded foreign investment in banking and other service industries, despite promising to open up. The latest directive, however, did not give details about the specific changes to foreign investment rules that policymakers in Beijing had in mind.

China's leaders are also promising to loosen foreign exchange controls, changes that are likely to reduce price distortions in the economy and allow the market to determine the value of the yuan. On Friday, the central bank, the People's Bank of China, issued a statement that repeated such vows.

Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics and an authority on the Chinese economy, said government controls on interest rates, the exchange rate and the price of energy had resulted in a huge misallocation of capital and unbalanced growth.

"These reforms would raise household income and reduce savings, providing a double-barrelled boost to private consumption," he said.

To succeed, China's leaders will have to fend off powerful interest groups, as well as corrupt officials who have grown accustomed to using their political power to enrich themselves and their families through bribes and secret stakes in companies.

The previous administration, led by president Hu Jintao and prime minister Wen Jiabao, also promised to deepen economic overhauls and strengthen the private sector. But analysts say they lacked the political clout needed to succeed. During their two five-year terms, the state's role in the economy actually expanded.

The new leaders, who took office in March after a once-in-a-decade leadership transition, seem more determined to change course. In his speech this month, delivered to party officials nationwide by teleconference, Mr Li said, "If we place excessive reliance on government steering and policy leverage to stimulate growth, that will be difficult to sustain and could even produce new problems and risks.

"The market is the creator of social wealth and the wellspring of self-sustaining economic development," he said.

Mr Li spoke of deregulation and slimming down the role of government.

"Li Keqiang thinks like an economist," Barry Naughton, a professor of Chinese economy at the University of California, San Diego, said. "He wants the government to get out of the way."