Paused at a Chinese crossroad

Economic reformers have been given cause for hope by China this week as key government figures motion towards change. But Beijing will still find it hard relax its tight grip on state-owned enterprises.

With delegates assembled in Beijing for the China’s National People’s Congress – the country’s last major political event before the once-in-a decade leadership changeover in November – observers are keeping a close eye out for signs the country might finally be about to embrace some major economic reforms.

The Chinese Communist Party is embroiled in an intense debate over the country’s future. In particular, whether China should persist with its current state-led development model, or whether it should rein in the government’s hold over the economy, and leave more room for the private sector.

In his opening address to the National People’s Congress on Monday, Chinese premier Wen Jiabao gave the reformers some cause for optimism. He signalled that China was aiming for economic growth of 7.5 per cent this year, after setting the target at 8 per cent for seven straight years. Observers took this as showing that China now appeared willing to sacrifice some growth for a more balanced and sustainable development.

In addition, Wen stressed the need to move China’s growth model away from a heavy dependence on labour-intensive exports, and instead to rely more on domestic consumption. Although Wen has been making a similar argument for the past few years, observers believe that the slow-down in Europe (China’s largest export market) may finally force Beijing to implement changes.

Reformers’ hopes also rose on Tuesday night when Wang Yang, the reformist Communist Party boss from the southern province of Guangdong, proposed a number of changes to the country’s political culture. He also called for local authorities to be given more powers to approve projects that are often blocked because of powerful vested bureaucratic interests.

The debate in the National People’s Congress comes at a time when there’s mounting criticism that China’s big state-owned enterprises are making excessive profits from their privileged positions and failing to contribute enough back to society.

According to the French newspaper, Le Monde, Hu Shuli, the influential editor in chief of the Chinese publication, Caixin, warned the assembled parliamentarians that "unless it’s rectified, Chinese capitalism could well become crony capitalism”. A similar attack came from Zong Qing Hong, head of the giant, privately-owned food and beverage company, Wahaha, who called for breaking up state monopolies. "The government is getting too much and the people are getting too little," he told Bloomberg on Saturday.

The debate over the state-owned enterprises has been given extra momentum by a recent World Bank report which argued that China’s current growth model was unsustainable and the country needed to embrace sweeping economic reforms in order to maintain growth rates of even half the levels it achieved over the past three decades.

The report warned that China risked being snared in a "middle income trap” unless it addressed issues such as excessive government interference in the economy, and growing social inequality. In particular, the report (which had the support of Xi Jinping, who is expected to become China’s next president, and Li Keqiang, the man tipped as China's next premier) said that Beijing had to push forward with the privatisation of state-owned enterprises.

It also called on state-owned enterprises to lift the level of dividends they pay to the state. At present, they contribute around 10 per cent of their profits in the form of dividends to the national budget, although many pay nothing at all, claiming that they are short of liquidity. At the same time, many Chinese state-owned enterprises are making huge investments in countries such as Africa and Brazil.

But Beijing faces a difficult choice. The state-owned enterprises – which are concentrated in "strategic” areas such as telephony and banking – allow Beijing to maintain its stranglehold on the Chinese economy.

The Communist Party appoints the executives in these companies, and is thus able to dictate their actions, and reward favourites. Beijing now is being forced to decide whether it is prepared to relinquish its tight grip in order to boost China’s future economic performance.