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China to reduce the state’s role in the economy

By Wayne Xing

BEIJING — China plans to reduce the role of the government in its future economic development and allow market forces to play a more important role, according to a New York Times report authored by David Barboza and Chris Buckley.

The article cited Premier Li Keqiang’s recent speech delivered at a video conference on the transformation of the functions of the State Council organizations which signals “a major policy shift intended to improve living conditions for the middle class and to make China an even stronger competitor on the global stage,” according to New York Times.

The article quoted Li Keqiang as indicating that China “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.”

Last Friday, the State Council published on the government website a set of policy proposals drafted by the National Development and Reform Commission (NDRC) which summarized Li’s recent speech. Titled “Major Tasks in 2013 for the Deepening of the Reform of Economic Structure,” the policy proposals clearly indicate that government has decided to reduce administrative intervention in economic affairs and let the market and private enterprises play a bigger role in investment, manufacturing and pricing decisions.

“Analysts see such announcements as the strongest signs yet that top policy makers are serious about revamping the nation’s growth model,” according to the article.

The NDRC policy proposals include streamlining the government bureaucracy, reforming corporate tax structure, expanding a tax on natural resources, loosening foreign exchange controls, 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, etc. “All of society is ardently awaiting new breakthroughs in the reform,” the NDRC document writes.

But the New York Times article points out that the new policy orientation does not signal the end of big government in China. The central government is “unlikely to abandon the state capitalist model, break up huge, state-run oligopolies or privatize major sectors of the economy that the party considers strategic, like banking, energy and telecommunications.”

The article believes that China has little choice but having to press ahead with some major policy changes. “The economy has slowed this year because of fewer exports to Europe and the United States and slower investment growth. Rising labor costs and a strengthening currency have also reduced manufacturing competitiveness,” the paper says.

Nicholas R. Lardy, a senior fellow at the Peterson Institute for International Economics and an authority on the Chinese economy, was quoted as saying that 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-barreled boost to private consumption,” Lardy said.

Premier Li admitted in his video conference that “if we place excessive reliance on government steering and policy leverage to stimulate growth, it 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.”  

Based on the new policy orientation, China is prepared to face a slowed but a healthy growth in its national economy as well as in the automobile demand in 2013. If successfully implemented, China may reverse the dangerous road of Guojin Mintui or “advance of the state and retreat of private enterprises” in recent years and find a sustainable model for its future economic growth.

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