China’s leaders face tough choices to keep growth going

BEIJING—China’s economic model that delivered three decades of double-digit growth is running out of steam and the country’s next leaders face tough choices to keep incomes rising.

But they don’t seem to have ambitious solutions. Even if they do, they will need to tackle entrenched interests with backing high in the Communist Party.

The cost of inaction could be high. The World Bank says without change, annual growth could sink to 5 per cent by 2015—dangerously low by Chinese standards. Some private sector analysts give even gloomier warnings.

The government’s own advisers say it needs to promote service industries and consumer spending, shifting away from reliance on exports and investment. That will require opening more industries to entrepreneurs and forcing coddled state companies to compete.

State banks would have to lend more to the private business sector that currently is starved for credit.

The ruling party’s latest five-year development plan promises reforms in broad terms. But many changes could face opposition from China’s influential state companies, their allies in the party, bureaucrats and local leaders.

“If the challenge is, can they do radical reform all at once, we know that won’t happen because these leaders aren’t powerful enough,” said Scott Kennedy, director of Indiana University’s Research Center for Chinese Politics & Business in Beijing. “They are facing interests which wouldn’t possibly allow that to occur.”

Also at issue is how much Communist Party leaders are willing to cut back state industry that provides jobs and money to underpin the party’s monopoly on power.

Li Keqiang, China’s top economic official is the man in line to lead reforms as the next premier. Now a vice-premier, Li is seen as a political insider with an easygoing style, not a hard-driving reformer. Along with the rest of the party’s Standing Committee, the ruling inner circle due to be installed in November, Li will govern by consensus, which could blunt their force.

“They are under pressure to change the economy, but they will not demolish party control,” said Mao Yushi, an 83-year-old economist who is one of China’s most prominent reform advocates. He co-founded the Unirule Institute of Economics, an independent think-tank in Beijing.

The next leadership will inherit one of the world’s strongest economies but one in which advocates say reform is stalled.

Many observers trace the past decade of double-digit growth to changes forced through by former Premier Zhu Rongji, who overcame resistance from companies and party factions to slash the size of state industry in the late 1990s. He led Beijing into the free-trading World Trade Organization, driving a jump in trade growth that propelled China past Germany in 2009 as the world’s biggest exporter.

The government defends the privileges given to its oil, telecoms and other major companies as necessary for building up Chinese global competitors. But entrepreneurs complain those companies abuse their control over essential resources such as energy, phone service and bank loans to gouge customers and pay their managers inflated salaries while stifling job-creating private businesses.

In a report last year, Mao’s institute calculated the biggest state companies consumed trillions of yuan (hundreds of billions of dollars) in subsidies over the previous decade. It said they are so inefficient that their annual return on equity was an average loss of six per cent.

The World Bank and a Cabinet think-tank , the Development Research Center, offered an ambitious roadmap for reform with a report in March that called for scaling back state industry and opening markets to private and foreign competitors. It warned that without change, China might be trapped at its current middle-income levels.

Changes to state industry will be politically sensitive. Companies that oppose giving up monopolies and other favours can argue that they provide tax revenue, provide money to develop poor ethnic minority areas and pay for ambitious but unprofitable initiatives such as developing homegrown mobile phone technology.

Bosses of the biggest companies are appointed by the party and are politically influential. Some will take part in the November party congress to install the next leadership. Their companies also create a cadre of well-paid executives and other professionals who form a base of support for continued one-party rule.

“State-owned enterprise bosses are very powerful. They outrank the people who are supposed to regulate them,” said James McGregor, an American businessman in Beijing and author of the new book “No Ancient Wisdom, No Followers: The Challenges of Chinese Authoritarian Capitalism.”

“That’s going to be a very hard thing to break. But the countervailing pressure is that growth can’t keep going unless they loosen up,” McGregor said. “The party’s only credibility is making life better, and if that doesn’t happen, how do you maintain stability?”

Associated Press researcher Fu Ting in Shanghai contributed to this report.