China reform may require a deeper crisis

March 20, 2012

By John Foley

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

“Reform” might turn out to be this year’s most overused word in China. The country’s outgoing premier Wen Jiabao, and his likely successor Li Keqiang, have both recently spoken of the urgent need to change. Even Communist Party mouthpiece People’s Daily advised last month that it’s better to have imperfect reforms than a crisis caused by none at all. The trouble is that China lacks external creditors or voters to hold leaders to account and make these reforms a reality.

In China, reform can mean almost anything. It includes the giant – like privatising the big state-owned enterprises – and the small, like raising gas prices, which China did with ease on March 19. Some reforms might sweep away anachronisms like the “hukou” ID system that splits citizens into urban and rural, and impedes a free labour market. Others seem trivial: Wang Yang, an ambitious politician from the provinces, has reportedly suggested axing unnecessary applause for officials at meetings.

The reforms that count would make capital flow more efficiently. But these could create powerful losers. If interest rates were liberalised so that banks were free to offer high deposit rates, savers would be more likely to keep their money in the bank than speculate on property. But it would erode the guaranteed profit lenders make under today’s capped interest rate system. Similarly, separating management and state ownership of companies would make steel, auto and construction companies more efficient, but would also make a job in politics less lucrative, and one in industry less powerful.

Short of a crisis that threatens the Party’s survival, it’s hard to see what will drive such big changes. Unlike Russia, Spain, Greece or France, the People’s Republic doesn’t have to keep foreign creditors happy, or appeal to a traditional electorate. It may take a greater turmoil for meaningful reform to become anything other than talk.

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