China needs to let the market play its role—not only for efficiency, but to reduce inequality and corruption.
Geng Xiao
The Wall Street Journal
November 22, 2012
Five years from now the Chinese people will judge their new Politburo Standing Committee members by how well they deliver on the social contracts spelled out in the 12th Five Year Plan. Xi Jinping, the Communist Party’s incoming general secretary, faces a daunting task: He must lead 1.3 billion people not only toward further GDP growth, but also more equal opportunities in jobs, income, education, health care and political participation.
What does Mr. Xi’s team need to do in order to deliver in these areas? Success will not come from adopting European social welfare programs or a U.S.-style political culture. Many developing nations that have attempted to copy such systems (such as India, Greece and African states) have failed to deliver economic growth and social development. The U.S. and Western Europe themselves are facing many economic and political problems.
However, few in the West or in China would question the importance of the West’s rule of law, particularly when it comes to defining and protecting property rights and contracts. I believe that the key to the next stage of China’s reforms lies in building a modern property rights system. By better defining the economic role of the state and by improving the quality of government services, China could take an important step toward a more inclusive, resilient economy.
The incentives for property reform are less about efficiency gains—though those would occur—than about dealing with the problems of inequality, corruption and social stability. These problems are all closely related to unclear ownership rules surrounding land, natural resources and state-owned enterprises (SOEs). Lack of clarity begets unfairness: Distortions in key macro prices, unequal access to financial services, complicated tax regimes and bureaucratic entry barriers for new businesses.
Property reform might seem like a delicate undertaking in a Communist country with large state-owned corporations. But Mr. Xi should realize that the state and the market are two sides of the same coin. They have a symbiotic relationship with each other.
Alleviating social problems is not a simple question of “More market or less market?” Rather, policy makers must identify mismatches between the role of the state and market in various sectors. The government needs to stick to what it does best, while the market should do more of what it is good at.
With that in mind, I see three areas of low-risk, high-return reform opportunities for China’s new leadership:
• Reform property rights and the ownership of SOEs.
China’s rapid urbanization has led to a massive revaluation of land due to productivity growth. China needs an institutionalized system for defining, transferring and adjudicating land rights.
China also needs a system for owning and transferring shares of SOEs. Most loss-making SOEs have been privatized over the last two decades. Only a relatively small number of SOEs remain in very profitable and monopolistic sectors, in particular the strategic and infrastructure sectors.
A few dozen centrally controlled large SOEs are now global players in terms of size and profitability. But they are not regarded as globally competitive in terms of innovation and quality of services. To boost competiveness in this area, China must allow additional voices to guide its companies. It must finish the job of SOE reform.
China’s initial SOE reforms were very successful. But in terms of ownership, they went no further than requiring companies to publicly list about 30% of their shares.
China could and should reduce state ownership by transferring blocks of shares to government pension funds and selling others to the public. This type of ownership reform would allow the state to continue to play a leading role in SOEs, but only when the state’s decisions are consistent with the interest and judgments of other shareholders.
Shareholders under such a scheme would together hold 70% of an SOE’s shares, but would individually hold less than the state. This reform should increase the stock prices of listed SOEs, as it will effectively allow their CEOs to be selected and behave like those in innovation-focused private companies.
• Get prices right for capital to unlock the full power of the markets.
Under the current low interest rate regime, migrant workers’ slowly appreciating bank deposits are subsidizing property owners who borrow cheaply to bet on rising real estate values. This is inefficient and unsustainable socially.
• Upgrade the quality of government services and bureaucracy.
Doing so could reduce the costs of doing business and could help China repeat the economic successes of the last three decades. This decade, however, the objective of the central and local governments would be geared more toward creating quality and sustainable jobs and less toward attracting foreign direct investment or pumping up GDP.
All of these reforms require a top-down approach in order to overcome resistance by strong interest groups. That’s where Mr. Xi and other new leaders come in. Senior officials and scholars in China have told me that there are clear and positive signs that the new leadership would like to implement reform and opening measures. Stronger property rights should be top of their list.
Mr. Geng is director of research and senior fellow at the Fung Global Institute.
