Bamboo chutes of recovery [By Zhai Haijun/China.org.cn]

Great potential for long-term growth

Despite all these challenges and difficulties, China still has excellent potential for long-term growth.

Firstly, China is still a poor country. Its per capita GDP is only 18 percent of that of the US. If China brings in a series of necessary reforms, its economy can hopefully reach the development level of such countries as Japan and South Korea. That is to say, China's per capita GDP could eventually reach 75 percent of the US's.

Secondly, there are still large areas in central and western China that are waiting for development. The people in these areas are still very poor. Thus, the motivation and enthusiasm for development is great in those areas. Compared with countries like Japan and South Korean, China can continue along its path of nationwide development without large-scale dependency on foreign countries.

Finally, other driving forces for China's economic reform are still here. Chinese people from different levels of society are still unsatisfied with their current economic system and continue to demand change. This is quite different from Japan's situation in 1985, when its failures to reform its economy resulted in stagnation. According to recent research from Tsinghua University and the World Economic Research Center, although its per capita GDP is only 18 percent of that of the United States, China, as a large country, can still expect relatively fast economic growth in the next 10 to 20 years.

Reforms must accompany economic 'reboot'

The new members of the Chinese leadership come from a set of unique backgrounds: They experienced the turmoil of the Cultural Revolution (1966-76), have a good understanding about the grassroots level of the society, pursued standard education at the beginning of reform and opening-up period, recognize the rationale behind reform, and have the prerequisite capabilities for judgment and decision-making.

There is also a consensus that certain reforms must be delivered to meet the challenges.

Reforms should be implemented in the administrative approval and supervision systems in order to further trim the relationship between the government and the economy. For example, entrepreneurs should be given the power to make decisions without administrative approval; and activities such as environmental protection or impact assessments can be performed by committees of qualified experts. This approach, compared with the current administrative approval system, is more objective and is not easily controlled by specific or engrained special interests. In this way, enthusiasm for nonofficial investment will be greatly stimulated, and, at the same time, the temptation for under-the-table deals and other corruption will be reduced.

The establishment of a basic people-oriented welfare system is integral to reduce people's anxieties about the risks of a market economy. People should be entitled to basic welfare and security, which includes housing, medical treatment and education. Only in this way can people embrace further market-based reforms.

Additionally, the country must implement further judicial reforms and improve the authority of judicial departments. To achieve this, a trans-provincial and trans-regional judicatory should be set up to lessen local governments' interference in judicial work. The trial system should be perfected as well; for example, in further judicial reforms for the stock market, it is necessary to clarify and enforce the judicial procedures related to listed companies in Beijing, Shanghai or Shenzhen. A stock adjudication division should be set up in the supreme court of the city to lead investigations, litigation and court decisions for stock-related cases.

Public finance, likewise, needs some tweaks. The key of tax reform is the relationship between the central and local governments. The central government should transfer funds to provincial and local governments according to their corresponding needs, but meanwhile should increase tax revenues from assets and resources. In the future, property taxes will be a breakthrough for local financial reform. Local governments can use the income from this sector to build and maintain public infrastructure and improve service quality. Both income and expenditures should be public and transparent so they can be supervised by the taxpayers. In addition, reform in the government's assets and liabilities should also be stressed.

China's public finance structure is different from that of Western countries. In China, governments at different levels have large volume of assets, with liabilities existing as well. This balance sheet management exerts significant impact on the long-term stability of public finance. Local governments can neither rely on land equity trading model, which is unsustainable, nor can they rely on local taxation in the future. A more proper way is to gain long-term, sustainable income by means of possessing public assets. For example, local governments use land as an investment to work with real estate companies, thus possessing part of the developed properties. These properties can be rented out either at market prices or preferential prices. In this way, local governments not only increase their supply of public housing but also create long-term and stable financial income.

Financial reforms also need to be substantially enhanced. The greatest risk to China's financial sector lies in banking industry. The key to overcoming the risk is asset securitization. At present, the assets of China's banking industry are so huge that their proportion of GDP is more than 200 percent. In order to lower the risk, banks should transfer part of their mature assets to the bonds market and request investors out of banking industry to buy these assets. This will reduce the pressure for banks' refinancing. More importantly, it lowers the risk from imbalanced asset distribution in capital market. Besides, banks can exert more effort to look for better investment projects.

Another important part of the financial sector is the capital market. Both principal and secondary aspects of the stock market should be reformed. On the one hand, there are three methods for this: first, slowing down IPOs; second, motivating long-term capital to enter into the stock market; and third, securitizing the stock market appropriately — that is, listed companies give out dividends so that stock investors can gain benefit directly from dividends instead of inappropriately through insider information. On the other hand, judiciary reform is needed to reduce interference of local governments and accelerate the development of stock market.

Lastly, the reform of state-owned enterprises is a further step necessary for marketization. State-owned enterprises should transition into market-oriented enterprises and should be treated the same as all other competitors. Their personnel, remuneration and management should all be based on the market instead of administrative interference. Some state assets can be sold to increase the income for future financial expenditures.