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April 24, 2013

Is China preparing for radical reform and if so when ?

If China's leader Xi were preparing for radical reform, we probably would not know it yet. Mr Jiang took eight years before he and his premier, Zhu Rongji, were able to launch sweeping economic changes in 1997. It could be years before Mr Xi consolidates his power.

His crackdown on corruption has gone further than many imagined, though more “flies” have been swatted than “tigers” bagged.

The urbanisation strategy being handled by Premier Li Keqiang is the biggest and most far reaching change. It could involve giving hukou urban residency permits to up to 220 million migrant workers and allowing farmers to sell land at market prices. Empowering a whole new class of consumers could have a huge impact on the entire economy, from banks to state-owned enterprises.

Central planners agree that dense, compact, energy-efficient cities must be built. “Urbanisation is not about sprawling cities,” Mr Li said at last month’s annual meeting of parliament.

China plans major bond market reform to raise the money the ruling Communist Party needs for a 40 trillion yuan ($6.4 trillion) urbanization program to buoy economic growth and close a chasm between the country's urban rich and rural poor.



Urbanization could cure China's economic imbalances, a study by consultants at McKinsey showed last November, putting it on a path to domestic consumption-led growth within five years to replace three decades of investment and export-driven development that stoked global trade tensions.

The government hopes 60 percent of its population of almost 1.4 billion will be urban residents by 2020, from about half now, and will build homes, roads, hospitals and schools for them.

But Urbanization and market reform must go hand in hand, as simply adding to housing stock risks creating "dead cities", according to Xia Bin, a former adviser to the central bank and now head of the financial research institute at the cabinet's think-tank.

A senior financial diplomat in regular contact with Chinese officials concurred.

"The focus should not just be on construction. They should also focus on creating a market," the diplomat said. "If they fail to create a market, they will end up with an urban poor much worse off than the rural poor."


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