No Swift China Breakthrough Seen by Mao-to-Xi Scholar of Economy

No Swift China Breakthrough Seen by Mao-to-Xi Scholar of Economy

Zhang Shuguang, who’s studied China’s economy for more than 50 years, is skeptical that Communist Party leaders will unveil significant breakthroughs in an economic plan due in November. “It will mention rural reform, it will mention fiscal reform, it will mention financial reform — but obstacles hindering these reforms are still there,” Zhang, 73, an economist and senior fellow with the Chinese Academy of Social Sciences, said in an interview in Beijing last week. “Hopes for breakthroughs shouldn’t be too high.”The gathering will be the third full meeting of the party’s current Central Committee, including President Xi Jinping, Premier Li Keqiang, ministers and the heads of the biggest state firms and banks. It was at such a third plenum in late 1978 that Deng Xiaoping and his allies inaugurated a series of economic reforms that began to open up China to foreign investment and loosen state controls over the economy.

Investors are watching for the party to flesh out plans to cut the state’s role in the economy, boost consumption and fuel growth by integrating millions of migrant workers from the countryside into cities. Land reform and changes to the household registration, or hukou, system that limits labor mobility may be on the agenda.

Fiscal issues loom, such as local governments’ reliance on land sales for revenue and allocating the costs of urbanization between central and local governments. The United Nations puts a price tag of at least 41.6 trillion yuan ($6.8 trillion) over two decades on integrating rural workers into cities.

Urbanization Model

“It’s very hard to shift the model of urbanization,” Zhang said. “Local governments have been making a lot of money by selling land in the old model of urbanization, and if they are told to pay money on social security and affordable housing in the new model, they won’t be happy.”

Zhang, who completed graduate and post-graduate studies before Mao Zedong unleashed the Cultural Revolution, is a co-founder of the Beijing-based Unirule Institute of Economics, a non-governmental research organization set up in 1993. Fan Gang, a former academic adviser on the central bank’s monetary policy committee, was also a founder.

While China’s leaders are trying to construct a new economic model, Zhang said moves such as increased railway spending this year showed the challenge of discarding the old investment-driven approach. Such measures to ensure growth mean that the government will meet this year’s target for a 7.5 percent economic expansion, he said.

Dangerous Business

One of Li’s stated goals is to pare back the government’s role in the economy to let markets play a bigger part, a shift that means tackling powerful state-owned businesses. To Zhang, the existing climate for private enterprise in China is not encouraging, and seems difficult to change.

He cites the example of the execution in July of businessman Zeng Chengjie for illegal fund-raising and fraud, a case discussed at a Unirule conference last month.

“On one hand, the government is saying that it wants to encourage private investment, and on the other hand, a private businessman was executed for, at worst, economic crimes,” Zhang said. “It doesn’t work this way.”

Obstacles to change in China mean that even the best-drafted policy blueprint may fail to produce the desired results, said Zhang. “You sow dragons’ teeth, but you harvest fleas,” he said.

To contact Bloomberg News staff for this story: Xin Zhou in Beijing at xzhou68@bloomberg.net