Beijing’s Overhauls Get Short Shrift; Long-Term Plans to Revamp Economy Take Back Seat to Immediate Needs; Premier Pushes Spending

Beijing’s Overhauls Get Short Shrift

Long-Term Plans to Revamp Economy Take Back Seat to Immediate Needs; Premier Pushes Spending

MARK MAGNIER

June 22, 2014 9:13 p.m. ET

Construction workers labored at the site of a new bridge over the Yellow River in Zhengzhou, capital of central China’s Henan Province, in May. Li An/Xinhua/Zuma Press

BEIJING—Long-term economic overhauls that China’s leadership promised are taking a back seat to short-term needs as Beijing wrestles with a slowing economy and a foot-dragging bureaucracy.

In the more-than-six months since the Communist Party announced the restructuring package, economic growth has slowed more quickly than leaders anticipated, prompting a series of stimulus measures.

In recent weeks, Beijing has laid out plans for stepped-up spending on rail, water, nuclear power and social housing projects, nudged banks to lend more to home buyers, eased export rules and cut reserves that smaller banks must hold in a bid to loosen credit.

The modest progress is in muted contrast to the big bang that President Xi Jinpingpromised. Last year, he consolidated his power atop the government, Communist Party and armed forces in half the time it took his predecessor, Hu Jintao, before unveiling in November a road map for a more vibrant nation.

Keeping Score

Beijing has outlined ambitious restructuring goals, but arresting a slide in growth has hindered the plans.

Goal: Restructure state-owned companies

Progress: Citic and Sinopec introduced some ownership changes, but more-accommodative monetary policies have eased pressure on state-owned firms to reduce bloat.

Goal: Liberalize the financial system

Progress: The yuan trading band was widened, though the central bank keeps fluctuations firmly under government control.

Goal: Tax overhauls

Progress: A limited municipal-bond trial program is being expanded, but formal rules granting local areas the authority to issue bonds have stalled.

Goal: Reduce red tape and administrative licensing

Progress: Premier Li Keqiang pledged to cancel more than 200 administrative approvals this year, state media reported, though some analysts say the impact remains difficult to assess.

Goal: Give markets a ‘decisive’ role in the economy

Progress: Authorities continue to control or heavily influence vast swaths of the economy, from banks and the currency to capital markets.

Goal: Develop a Shanghai Free Trade Zone as a model for greater capital liberalization

Progress: A lengthy list of off-limits activities has been reduced, but freeing up cross-border capital controls has been slow.

Source: WSJ reporting

Premier Li Keqiang recently tried to impress upon local officials the urgent need to accelerate spending to generate growth and to warn them against doing nothing, state media reported. He added that Beijing was sending out inspection teams to “root out laziness” and punish those paralyzed by “fear of making mistakes,” the official Xinhua news agency reported.

It isn’t that the planned overhauls have been scrapped. President Xi’s team has modestly widened a trading band for the yuan, expanded a municipal-bond trial, clarified some equity rules and allowed more private ownership in the state-dominated banking sector.

Rather, in the trade-off between short-term growth and longer-term restructuring, Beijing is tacking decidedly short-term. In doing so, economists and analysts said, the government is exacerbating old problems and working at cross-purposes to reform.

“Unfortunately we haven’t really noticed a meaningful pickup in reforms, and it’s probably going to be more of a 2015 story than this year,” said Nomura economist Zhang Zhiwei, who recently raised his 2014 forecast for growth in gross domestic product to 7.5% from 7.4% after new stimulus measures were announced. “My expectations are pretty low.”

Beyond the economy, also vying for the leadership’s attention are deadly attacks the government attributes to separatists from western Xinjiang province and friction over territorial disputes with Japan, the Philippines, Vietnam, and the U.S., which has alliances with Tokyo and Manila.

Mr. Xi’s plan promised to limit the government’s hand in the economy, overhaul China’s stodgy state companies, liberalize financial markets, let markets play a “decisive” economic role, and tap private-sector initiative. Overall, the program aims to make consumption the main economic driver, rather than investment, which has spurred industrial overcapacity, a property glut, elevated corporate debt and environmental despoliation.

But tight credit policies engineered by the central bank over the past year in a bid to rein in debt—which saw short-term interbank interest rates at one point approach 12%— were quietly reversed, with rates now around 3%. “Are they saying it’s mission accomplished?” said ING economist Tim Condon. “They’re worried that they need more liquidity.”

Recent cuts to the ratio of reserves that banks are required to hold are supposed to lead to more lending. Rather than let the market decide where banks lend, Beijing is steering the new money chiefly to small and midsize businesses. “They’ll have to give up some of the micro reform measures to support the law” of 7.5% GDP growth, said ANZ economist Li-gang Liu, adding that recent reserve cuts could fan rural shadow-banking activities. Shadow banking, which tends to be less regulated, can encourage risky behavior and mask financial problems, as seen leading up to the global financial crisis.

After being told that promotions would depend on environmental and quality-of-life policies, not just GDP growth, cadres now face renewed criticism for neglecting growth. This month, a government website quoted Mr. Li saying China’s 7.5% 2014 GDP target is “legally binding.”

Where overhauls have advanced, the measures seem incremental. Rules governing a Shanghai free-trade zone, meant to better integrate Chinese and overseas capital markets, remain vague and incomplete. After promising to resume letting companies list shares on domestic exchanges following a one-year hiatus, Beijing initially went ahead, then added more restrictions.

Ultimately, Beijing sees reform more as a tool to maintain its grip than an end in itself, said Zheng Yongnian, director of the National University of Singapore’s East Asian Institute. “The point is to consolidate the Party,” he said, “not to weaken it.”

Elsewhere, state companies continue to dominate key industries, crowding out entrepreneurs essential for longer-term economic prosperity. This, economists say, essentially lets Beijing, rather than market forces, continue to pick winners and losers.

“One of the biggest challenges faced by smaller companies like us is market access,” said Ding Lieming, chairman and chief executive of Betta Pharmaceuticals Co., a private company based in Zhejiang province. “Private companies are never on the same footing.”

Beijing’s effort to get state companies to sell off some assets and bring in outside investors has made only small progress.

Two months after unveiling a 30% selloff of its fuel and oil distribution business, state energy giant Sinopec said in April the divestiture mostly involved only gas-station convenience stores—less restructuring than some hoped.

While state-owned conglomerate Citic Group has been touted as a reform model for its recent shareholder approval of a planned Hong Kong listing, critics say Beijing’s 82% stake in the renamed Citic Ltd. still makes the company ultimately answerable to the government, not shareholders.

Efforts to stimulate the economy appear to be gaining traction and arresting the recent slide in growth. Official data show industrial production, retail sales and exports improved in May, perhaps giving the leadership a breather to resume reforms.

“I wish the government would give more support to the real economy,” said Xu Fengping, a 48-year-old manager at a Beijing property company, who wants to see industry restructured, pollution controls tightened and corruption end. “We need to maintain steady economic growth in the right way,” she added.