Passage -2 (Based on memory) Asked in IBPS PO -IV (01-Nov-2014) Morning Shift RUNNING the world’s biggest country requires sacrifice. For the Communist Party’s top officials on its central committee, the sacrifice includes the occasional meeting. From November, they will gather in Beijing for the third time since Xi Jinping became head of the party nearly a year ago. The “third plenum”, as this meeting will be called, is the new leadership’s chance to lay out its stall on economic reform. In the past similar gatherings have shaken the world. The third plenum in 1978, for example, sealed Deng Xiaoping’s authority over the party, allowing his vision of “reform and opening up” to prevail. Another third plenum, in 1993, set the stage for a ruthless shake-out of loss-making state-owned enterprises (SOEs). Mr Xi has encroached on the formal responsibilities of the prime minister, Li Keqiang, who oversees the economy. This is not unprecedented: Jiang Zemin, president from 1993 to 2003, also busied himself with economic affairs, Helen Qiao of Morgan Stanley points out. It is also potentially a good sign. Both the president and the prime minister share similar views about reform. By engaging in economic matters, Mr Xi is presumably backing his prime minister rather sidelining him. The road map Mr Xi will submit to the third plenum has been months in the making. It draws on the advice of China’s ministries and the wider network of official research institutes and think-tanks. To knit it together, Mr Xi has appointed Liu He, a thoughtful, reform-minded policy adviser who was educated at Harvard’s Kennedy School and whom Cheng Li of the Brookings Institution once compared to Larry Summers, the brilliant academic who became Barack Obama’s economic guru. As a technocrat, Mr Liu has no power to impose his own ideas. But in picking him, Mr Xi clearly endorses some of the things he stands for. Fiscal reform is difficult because it requires the central and local governments to renegotiate the division of revenues and responsibilities, says Shen Jianguang of Mizuho, a Japanese bank. Local-government outlays, especially at the county level, run far ahead of local revenues. This spending is also often wasteful. Local governments scramble to promote industrial activity rather than public amenities, poaching trade and investment from their neighbours by duplicating whatever worked next door. Both problems would be eased by an annual tax on the market value of properties. It would provide a stable source of revenues for local governments, helping to bridge the gap between their receipts and outlays. It would also encourage local governments to invest in public goods, such as clean air or better drainage, that raise the value of properties, thereby increasing the tax base. Despite its theoretical appeal, such a tax does, however, pose some practical difficulties, including the need for up-to-date registers of ownership and credible calculations of a property’s value. Overcoming those obstacles will serve as one test of Mr Xi’s reform credentials. The SOEs shuttered in the 1990s were loss-making drains on the exchequer. Many of the remaining SOEs, especially those owned by the central government, are profitable, however. That makes them far more difficult to cull: they are sacred cows because they are cash cows. Unfortunately the SOEs’ nominal owner does not greatly benefit. The SOEs pay too little in dividends, and what they pay is collected not by the finance ministry but by the State-owned Assets Supervision and Administration Commission (SASAC), which oversees them. It then ploughs these earnings back into the SOEs under its purview. Another test for Mr Xi, therefore, is dividend policy. He will pass if SOEs are required to pay higher dividends and to pay them not to SASAC but to the central government’s coffers. Given the obstacles they face in improving SOEs and local public finances, China’s budding reformers will press ahead where they can, in the hope that half-measures build momentum to finish the job. In some cases, this strategy may work. In allowing shadow banks to proliferate, for example, China’s liberalisers have created pressure for interest-rate deregulation. Until formal banks are allowed to raise the rates they pay on deposits, they will lose customers to lightly regulated alternatives offering higher yields. Yet there are potential dangers to this “skewed reform”, as Louis Kuijs of the Royal Bank of Scotland puts it. Were China, for example, to liberalise interest rates and capital flows without removing any of the SOEs’ privileges, it might find that finance simply flows more freely to the same firms that already gobble up more than their fair share. Even commercial lenders, able to price risk and set interest rates freely, would be keener to lend to big firms that dominate their markets and can count on the state should they ever get into trouble. China’s leaders set great store by gradualism. Even the momentous 1978 plenum changed the country by increments in the following months and years. But gradualism is not the same as inertia. It has been many years since the last big changes. If China’s leaders wait another five or ten years to renew the momentum of reform, the consequences will take more than a long meeting to fix.
Posted on: Sat, 01 Nov 2014 17:53:28 +0000