China scandal risks sapping will for reform

BEIJING (Reuters) – China’s most lurid political scandal in years could claim yet another victim – the boldness to grasp difficult reforms needed to ward off mounting risks to growth and stability.

Bo Xilai

Beijing long ago signalled the need for deeper changes to usher in the next round of growth as the country’s polluting, export-led model runs out of steam.

But in recent months, Premier Wen Jiabao and others have warned that China is running out of time to tackle important reforms, including freeing up land ownership and reining in the coddled state-owned sector.

The ouster of ambitious leadership contender Bo Xilai, who wrapped himself in populist rhetoric, could sap China’s will to tackle nettlesome problems by discouraging bold ideas from either to the left or the right, especially ahead of a leadership succession from later this year.

Bo was a brash politician who loved the limelight, a rival who needled other leaders to compete in policy innovations, said analysts.
“When Bo Xilai was still a factor, that was provoking rivalry between left and right, and encouraging more reformist impulses so that each camp could show its stance,” said Chen Yongmiao, a lawyer and political commentator in Beijing.

Had Bo had been promoted to the top leadership, “reformists might have had to be more forceful precisely in order to counter his influence,” said Chen. “But now he’s been ousted, their steps could be weaker because the incentive isn’t there.”

This week, the ruling Chinese Communist Party announced Bo, recently dismissed as the party chief of Chongqing municipality in southwest China, had also been suspended from the Central Committee, a council of senior officials. Bo’s wife was named as a suspect in the murder of British businessman Neil Heywood. Until his abrupt downfall, Bo was widely seen as a contender for a spot in the party’s next Standing Committee, an inner-circle of decision-making power that now has nine members.

Even before the stunning announcement about Bo, President Hu Jintao had signalled caution in the face of calls to embrace big financial and political reforms that would curtail central power, according to an editor in Beijing with close ties to senior officials.

“Now is not the right time to consider reform in some crucial areas,” Hu said recently, according to the editor, who spoke on condition of anonymity, citing the sensitivity of policy debates.   Hu did not specify which reforms he meant, but the editor took it to mean that political changes, along with challenges to the grip of the powerful state-owned businesses, were off limits.

Just last week Premier Wen called the country’s big banks a monopoly that must be dismantled to get money flowing to cash-starved private firms.

Other changes include reforming land ownership, which could dramatically increase the supply of housing and let out air from the property bubble, opening state-dominated sectors like telecommunications and healthcare to real private competition, and introducing market-based interest rates for banks.

Further delay in such reforms is an alarming prospect for economists who see trouble ahead if some of the most important changes are put off for much longer. An increasingly urgent chorus of policy-advisers and intellectuals warns that without reforms, economic growth and political stability could be imperiled.

“You can wait until after the leadership transition (in early 2013) but by then you might already have a crisis,” said Tao Ran, a professor of economics at Renmin University in Beijing.

The case for change

Pushing through big change in a year of leadership transition was always going to be difficult. Breaking up state monopolies and fiscal reforms could create disruption the party wants to avoid as it tries to engineer a smooth handover of power.

But the leadership rifts uncovered by the Bo Xilai scandal suggest that even after the new leaders take power, it could be hard to achieve the consensus needed to confront vested interests like state-owned enterprises and banks.

“Reform needs an ideological consensus or overriding will from a powerful leader like Deng Xiaoping, and that doesn’t exist,” said the Beijing editor. “The system of power prizes stability before all else, and there’s no real reform that doesn’t affect stability, so there’s no real will to take on deeper reforms.”    China’s past decades of stunning growth have been driven by huge overinvestment in manufacturing, which has produced a glut in production capacity. To ensure a market for all those goods, China has held its currency low, which in turn has brought back a flood of foreign exchange that has stoked inflation and real estate bubbles, among others.

Along the way, a growing state sector has stifled innovation and encouraged misallocation of capital, often funneling it into even more industrial capacity in China’s coastal areas.

Shrinking the bubbles and spreading wealth more evenly means spurring domestic consumption and fostering more private sector competition, both of which could boost growth and create jobs, which are priorities for the Communist Party.    “There is still huge room for China to grow if it deregulates land, for instance,” said Tao of Renmin University. “With 200 million migrant workers and their families, there are maybe 150 million housing units that need to be built. That’s a huge business.”

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