From the NYT:
SHANGHAI — In a major policy shift, the Chinese government is planning for private businesses and market forces to play a larger role in its economy, the world’s second-largest after that of the United States.
I believe it’s already the largest.
In a speech to party cadres containing some of the boldest pro-market rhetoric they have heard in more than a decade, the country’s new prime minister, Li Keqiang, said this month that the central government would reduce the state’s role in economic matters in the hope of unleashing the creative energies of the nation.
On Friday, the Chinese government also issued a set of policy proposals that appeared to be intended to show that Mr. Li and other leaders were serious about reducing government intervention in the marketplace and giving competition among private businesses a bigger role in investment decisions and setting prices. The overhauls, if successful, could also make China an even stronger competitor on the global stage by encouraging innovation and expanding the middle class.
Whether Beijing can restructure an economy that is thoroughly addicted to state credit and government directives is unclear. But analysts see such announcements as the strongest signs yet that top policy makers are very serious about revamping the nation’s growth model.
“This is radical stuff, really,” said Stephen Green, an economist at the British bank Standard Chartered and an expert on the Chinese economy. “People have talked about this for a long time, but now we’re getting a clearly spoken reform agenda from the top.”
The broad proposals, developed by the National Development and Reform Commission, an agency that steers many areas of economic and industrial policy, include expanding a tax on natural resources, taking gradual steps to liberalize bank interest rates and developing policies to “promote the effective entry of private capital into finance, energy, railways, telecommunications and other spheres,” according to a directive issued on the government’s Web site.
Foreign investors will be given more opportunities to invest in finance, logistics, health care and other sectors. “All of society is ardently awaiting new breakthroughs in reform,” the directive said.
For years, Western governments, banks and companies have complained that the China government has impeded foreign investment in banking and other service industries, despite promising to open up. The latest directive did not give details about what specific changes to foreign investment rules that policy makers in Beijing might have in mind.
China’s leaders are also promising to speed up efforts to liberalize interest rates and loosen foreign exchange controls, changes that are likely to reduce price distortions in the economy and allow the market to determine the value of the Chinese currency, the renminbi. On Friday, the central bank, the People’s Bank of China, issued a statement that repeated such vows.
Then comes the inevitable NYT “to be sure”:
The push does not signal the end of big government in China, experts say. The Communist Party is unlikely to abandon the state capitalist model, break up huge, state-run oligopolies or privatize major sectors of the economy that the party considers strategic, like banking, energy and telecommunications.
But one paragraph later they get back on message:
But analysts say a more market-oriented economy in which government has a smaller role in business outcomes could have far-reaching consequences for the global economy and bolster the prospects of foreign investors, multinational corporations operating in China and Chinese entrepreneurs.
Beijing seems to be pressing ahead because it has few alternatives. The economy has slowed this year because of fewer exports to Europe and the United States and slower investment growth. Rising labor costs and a strengthening currency have also reduced manufacturing competitiveness.
China’s leaders seem to believe that more government spending could worsen economic conditions and that the private sector needs to step in.
. . .
“Li Keqiang thinks like an economist,” said Barry J. Naughton, a professor of Chinese economy at the University of California, San Diego. “He wants the government to get out of the way. And although the growth outlook is getting worse, he says, ‘We don’t want to rely on stimulus; we want private-sector participation.’ This is what economists want.”
Behind Mr. Li and President Xi Jinping is a group of pro-market bureaucrats who seem to have gained in the leadership shuffle this year, including the central bank chief, Zhou Xiaochuan; Finance Minister Lou Jiwei; and Liu He, who is a vice chairman of the National Development and Reform Commission and director of the Office of the Central Leading Group on Financial and Economic Affairs, a body that advises party leaders on the economy. Mr. Liu is part of a team working on proposals for economic changes that could be announced in the autumn at a meeting of the Communist Party Central Committee.
The State Council, the Chinese cabinet, took action this month by releasing a list of administrative items that no longer need central government approval, part of an effort to delegate power and to ease the burden on business.
Beijing has also signaled that even though the economy is weakening, there is unlikely to be a major government stimulus package this year, like the one announced in late 2008, as the global financial crisis deepened. The central government worries, in part, about mounting local government debt and the possibility of a huge increase in nonperforming loans at state-owned banks.
My libertarian friends often wonder why I am so bullish on China. It’s not because I think they have a good economic model—just the opposite. Rather it is the fact that there has been a great deal of pro-market economic reform over the past three decades, and I fully expect the reform process to continue. Don’t tell Noah Smith, but the Chinese government is actually rather pragmatic.
HT: Tyler Cowen