CUTTING BACK ONRED TApE

By Lan Xinzhen

The Chinese Government places more power in the hands of the market and enterprises

China has moved once again to cut the number of items that require Central Government approval, in a move some say will help create a more ef ficient and friendly environment for business and help boost economic growth.

On May 15, the State Council announced reforms of 133 items that require top-level approval, including rights on investment and production in the economy, which will be delegated to lower-level governments. Just 58 days after being elected, the new cabinet has heavily streamlined the central authority and delegated more powers to lower-level governments.

Two days before the cabinet announced its decision, Premier Li Keqiang said the government had three goals in mind for its streamlining reforms: to ensure economic growth,to facilitate changes in the country’s growth model and to increase employment.

He stressed that transforming the government at the very top is urgently needed for maintaining the healthy development of the economy.

Song Xiaowu, vice President of the China Society of Economic Reform, says China is in a crucial period of economic development, whereby the economy is shifting from an export-oriented one to a consumptiondriven one. Therefore, cutting back on Central Government red tape is quintessential during this time of economic transition. Gao Xiaoping,Executive vice President of the Chinese Public Administration Society, says the changes will help break up monopolies and put more power in the hands of the market.

For economic growth

Why has the Chinese Government chosen to reduce red tape now?

Song says this is related to current conditions in the economy. After the 2008 global financial crisis, the Chinese economy became the first to bottom out, attracting global attention. However, its economic growth is beginning to be stagnant this year, and the recovery of the real economy is weak. It would be difficult for the Chinese economy to return to the days of 10-percent or even higher growth merely driven by investment, he says. A high growth rate is no longer a priority, as increasing employment and maintaining social stability have become top concerns.

“China must both ensure stable growth and improve the quality of growth. Hence it is particularly significant for the government to cut and ease administrative powers, which will encourage society and enterprises to be more creative in solving problems,” said Song.

A series of reforms have already been carried out during the transformation from a planned economy to market economy.Currently, the most important reform is to change the way resources are allocated, with the market instead of the government playing the leading role. In a planned economy,the government decided all corporate affairs.Since the policy of reform and opening up was introduced some 30 years ago, especially after

THE CHANGES

● The National Development and Reform Commission: Approval of 14 items removed and 12 items delegated away, including corporate investment in expanding civil airports,corporate investment in trains, signal systems and drive and control systems for urban rail transportation.

● The Ministry of Industry and Information Technology: Approval of six items removed, including the confirmation of corporate qualifications for telecom and information network integration.

● The Ministry of Agriculture:Approval of four items removed, including the names of deep-sea fishing vessels, fishing research vessels and vessels for teaching purposes.

● The Ministry of Communications:ver ification or approval of three items removed, including the verification of mergers in international shipping.

● The Ministry of Culture: Approval of three items removed and one item delegated away, involving the approval of commercial performances by foreign troupes at non-entertainment sites.

● The Ministry of Commerce:verification of two items removed,including the approval of foreign cooperation contracts involving petroleum,natural gas and coal-bed gas

● The State Administration for Industry and Commerce: ver ification of two items removed, including the registration of resident representative offices of foreign companies

● The Ministry of Public Security:Approval of one item removed, involving the travel of foreign individuals in China with their own vehicles.China’s accession to the WTO in 2001, the Chinese Government has cut or eased many items subject to Central Government approval.But it wasn’t nearly enough. Premier Li once saw a letter describing the over elaborate procedures for investment approval: If a company plans to invest in a project, it must go through approvals from 27 departments, which may take six to 10 months. This will not only dampen corporate enthusiasm, but may also cause a loss in business opportunities. Moreover, among the huge number of cases subject to approval by the ministries and commissions, some are difficult to comprehend. For example, private investment in urban rail transportation and the names of fishing vessels all need government approval, matters that should have been decided by companies themselves but were all monopolized by the government.

“Market access requires approval from the government. Without a government permit,no company can enter a sector even if it has capital. This restrains the vitality of economic growth,” Song said.

Arouse policy dividend

Cutting back on red tape will stimulate the creativity of various market players and facilitate stable economic growth, which is undoubtedly a “good recipe,” said Yi Peng, a researcher with the China Center for Urban Development.

According to figures from the National Bureau of Statistics (NBS), the purchasing managers’ index dropped to 50.6 percent in April. In the meantime, the producer price index declined by 2.6 percent from a year ago and went down by 0.6 percent against the previous month, a decline for the third straight month.In March, corporate profits only grew by 5.3 percent, while in the fourth quarter last year,corporate profits increased by an average 20 percent each month.

Furthermore, college students find it difficult to get a job. Figures from the Ministry of Education show that in 2013 there will be 6.99 million college graduates, the highest since 1949. However, the Ministry of Human Resources and Social Security says job opportunities for college students will fall by 15 percent this year.

Yi says when the 4-trillion-yuan ($647.25 billion) stimulus package had been carried out years ago and the current amount of M2 (broad money) reached 100 trillion yuan ($16.18 trillion), merely depending on investment will do little to stimulate economic growth. Reducing red tape and relying on the market to stimulate the Chinese economy will help accelerate the country’s economic transformation.

Two sectors best illustrate the impact of slashing away red tape to spur economic activity, according to Yi. The first is in the service sector. Currently,the proportion of the service sector to the overall economy is below 50 percent, but in Western countries,the number is above 70 percent.An important reason for the big gap is that too many items in the service sector are subject to government approval. The other is in the e-commerce sector. Since there are few items subject to government approval, the ecommerce industry has grown rapidly.In 2012, the number of online users in China reached 560 million, and the sales volume of the e-commerce industry surpassed 8 trillion yuan ($1.24 trillion). In the first quarter, its sales volume totaled 2.4 trillion yuan($390 billion), surging 45 percent, much faster than the growth of the retail sector during the same period.

The cutting and easing of government approvals effectively address corporate concerns and are in respect of market rules, said Gao. The recent government action to reduce red tape will produce positive changes in two respects:In the investment sector, decision-makers will be better able to make decisions by themselves only if the projects do not involve national and public security; on the production and business side, items will be exempted from government approval only if they can be effectively regulated by the market. Reducing red tape overall will make corporate operations moreflexible.

OUT TO SEA: Fishing boats stop at Sanya, Hainan Province. The naming of fishing vessles now falls in the hands of lower-level governments

“China is now in a decisive stage of accelerated industrialization and urbanization with a broad space for economic development.Reducing red tape will better integrate enterprises with the potential for economic growth,which will be a powerful impetus for sound and sustained development,” said Gao.

problems

After reducing red tape, the government must still fulfill its oversight role or else face market chaos, such as redundant and blind investment,said Song. An important aim for the government in delegating as many powers as possible to lower-level governments is to create an environment conducive to fair competition.Only when a fair environment is established,can true competition be realized. At present,China’s market economy has a long way to go in this regard, with rampant fake products and a widespread infringement on intellectual property rights in the country. This is unfair to those businesses that operate honestly and will discourage foreign companies from investing in China.

Reducing red tape will actually make the Central Government’s work a lot tougher and require that it be a lot more attuned to what’s happening on the ground, said Song Shiming,an associate professor with the Chinese Academy of Governance. There are a few things the government must pay attention to, he said.

First, oversight and macro-controls should be strengthened. The Central Government delegating more powers to lower levels means local governments will have more decisionmaking powers regarding investment projects.Since economic growth is the most important indicator in evaluating an official’s performance,we could see more redundant projects and disorderly competition.

Second, because the changes put more power in the hands of provincial and municipal governments, corruption—already a major problem in the country—could surge. The government will no doubt have to toughen its current crackdown on corruption.

For Song Shiming, the latest reforms offer no guarantee. “If these problems are not prevented or properly resolved, the much desired changes from reducing red tape will be hard to come by.” ■