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World Bank says China needs sweeping reforms

World Bank says China needs sweeping reforms

February 27th, 2012 by JOE McDONALD, AP Business Writer in News

BEIJING (AP) - China needs to reduce the dominant role of state companies in its economy and promote free markets to keep growth steady and avoid potential crises, the World Bank and Chinese researchers said Monday.

The recommendations, in a report on China's development through to 2030, come amid a debate in the ruling inner circle over the future course of economic reform as a new generation of leaders prepares to take office this year.

The emphasis on curbing state industry clashes with Beijing's strategy over the past decade of building government-owned champions in fields from banking to technology and is likely to provoke opposition.

"As China's leaders know, the country's current economic growth model is unsustainable," said World Bank president Robert Zoellick at a conference about the report. He said China has reached a "turning point" and needs to "redefine the role of the state."

The full report was due to be released later Monday.

Its recommendations highlight the fact that after three decades of reforms that allowed Chinese entrepreneurs to become world leaders in export-driven manufacturing, state companies still control domestic industries from steel to airlines to oil to telecommunications.

Government companies are supported by low-cost credit from government banks and business groups complain regulators shield them from foreign and private competitors despite Beijing's market-opening pledges.

China's leaders have promised repeatedly to support entrepreneurs who create most of its new jobs and wealth. But most bank lending still goes to state companies and Beijing's huge stimulus in response to the 2008 crisis set back reforms by pouring money into government industry while thousands of private companies went bankrupt.

A summary of the report released by the World Bank recommended an array of politically thorny changes, including forcing state companies to compete with private rivals, basing bank lending on market forces and changing a household registration system that limits the ability of rural migrants to work in cities.

Zoellick acknowledged they might face opposition from political factions that benefit from the old system. He said Beijing should make changes gradually to build support from new groups that profit from more open markets.

In a reflection of high-level support, Zoellick said work on the report began 18 months with an endorsement by President Hu Jintao and Vice President Xi Jinping. Xi is due to succeed Hu as China's paramount leader.

Vice Premier Li Keqiang, a top economic official, gave "unwavering commitment to this project," Zoellick said.

Early drafts were discussed with a wide range of Chinese officials, which should help to win support for its recommendations, Zoellick said.

Adding urgency to the need for change, the researchers expect China's rapid growth to slow from 9 percent a year to about 5 to 6 percent by 2015.

"There will be many risks and challenges going forward, especially if China is unable to change its current pattern of growth," said Vikram Nehru, a former World Bank chief economist for East Asia and one of the report's lead authors.

Nehru cited the need to support an aging population, competition for natural resources and potential environmental damage.

"In the next 20 years, even with reforms, China's growth is expected to slow," Nehru said. "But managing the smooth slowdown to a sustainable path in the medium-term will be challenging, and a key risk could be if growth suddenly slows."

China's growth declined over the past year after Beijing hiked interest rates and tightened other controls to cool an overheated economy and inflation. Chinese leaders reversed course in December and promised more bank lending to help companies cope with the slump in global demand but changes have been gradual.

Zoellick said he expects China to achieve a "soft landing" this year and avoid an abrupt growth slowdown.

Zoellick contrasted China's ability to make changes with the difficulties faced by crisis-hit Italy and Spain in restructuring their economies amid little or no growth.

"What I am picking up from discussions, not only in Biejing but with provincial party secretaries, is a recognition that it is better to undertake structural reforms while the economy is growing," he said.

"The timing of this report is also important, because you'll have a leadership transition in China."