Full Steam Ahead

　　Effectively tackling resistance to reform will represent a major test of the Chinese Government’s wisdom and resolve.

　　The Second Session of the 12th National People’s Congress (NPC) passed on March 13 the Report on the Work of the Government by Premier Li Keqiang. The report，delivered on March 5，the opening day of this year’s annual NPC session，mentions the word “reform” 77 times and the measures proposed by the report encompass the sectors of the economy，politics，people’s well-being，rule of law and ecological progress.

　　This is the first report on the work of the government by Premier Li. All of the 60 detailed reform tasks proposed by the Decision of the Central Committee of the Communist Party of China (CPC) on Some Major Issues Concerning Comprehensively Deepening the Reform adopted last year are included in this report. Moreover，on issues of taxation，finance，pollution control，urbanization，medical reform and education，the report puts forward even more detailed guidelines.

　　Zhao Xijun，Vice Dean of the School of Finance of Renmin University of China，said the report indicates that the Chinese Government is implementing the blueprint of reform formulated by the Third Plenary Session of the 18th CPC Central Committee last November，and it has enough determination and confidence to effectively implement the blueprint.

　　China’s measures of comprehensive reform are also good news for the world economy. Because the fortunes of the Chinese economy are so indelibly linked with those of the global economy，sound economic and social development in China will bring opportunities to the wider world.

　　High expectations

　　Zhao said that according to the Report on the Work of the Government，reform measures among the nine key aspects of government work can be divided into three categories. Those pertaining to the economy include streamlining administration and delegating power to lower levels，tax reform，financial reform and accelerating economic transformation. Those relating to social development and management include advancing urbanization，improving people’s well-being and reforming the household registration system. Finally reform in ecological progress comprises measures advancing the transformation of energy production and consumption.

　　Reform is the primary theme of the government’s work this year，with economic reform in particular being the paramount task. In contrast to bygone years，this year’s reforms will mainly tackle the difficulties that，up to now，have not been addressed. For example，last year，the government reduced the number of items subject to government review and approval，and this year the government may work on some more contentious items.

　　According to the report，the government will introduce a system to list all items over which government review and approval are required，and only those items not listed will be subject to government review and approval. China will also refashion its business registration system nationwide and carry out registration of subscribed capital. In addition，annual inspections of businesses will be replaced by annual reporting. For the government，this is a self-imposed revolution with the aim of incentivizing potential market participants.

　　Another area of difficulty is fiscal and tax reform. Zhao said reform of the fiscal and tax system basically involves how much the government will take，how much the market will reserve and how much residents can get. With regards to government itself，it also involves how much fiscal revenue is allocated to the Central Government and how much goes to local governments. It is a reform of the fiscal and tax system，but in fact it involves relationships between interests in the government，the market and among the common people. It also involves the relationship between interests within the Central Government and various local governments. Therefore，navigating through this jungle of conflicting interests and attitudes in order to forge a path to clear solutions will be a very challenging job.

　　Zhao said that the commitments to financial reform made by the report are likely to be honored. Owing to factors such as shadow banking and local government debt risks，the academic circle has questioned the overall health of the Chinese financial industry. The report vows to deepen reform of the financial sector，including measures such as continuing to liberalize interest rates. Zhao believed issuance of large-denomination negotiable certificates of time deposit，or CDs，is considered a key step toward interest rate liberalization. He estimated that this year，financial institutions will be enabled to engage in activities such as regularly issuing negotiable certificate of deposit (NCD) and directly issuing CDs to individuals and enterprises，setting up an interest rate corridor for open market operations，formulating regulations regarding the bankruptcy of financial institutions and deposit insurance system，regulating Internet-based financing and establishing private banks.

　　The public is also concerned about reforms of ownership. Premier Li’s report vows to formulate measures for non-state capital to participate in investment projects of state-owned enterprises，and allow non-state capital to take on a number of projects in areas such as banking，oil，electricity，railway，telecommunications，resources development and public utilities. The government will formulate specific measures to permit non-public enterprise participation in franchising，to reform the railway investment and financing system，and to open competitive operations in more areas so as to create a platform for the full participation of private capital. In the meantime，China will also strive to improve its property rights system.

　　Zhao went on to say that although China has announced the introduction of many measures to support development of the non-public economy，the “glass door” for non-public capital to enter state-owned monopoly industries has not yet been broken through. This year the government will take larger strides in this regard.

　　Zhao once made his own investigations and analyzed the results of online polls conducted by websites of People’s Daily and China Central Television. In general，the public eagerly anticipates breakthroughs this year in administrative reform，improvement of the market system，reform of state-owned enterprises，fiscal and tax reform，financial reform，reform for integrated development of urban and rural areas，establishing new institutions for open economy and reform of the ecological progress system.

　　Strong resistance

　　“It is not easy to implement these reform measures，” said Yang Weimin，deputy head of the Office of the Central Leading Group on Finance and Economic Affairs. “The biggest resistance not only lies in the difficulty and complexity inherent in the reform measures themselves，but also comes from vested interest groups.

　　According to Yang，after 36 years of development，the benefits of the previous round of reforms have been almost exhausted. Facing problems，old and new，and demands from interests in all areas，the process of implementing reforms for the future is becoming increasingly difficult. From Premier Li’s report，people will find that implementation of reform measures have touched a nerve among vested interest groups. To carry out reform measures，China must therefore break through the obstacles presented by mental shackles and vested interests with great determination.

　　The report meets the demand by last year’s CPC plenary session that steps be taken to “make the market play a decisive role in resource allocation.” This year，China will cancel or delegate to lower-level governments an additional 200 plus items subject to government review and approval，items over which many government departments are reluctant to lose control.

　　At a press conference held on March 6，Li Yining，a member of the National Committee of the Chinese People’s Political Consultative Conference (CPPCC) and a renowned economist，expressed his concerns regarding resistance to reform.

　　Li said today’s reform climate is different from three decades ago，because the problems that most need to be addressed all represent thorny issues. The resistance to reform comes mainly from two areas. First and foremost are the interest groups，as they think reform will damage their interests. The second source is a feature of human nature，namely，people’s innate resistance to change. Having become accustomed to one way of doing something and having grown to rely on that system，people are generally loath to try alternative methods.

　　China needs to shift its focus from management of demand to management of supplies，Li continued. The government must offer better products and services to consumers. It should encourage improvement of product quality，establishment of independent brands and offering products that meet the customer demand.

　　At an interview with the press on March 8，Chi Fulin，a CPPCC National Committee member and President of the Hainan-based China Institute for Reform and Development，said China must pay special attention to balancing the relationship between various parties and coordination of the reform at this critical moment. As far as reforms go，now comes the hardest part. Given the presence of conflicts of interest within，and indeed between，different departments，industries and localities，any reform must address multifaceted problems and attempt to circumvent the hurdles put in place by vested interests and people’s natural resistance to change.

　　Making breakthroughs

　　China’s reform used to be led by the government，but the future reform will be a revolution imposed by the government on itself. This will be a painful process，which needs not only great determination，but also great political wisdom.

　　Yang said that in order to carry out the reform measures，six strategies should be employed.

　　Firstly，the introduction of easily implemented measures first，followed by difficult ones. Whether a measure is easy or difficult depends upon the public acceptance of it，not the scope involved. If society has reached agreement on a measure，it should be carried out in a timely manner. To the reforms on which society has not yet reached agreement，the government can reach consensus through discussions，research and pilot projects.

　　Secondly，accelerating the overall reform objective through smaller measures of an incremental nature. For example，in fiscal and tax reform，the focal point for this year is to extend trials for replacing business tax with value-added tax. This may seem to be a small measure，but it will help to pave the way toward reform of the whole local tax system，which is in turn pivotal to reform of the division of power between central and local governments.

　　Thirdly，grasping the core and key points in the reforms of various fields.

　　The fourth strategy is to control the tempo of reform. The government should be both bold and steady in advancing reform. For example，current reform must be carried out under the existing legal framework，though some breakthroughs can still be made. The government should not advance the reform blindly without first considering present limitations.

　　The fifth point is to make steady progress and strike sure blows. Based on full assessment and reaching agreement，reform measures must achieve real effects.

　　The final strategy is to focus on concrete results and measurable achievements. At present，some departments and localities are swift to action，but few of their measures have made any substantive progress.

　　According to Yang，when drafting Premier Li’s work report，the State Council organized several discussions and collected opinions from insiders from various industries. An important principle to decide this year’s reform measures is to ensure stable economic growth and avoid unnecessary risks. Therefore the reform measures must facilitate economic growth.

　　The Chinese Government has determined that the process of comprehensively deepening the reform will be completed in seven years，and 2014 marks the first year. As it stands，directions of many reforms have been made clear and the measures have been readied for implementation. However，it is of vital importance that reform measures must be issued at the proper time and tempo，Yang concluded.

　　Email us at： lanxinzhen@bjreview.com

　　Reform Tasks for 2014

　　Deepening reform of the administrative system. This year，China will cancel or delegate to lower-level governments an additional 200-plus items requiring government review and approval； introduce a system to list all items over which government review and approval are required and release that list to the public.

　　Basically completing the reform of government bodies at the provincial，municipal and county levels，and continuing to reform public institutions. China will reform the business registration system nationwide and carry out registration of subscribed capital. Issuing an operating permit before a license，which was the practice in the past，will be replaced with the practice of license first，operating permit second. Annual inspections of businesses will be replaced by annual reporting.

　　Exercising stronger oversight over delegated matters when they are being handled and after they have been handled. A blacklisting system will be introduced to make those who lose credibility pay the price and smooth the way for those who have credibility.

　　Giving high priority to reforming the fiscal and tax systems. China will ensure transparency of public finance and make it easy for people to understand and oversee it. The reform of the tax system will be advanced，including extending trials for replacing business tax with VAT to the railway transport，postal and telecommunications services industries，abolishing fees and replacing them with taxes，reforming the excise tax and resource tax，and moving ahead with legislation on a property tax and environmental protection tax. China will grant additional tax breaks to micro-businesses with low profits and reduce the burden on businesses. A standard financing mechanism for local governments to issue bonds will be set up to guard against and defuse debt risks.

　　Deepening reform of the financial sector. China will continue to liberalize interest rates，establish a deposit insurance system and promote the healthy development of Internet banking.

　　Enhancing the vitality of economic entities under all forms of ownership. China will improve the distribution and structure of the state-owned sector of the economy，accelerate the development of mixed-ownership economic entities，formulate measures for non-state capital to participate in investment projects of central government enterprises and formulate specific measures to permit non-public enterprise participation in franchising. The property rights system will be improved to ensure that property rights are inviolable in both the public and non-public sectors.

　　(Source： Premier Li Keqiang’s Report on the Work of the Government，March 5，2014)

　　By Lan Xinzhen

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