As a reform research institution based in Hainan, the China
Institute for Reform and Development (CIRD) has been providing
intellectual services for the Boao Forum for Asia over the past six
years. These services include recommending key topics for and
drafting comprehensive summary reports on its annual conferences as
well as drafting minutes for its annual board meetings and annual
member conferences. The following selections are CIRD opinions on
this year's hot economic issues:
Yuan patience a virtue
The renminbi exchange rate has always been a sensitive issue,
but judging from recent exchange rate reforms, decision makers in
the Chinese government have reached consensus for reform. The
general posture is that a market-oriented and more flexible
exchange rate mechanism should be further improved, but since this
reform covers a wide range of issues and has far-reaching
influences, patience is required.
According to the established mechanisms, the renminbi exchange
rate may appreciate at an annual rate of less than 5 percent during
2006-10. While reform of the renminbi exchange rate has been
incorporated into the 11th Five-Year Plan (2006-10), the major
problems China now faces are an excessive trade surplus and the
rapid increase of foreign exchange reserves.
As regards the latter, China has to expand its money supply. The
government work report delivered by Premier Wen Jiabao at the Fifth
Session of the 10th National People's Congress states that
"effectively addressing the problem of excess liquidity in the
banking system" is among the major tasks of the Chinese government.
In order to relieve excess liquidity, the central bank has
increased the reserve requirement ratio twice since the beginning
of the year.
The government also strengthened its efforts at reining in
excess liquidity following the Spring Festival when banks rush to
supply loans, hoping to control the growth of loans and fixed
assets investments within reasonable limits by raising the reserve
requirement ratio. In this respect, if excess liquidity is not
reduced by raising the reserve requirement ratio, the renminbi will
face heavier pressure to appreciate, and vice versa.
Moderate renminbi appreciation is generally beneficial to the
Chinese economy. First, it helps relieve excess liquidity and
pressure from overheated investments and housing price hikes.
Second, if companies have expectations about a stable renminbi
appreciation, although it may influence the exports of some
companies, this can force them to improve internal management
practices and push them to transfer price advantages into new
competitive advantages, aiding the economy in the end. Third,
appreciation can correct distorted exchange rates, preventing
Chinese companies from producing so-called cheap products through
consuming massive resources.
Moderate renminbi appreciation is beneficial to other Asian
nations. It increases the competitiveness of Asian exports and, in
turn, China imports more from across Asia. The renminbi, if allowed
to appreciate at a moderate rate, also benefits the global economy.
Moderate appreciation will not create serious economic disturbances
in China and the economy will retain a steady growth rate, in
essence buoying the growth of the global economy.
Financial reforms gaining pace
Financial reform has recently quickened in China, with the
banking, securities and insurance sectors leading the way. The
introduction of the shareholding system in state-owned commercial
banks has led several state-owned commercial banks to list on
overseas stock exchanges. The reform of the shareholder structure
is close to completion. Other reform success has occurred within
the property rights system, corporate governance and internal
control mechanisms. Since the reform of the exchange rate in 2005,
the renminbi exchange rate has gained flexibility. An insurance
sector reform blueprint has been formulated and rapid development
is expected in this arena.
The national financial work conference, occurring once every
five years, was held on January 19, 2007 in Beijing. Four days
later, the Political Bureau of the Central Committee of the
Communist Party of China met to discuss a strategic plan for
financial reform. The Chinese financial industry is at an important
turning point and a crucial development stage. Momentum towards its
reform is expected to continue.
In the latest government work report, Premier Wen laid out six
tasks developed to accelerate financial reform in 2007. The
following summarizes Premier Wen's remarks:
The first task is to deepen reform of state-owned banks. This
will be led by transforming state-owned commercial banks to
joint-stock companies. Shareholding systems will be introduced with
the Agricultural Bank of China. Additional reforms will focus on
the China Development Bank.
Second, reform of the rural banking system will accelerate. A
system of rural financial organizations with a proper division of
work, diversified investment and a full range of functions that
provide efficient services will be established. The Agricultural
Bank of China and the Agricultural Development Bank of China will
serve as the backbone of rural banking. Rural credit cooperatives
will be reformed and the role of the China Postal Savings Bank in
serving agriculture, rural areas and farmers will be strengthened.
Controls will be relaxed on the establishment of rural financial
institutions, with banking functions and investment in rural
financial institutions from varied sources of capital encouraged.
New types of financial organizations suitable for rural areas will
be explored, and efforts to innovate financial products and
services will be strengthened, eliminating difficulties farmers
encounter in obtaining loans.
Third, development of capital markets will be a priority. The
development of a multi-level system for capital markets will be
promoted, and the amount and proportion of direct financing will be
increased. The development of the stock market, the accelerated
development of the bond market and the active yet prudent
development of the futures market will be encouraged. Basic market
systems will be further strengthened, and reforms of the system for
issuing stocks and bonds will continue to make it more responsive
to market conditions, effectively raising the quality of listed
companies and strengthening market oversight.
Fourth, reform of the insurance sector will deepen. Expanded
insurance coverage and improved services will be provided by
insurance companies. Their ability to handle risk will be
addressed.
Fifth, the financial sector will further open to foreign
competition.
Sixth, strengthening and improving financial oversight,
improving mechanisms for coordinating oversight and effectively
guarding against and defusing financial risks will be developed in
order to maintain China's financial stability and security.
Reining in housing prices
Over the past year, rising real estate prices have been a hot
topic across China. A survey conducted last year by the Social
Survey Institute of China querying residents of over 16 cities
found that 75.3 percent of respondents were concerned about the
high cost of real estate.
While it will be difficult to reverse these trends in 2007,
government intervention is attempting to control the rapid increase
of housing prices.
In recent years, the government has put stabilizing housing
prices at the top of its list of priorities. At the beginning of
2007, Premier Wen stressed the importance of attending to this area
and reiterated that securing and improving the livelihood of the
people is the basic function of the government. Hence, regulatory
measures by the Central Government will be strengthened, instead of
weakened, in 2007.
In his government work report, Premier Wen pointed out that the
real estate industry plays a major role in developing the economy
and improving the housing conditions of the people, and the
government must promote the industry's sustained and sound
growth.?The following summarizes Wen's remarks:
In 2007, the government will attempt rational regulation of the
real estate sector. Taking into consideration the fact that China
has a large population and relatively little land available for
building housing, as well as the current level of its economic
development, appropriate plans are needed. Environmentally friendly
buildings that conserve energy and land, and development of a
Chinese model for housing consumption, are important goals.
Second, the real estate industry should focus on developing
affordable housing for ordinary people. The government will pay
particular attention to addressing the housing problems of
low-income families by increasing fiscal and tax policies
supporting and setting up a sound system of low-rent housing.
Improving and standardizing the system of affordable housing is
important in this respect.
Third, the proper use of both government regulation and market
forces to maintain a reasonable scale of real estate investment,
while improving the supply of commercial housing, strengthening
oversight and regulation of housing prices, preventing overheating
in housing prices and keeping prices at a reasonable level, should
be aimed for.
Fourth, efforts will intensify to ensure order in the real
estate market, strengthen oversight over it, and uphold laws and
regulations in all facets of the real estate industry, including
development, sales and real estate agencies. Local governments at
all levels must assume their full share of responsibility for
regulation and oversight of local real estate markets.
Transforming the energy sector
In the government work report, Premier Wen stated that the
country fell short of targets for cutting energy consumption by
about 4 percent per unit of GDP, and by 2 percent on the total
discharge of major pollutants. However, he also pointed out that
meeting these two mandatory targets in the 11th Five-Year Plan is
very important. The targets cannot be revised, so working
resolutely to reach them is a major goal.
Since conserving energy and reducing energy consumption are so
important to the transformation of economic growth patterns, the
State Council has established detailed targets for every province,
autonomous region and municipality. Leaders in these localities are
tasked with working out objectives and plans in varying stages and
creating measures for accomplishing them.
Judging from circumstances in China, it is increasingly urgent
to improve the energy structure. At present, the reliance on coal
as the major energy source ensures stable development of the
world's most important economic system, and helps the growth of
global trade. At the same time, it also leads to low efficiency of
energy utilization, heavy pressure on the environment and high
costs of social management. To change the structure away from using
coal as the major energy source will be the only road for China to
transform its economic growth pattern.
From a sustainable development point of view, gas will likely
become the most important energy source, along with simultaneous
development of gas, petroleum and coal resources. This could be the
most ideal road for China's modernization of the energy
structure.
Conservation and environmental protection keys for
2007
According to requirements stipulated in the 11th Five-Year Plan,
by 2010 China must cut energy consumption by 20 percent per unit of
GDP and reduce emissions of major pollutants by 10 percent. These
are binding goals. However, an official from the State
Environmental Protection Administration (SEPA) said that emissions
of major pollutants in 2006 had increased and according to the
National Development and Reform Commission (NDRC), the national
goals of conserving energy and reducing energy consumption in 2006
had not been reached. Statistics showed that only such provinces or
municipalities as Guangdong, Shandong, Beijing, Shanghai and
Tianjin accomplished their goals last year.
Now is a crucial time for China to conserve energy, reduce
energy consumption and promote the transformation of economic
growth patterns through conservation of energy and reduction of
consumption. President Hu Jintao stressed late last year the
urgency of building an environmentally friendly, energy-conserving
society and doing the utmost in conserving energy and reducing
energy consumption. The NDRC released a document at the end of 2006
requiring local departments responsible for energy consumption to
verify energy reports and plan for energy conservation of 1,000
enterprises within prescribed time limits.
As of January 1, 2007 they are also tasked with carrying out
accession and examination of energy conservation in fixed assets
investment projects. Projects that are not carried out or fail to
pass examination shall not be approved and permitted for
construction.
As for environmental protection, the SEPA and the People's Bank
of China declared on January 9, 2007 that the incorporation of
environmental protection information from enterprises will be added
into the corporate credit information system as of April 1. This
will require commercial banks to consider whether the enterprises
abide by environmental protection laws as important grounds when
considering granting loans. That is to say, enterprises that break
environmental protection laws will not receive loans.
To China, the ultimate way to establish an economical and
environmentally friendly society is to promote market reform and
enhance scientific and technological innovation. Since property
rights reform of enterprises has lagged behind, some enterprises do
not care about the environmental costs and don't see the point in
conserving energy and reducing energy consumption. Moreover, market
reform of resource prices has also lagged behind, meaning prices do
not reflect scarcity. Accelerating technological innovation can
lead China out of a growth pattern that depends on exhausting
resources and the environment; the sooner the better.
The growth of SMEs as an economic focal point
At present, China is witnessing rapid growth of small and
medium-sized enterprises (SMEs). These are playing an active role
in strengthening economic growth, expanding employment channels,
opening the economic system, optimizing the ownership structure,
improving industrial competitiveness and promoting urbanization and
industrialization. Further, SMEs are a major force in technological
innovation.
By the end of October 2006, the number of SMEs in China had
reached 42 million. This accounts for 99.6 percent of the total
number of enterprises in the country. SMEs contributed 58.5 percent
to the county's total value of final products and services, 59
percent to the retail sales of total commodities that the country
produced, 48.2 percent to taxes and 75 percent to job
opportunities. At present, 65 percent of the country's invention
patents and 80 percent of new products are developed by SMEs. A
large number of new technologies are utilized for industrial
production by SMEs. This sector is also promoting the adjustment of
the economic structure, with many developing businesses in fields
such as infrastructure, mechanical, electrical manufacturing and
services.
Expanding consumption provides a vast market for SMEs.
Improvement in policies supporting and providing a beneficial
environment for SMEs is occurring. Economic globalization,
innovation in science and technologies, as well as industrial
restructuring worldwide, will provide ample opportunities for the
development of SMEs during the coming years.
In the future, China will strive to promote the transformation
of SMEs in four aspects, improving their quality and
competitiveness all round: transforming from quantity-oriented to
quality-oriented; transforming from extensive growth to sustainable
development; transforming from sole ownership to entering into
partnerships; and transforming the motive of economic benefit by
focusing on both economic benefits and social responsibilities.
The Chinese Government, based on the idea of allowing market
mechanisms to work, will ensure practical policies providing more
effective services for SMEs. Relaxation of regulations on market
access for SMEs, with principles of equal access and fair
treatment, will improve the environment for business start-ups.
Every effort will be made to relieve difficulties in accessing
financing, and mechanisms will be established for protocols of
initial investment and exit. Improvement of social services and
strengthened efforts in technological innovation, as well as human
resource development, will also help promote healthy development of
SMEs.
Prospects for China-ASEAN relations
Since the establishment of the dialogue mechanism in 1991, China
and the Association of Southeast Asian Nations (ASEAN) have carried
out continuous communication and cooperation. Bilateral relations
have developed into close and strategic cooperation in multiple
fields. China and the ASEAN members are all developing countries.
Although there are differences and competition between the two
parties, they are also complementary to each other in many
fields.
ASEAN is China's fifth largest trading partner, the nation's
fifth largest export destination and its fourth largest import
source. According to statistics from the Ministry of Commerce,
since 1991, bilateral trade between China and ASEAN countries has
been increasing at an average annual rate of more than 20 percent.
Many ASEAN members have trade surpluses with China. In 2006,
China's trade deficits with ASEAN nations totaled $18.22 billion.
For example, it was $11.94 billion with the Philippines, $10.04
billion with Malaysia and $8.2 billion with Thailand.
Renminbi appreciation strengthens this trend and will bring huge
opportunities to ASEAN members. ASEAN not only needs Chinese
products, it also needs Chinese technologies, experience and
capital. Huge potential exists in terms of bilateral cooperation.
Increasingly, Chinese companies are attentive to and willing to
cooperate with ASEAN members. China's three petroleum companies
have established four energy development areas in the world, one of
which is located in Southeast Asia with Indonesia, Malaysia and
Brunei as the key areas of concentration.
At the Commemorative Summit marking the 15th Anniversary of
ASEAN-China Dialogue Relations in October 2006, Premier Wen
declared that China-ASEAN relations are now in their best stage of
development. The average tariff between China and ASEAN will fall
to 6.6 percent in 2007 and 2.4 percent in 2009. By 2010, 90 percent
of the products China imports from ASEAN countries will be tariff
free.
In January 2007, China and ASEAN signed a free trade area,
service trade agreement. Starting from July 2007, China will
further open its market in 26 fields within five service sectors:
environmental protection, construction, commerce, sports and
transportation. The aim of this is to expand trade exchanges
between the two partners. At the same time, ASEAN will also open
its markets in education, tourism, construction and finance to
China, allowing ASEAN to establish sole proprietorship companies or
joint ventures. Stockholding restrictions will also be reduced.
In the future, according to the Framework Agreement on
Comprehensive Economic Cooperation signed in 2002, China and ASEAN
will establish a Free Trade Area in 2010. This will be comprised of
1.7 billion consumers, amount to $2 trillion worth of GDP and
produce $1.23 trillion worth of trade volume. This will nearly
equal the level of free trade areas existing in the European Union
and within North America and will be the largest free trade area
composed of developing countries in the world. It is reasonable to
believe that China and ASEAN will both gain in this future
development, based on the friendly dialogue and close cooperation
nourished over the past 17 years and based on mutual expectations
toward the development of bilateral
relations.??
(Beijing Review, April 19, 2007)