China's new reforms must breach vested interests

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China's new reforms must breach vested interests

By Han Miao, Guo Xinfeng, Cui Yuanlei (Xinhua) 18:11, November 04, 2013

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BEIJING, Nov. 4 -- When Chen Feng served passengers on his airline's first flight from Haikou to Beijing on a sunny day in May 1993, he had no idea how far Hainan Airlines (HNA) would fly.

The startup, founded through joint stock reform, was a relatively new phenomenon in the country's aviation industry at the time, which was dominated by state-owned airlines. Later that year, China would start reforming state-owned companies after it endorsed the "socialist" market economy in a key Party meeting in 1992.

Two decades on, HNA has become the country's fourth-biggest airline, with more than 330 planes and total assets of nearly 360 billion yuan (59 billion U.S. dollars). However, Chen said China's market, including the aviation industry, is still not free enough. He is not alone.

The past 35 years of reform and opening up have fueled the growth of a raft of companies like HNA and the proliferation of self-made rich. Yet, some beneficiaries of reform have started to oppose further changes in the country, becoming "powerful vested interests" that obstruct China's new reforms.

PATTERN OF VESTED INTERESTS

"Compared with 20 years ago, now it is very easy to tell who is rich and who is poor. In the past, we were all poor. A pattern of vested interests has come into being. The yawning rich-and-poor gap stands out among the problems caused by the 'entrenched interests,'" said Chi Fulin, head of the China Institute for Reform and Development, a Hainan-based think tank.

The Forbes 2013 list of China's richest showed that the wealth of the top 100 totaled 316.45 billion U.S. dollars, while around 100 million people earn less than 2,300 yuan per year in rural areas, according to official data.

This is just a snapshot of China's unbalanced distribution of wealth. In fact, the gaps are widening between city and countryside, industries, rich and poor and among different regions, said Wang Yukai, a professor at the Chinese Academy of Governance.

Zhou Tianyong, a researcher at the Party School of the Communist Party of China Central Committee, pointed out that the government and state-owned companies and banks are taking the lion's share of interests. Some key industries, such as energy, finance and telecommunications, are monopolized by state-owned enterprises (SOE).

The job preferences of young people provide a further glimpse into the reality. College graduates are least interested in being factory workers, while they identified civil servant jobs as the most sought-after positions, according to a poll launched this year by SINA.com, a major portal website in China. Another survey conducted by YJBYS.com, a recruitment website, showed that young people voted finance, banking and IT industries as the most desirable areas of work.

Meanwhile, the administrative approval system gives the government paramount powers, which can encourage bribery and spawn corruption, Zhou said.

Whenever HNA wants to buy a new plane or add flights, the company must ask for government permission.

"The market should have the final say, rather than the government," said Chen. "This way of doing things really needs reform."

KEY OF CHINA'S NEW REFORMS

Experts believe that the key to China's new reforms is not simply how to make the economic pie bigger, but to realize fair distribution.

The benefits of reform and opening up should be enjoyed by all people. A first-come-first-served and winners-take-all situation should be avoided, said Zheng Yongnian, professor at National University of Singapore.

China currently has approximately 260 million migrant workers, mostly farmers who have left their families to forge a living in cities. About 10 million rural residents are expected to move to urban areas every year in the coming decade.

The newcomers generate huge consumption and investment demand, but the residence registration, or hukou system, prevents them from gaining access to education, social welfare and heath care in cities. Back in their home villages, farmers cannot sell land freely, but the land might be grabbed by local governments for development. In most cases, farmers only get a fraction of the market value as compensation due to the prevailing land policies.

Analysts noted that as the government pushes urbanization, it should break down the hukou system and give farmers more rights to the land as ways to solve public service inequality and ease public anger.

Chi said China's distribution of wealth and interests is still not fixed, which means the window stays open for reforms. Zhu Haibin, chief China economist at JPMorgan Chase & Co., said there are difficulties in pushing forward reforms. However, the political pressure is much less compared with 30 years ago and the government should take actual measures to deepen reforms on all fronts.

LEADERSHIP DETERMINATION

Judging by recent remarks by senior leaders, the central government is determined to make breakthroughs in reshaping the distribution of interests.

China must break the barriers from entrenched interest groups to further free up social productivity and invigorate creativity, said President Xi Jinping when visiting Hubei Province in July. The country must deepen reforms in major areas with "ever more political courage and wisdom" to surmount the institutional barriers that are restraining growth, Xi stressed.

Premier Li Keqiang has unveiled a new round of economic reforms since he took office in March. He acknowledged such reforms "will be very painful and even feel like cutting one's wrist," but he stressed that the central government would honor its commitments when addressing the Summer Davos Forum in September.

Under the new leadership, the State Council, or China's cabinet, has abolished a slew of administrative approvals and transferred supervision to lower-level government bodies to streamline governance and reduce government intervention in the market.

HNA's Chen hailed the measures. "The market in most circumstances can serve as an effective mechanism in distributing interests in a fairly Darwinian manner," he said.

Government reforms can bring about significant development dividends, said Zhou. Meanwhile, the public could also benefit from the government's increasing spending on social welfare, health care and other areas related to people's livelihood. In this sense, the government should shoulder a larger part of reform costs.

Chi said that there were two more ways to absorb the costs: one is through transforming SOEs into public welfare organizations and the other is via structural tax reduction. "The burden should not be put upon the middle-and-low income groups," he said.

"We should forge a social structure in which middle-income groups rise to be a buffer zone and the overall average income will double by 2020. 'Migrant workers' will become history, with all of them integrating seamlessly into cities. This kind of interest distribution is helpful for China to maximize the potential for growth and achieve social stability," Chi said.

(Zhou Zhou and Zhou Zhengping contributed to the story)