Now, It's Reform Or Bust In Beijing

The details of China's bold plan are starting to emerge

After months of political intrigue and closed-door policy debates, Beijing's new technocrats face a daunting task: figuring out how to implement the ambitious economic agenda unveiled by new Premier Zhu Rongji in late March at the National People's Congress. The objective is to keep China's economy growing at an 8% clip at a time when consumer spending is drying up and the rest of Asia is in crisis. What's more, in just three years, Zhu wants to overhaul China's financial system, state industries, and bureaucracy--goals that have frustrated reformers for decades. It's "no easy job," concedes Vice-Premier Wu Bangguo in an interview with BUSINESS WEEK.

Wu provided an early look at many of the details of China's bold new plan. The main thrust is a big boost in public spending--at least $30 billion in new funds this year alone, says Wu, 56, who is second only to Zhu in setting economic policy. Most of this investment, to be financed largely through greater bank lending and public borrowing, will be in housing and infrastructure. But the plan also calls for opening the economy to new competitors by shrinking Beijing's role in key industries and boosting the private sector.

BAD LOANS. The pace set by Zhu and his deputies is breathtaking. By yearend, they aim to end China's system of subsidized housing. More than 4 million civil servants will lose their jobs when one-quarter of China's ministries and commissions are eliminated. Within three years, Zhu expects to restructure the nearly insolvent banking system and wipe out hundreds of billions of dollars in bad loans. Economists doubt if such a transformation can be achieved so quickly. But clearly, China's new leaders are poised to dismantle much of what's left of central planning.

In some areas, the government intends to step up programs already under way. Beijing plans to increase spending on railways by 25%, to $5.4 billion, and hike its already masssive investments in new phone lines. Elsewhere, Zhu is speeding up reforms that were to be phased in over many years. Take the drive to end subsidized housing by yearend. Beijing wants more Chinese to own their homes, partly because new homeowners invest an average of $7,000 to spruce them up. But most Chinese pay only about $5 a month for employer-owned flats, so few are buying. The plan, says Wu, is to hike rents as much as fourfold. Workers then will be offered raises that can only be used toward buying their flats. Also, Beijing will increase the supply of mortgages and low-cost housing.

Sweeping bureaucratic reforms also should stimulate growth. Currently, companies owned by bodies such as the Posts & Telecommunications Ministry (MPT) dominate industries they regulate. As a result, MPT-controlled China Telecom Ltd. has few competitors. But the MPT will be folded into another ministry, reducing its power, and China Telecom will sell noncore businesses, such as satellite services. "China Telecom is in a position of state monopoly," says Wu. "We are going to break that monopoly."

In another key rupture with tradition, Wu says Beijing will "actively promote the nonstate sector"--meaning private enterprise--and service industries. These sectors now are seen as critical sources of jobs. Foreign investment also is likely to be liberalized. Beijing's decision to allow Eastman Kodak Co. to take over ailing Chinese film manufacturers is seen as a breakthrough.

Some still think Zhu isn't going far enough. Controversial plans to create giant state-owned business groups are going ahead. And there are doubts the Communist Party is really ready to cede so much control. But if Zhu's team succeeds, China will have made a huge leap toward a true market economy.

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