China Must Give Market Bigger Role as Growth Slows, Chamber Says

China’s government must reduce its role in the economy and allow market-driven change to ensure sustainable growth, according to a report by the European Union Chamber of Commerce in China.

“China could previously make a choice between economic restructuring and maintaining growth,” Davide Cucino, president of the chamber, said at a briefing on its annual position paper in Beijing yesterday. Now “the only way to get sustainable growth is to carry out structural reform.”

Plans for a zone for trade and investment reforms in Shanghai and July’s move to deregulate lending rates indicate the new leadership of President Xi Jinping has a “serious approach” to carrying out market-driven change, Cucino said. For now, the government has a conflict of interest as both owner and regulator of businesses and its banks are propping up unproductive state enterprises and financing wasteful projects, the chamber said in its report.

“In the past we had the experience to have a lot of wording about this and that change but not really actions,” Cucino said. “This time it looks like there is a serious approach even because I believe, and we believe, there is not really a big choice. We are in a no u-turn situation.”

The chamber recommended further interest-rate liberalization, more independence for regulators, a greater role for the private sector, and that more resources be allocated to ensure compliance with regulations.

Incentivize Inefficiency

“Market price signals -- in particular higher interest rates -- would restrain current high levels of credit growth and incentivize efficiency,” the chamber said in its report.

The EU is home to some of the biggest foreign companies doing business in China, including Wolfsburg, Germany-based carmaker Volkswagen AG, Munich-based engineering company Siemens AG, London-based bank HSBC Holdings Plc, Deutsche Bank AG, and Danish wind-turbine maker Vestas Wind Systems A/S.

Details of any economic policy changes are unlikely to emerge from a meeting of the Communist Party’s Central Committee later this year even as that gathering may provide a broad framework for the direction of market-driven change, Cucino said.

China’s decelerating growth and excess capacity in some sectors is cutting company revenues and profits “dramatically,” Cucino said.

“There is a new business environment you need to face,” he said. “Going to China to invest thinking that you will have the same kind of profit, the same kind of revenue that you had in the past is not possible anymore.”

China is an increasingly important part of global strategy for 64 percent of European companies, down from 74 percent in 2012, according to a survey released by the chamber in May.

“This is still one of the best if not the best place to be,” Cucino said.

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