Deepening reforms expected to vitalize market

As a young company, China's largest private shipbuilder, Rongsheng Heavy Industries, which just celebrated its 8th birthday last week, did not expect to brace the winter of its industry so soon.

The company's operating revenues for 2012 stood at 7.9 billion yuan (1.3 billion U.S. dollars). down 50 percent year on year, forcing the company to downsize its employees from 40,000 to 8,000 in two years, according to company president Chen Qiang.

The number of shipyards surged from hundreds in 2000 to more than 3,000 by 2007, when shipyards, especially those with private investment like Rongsheng, exploded as a symbol of the country's booming economy, leading to severe overcapacity.

The shipbuilding oversupply is only the tip of the iceberg of China's overcapacity. Other heavy industry sectors, and even strategic emerging industries, such as wind farms and photovoltaic plants, have also seen serious overcapacity, which experts believe is caused by too much involvement from local governments.

"Because of the prevailing role of local governments, the current overcapacity situation has deviated from normal levels under the market economy," said Feng Fei, head of industrial economic research at the Development Research Center of the State Council, China's cabinet. "The market's role in controlling production capacity and restraining excessive capacity has malfunctioned."

According to the Ministry of Industry and Information Technology, the capacity utilization rate of industrial enterprises was only 79 percent in the first half of this year. A capacity utilization rate of less than 70 percent is dangerous and could trigger vicious competition, according to experts.

Chinese Premier Li Keqiang said at a video conference on Nov. 1 that the central government has made transformation of government functions a major work agenda item in order to release more market vitality.

He urged local governments to transform their administrative functions and press ahead with institutional reforms, saying these efforts will better balance the government's relations with the market and society.

CALLS FROM THE MARKET

In the 2011-2015 development plans of 32 provincial-level areas of the Chinese mainland, 16 provinces, municipalities or autonomous regions included iron and steel production as a key industry, and 30 of them emphasized developing new energy, both of which are already oversupplied.

Local governments have been attracting large industrial projects to boost local gross domestic product (GDP) as well as tax revenues. Meanwhile, investors prefer government-targeted sectors to ensure approval from local governments, which has worsened the oversupply problem.

Chi Fulin, director of the China (Hainan) Institute for Reform and Development, said the Chinese government's bailout efforts following the 2008 global financial crisis contributed greatly to the world's economic recovery, but they also aggravated government interference in the market.

Apart from industrial overcapacity, local governments' excessive involvement in the economy has also led to a fragmented market and regional protectionism.

An official who asked not to be named said that some coal-rich provinces tried to prevent their coal from being sold elsewhere during a period of power shortage in 2011, and later ordered companies in their provinces to purchase locally-produced coal this year, which has seen coal oversupply nationwide.

Without an overall development view, these provinces have encountered overlapping development with huge costs and resource waste.

Li Yizhong, chairman of the China Federation of Industrial Economics, said primary energy consumption last year totaled 3.62 billion tons of standard coal, accounting for 21.6 percent of the world's total. Per capita GDP energy consumption was twice the world's average level, and four times the average levels of developed countries.

This kind of development has caused a deteriorating environment, which will hamper the economic development and social stability of the country, Chi said.

"The unprecedented heavy smog in east and central China this year has sounded the alarm," he said.

Air pollution has been visible in many regions of China. In an extreme case, dense smog shrouded major cities in northeast China last month, closing schools, highways and airports, with visibility of less than 10 meters in certain areas.

REFORMS IN PROGRESS

Prompted by the various problems occurring in the market, reforms have steadily been put forward.

Over the past two consecutive years, the Chinese government lowered its GDP growth target to 7.5 percent, shifting its focus from fast development to economic restructuring.

During times of global economic downturn, the government would rather encourage domestic consumption than release a stimulus package, indicating tolerance for slower growth during the reform process, said Xu Shaoshi, director with the National Development and Reform Commission.

According to Xu, of the nation's 7.6 percent GDP growth in the first half of this year, 3.4 percentage points were boosted by consumption, a positive sign that the country is depending more on domestic consumption, rather than exports.

To further release market vitality, the central government has vowed to reform government functions, and has scrapped or transferred 334 administrative approval rights.

On July 20, the People's Bank of China removed the floor for lending rates, another important step in the reform process to revitalize the market.

More hopes for deepening reforms have been pinned on the upcoming Third Plenary Session of the 18th Communist Party of China (CPC) Central Committee. Chinese president Xi Jinping, also general secretary of the CPC Central Committee, said on Saturday that a blueprint for comprehensive reform would be put forward at the plenary session.

Feng Fei said the new administrative system should give the market a bigger role, and advised the government to strengthen information disclosure to better serve the market.

"Governments at various levels should restrict and administer investment through energy saving, environment protection and production safety criteria, instead of business scale and profitability, which investors themselves definitely care about," he said.