Reform advocates look to China's legislature for possible changes in banking, investment

BEIJING, China – Fledgling entrepreneurs in Liaoning province in China’s northeast received a Lunar New Year gift in January when the government scrapped fees of up to $1,600 for registering a new business.

The move was part of a stream of small changes in recent weeks aimed at carrying out the ruling Communist Party’s pledge in November to make the world’s second-largest economy more open and competitive. Authorities say it paid off quickly: the number of new companies registered in Liaoning in January jumped 50 per cent from a year earlier to nearly 5,800.

Now, reform advocates are looking to this week’s meeting of China’s ceremonial legislature, the National People’s Congress, for signs the ruling party is ready to tackle more ambitious and politically thorny changes.

President Xi Jinping and other leaders promised in a reform blueprint issued in November to give markets a “decisive role” in the economy, force state-owned companies to compete and open more industries to entrepreneurs.

“Xi Jinping has made clear this is about giving more power to the market,” said Andy Xie, an independent economist.

The annual meeting of the full legislature does little lawmaking but China’s leaders use it to showcase policy changes and set the tone for the year’s government work. The 10-day event draws thousands of officials from across China who sit through rounds of dry discussion sessions to pledge support for the latest initiatives.

Analysts expect no major initiatives but are looking for details of possible changes in banking rules, exchange rate controls and the status of state companies such as requiring them to hand over more profits to pay for social programs.

After a decade of a blistering expansion fueled by a trade and investment boom, Chinese leaders’ plans call for slower, more self-sustaining growth based on domestic consumption. Growth declined in 2013 to a two-decade low of 7.7 per cent and is expected to cool further this year.

“We think the government is ready to press ahead with substantive reforms and endure some sacrifice of growth,” said Citigroup economists Shuang Ding and Minggao Shen in a report.

The most pressing issue, entrepreneurs and economists say, is an overhaul of a state-owned banking industry that subsidizes state industry with cheap credit and pays savers low interest rates. Reform advocates say a relaxation of interest rate controls would result in more lending to competitive, profitable businesses and put more money in the pockets of household savers.

“Distortions in the financial sector are the most severe,” wrote economist Yiping Huang in a commentary last month in the business magazine Caixin. He said low-interest loans to state companies are a “tax in disguise.”

In Liaoning, changes that took effect Jan. 1 eliminated a minimum capital requirement for new companies, making it easier to set up barber shops and other small businesses.

A requirement for a separate business address also was scrapped, allowing entrepreneurs to work out of their homes. Fees that can total as much as 10,000 yuan ($1,600) were eliminated. The time required to obtain a business license fell from as much as one month to as little as 30 minutes.

On Monday, the chairman of one of China’s biggest independent automakers, Geely Holding Group, issued a statement appealing for an overhaul of the taxi industry. Li Shufu called for Beijing to break up a structure based on city government-owned monopolies and allow drivers to own their vehicles.

The current system is “an outdated relic of the planned economy,” said Li in a statement.

But Communist leaders have made clear the limits of change by declaring in their November reform plan that state industry will retain its privileged status as the core of the economy.

And even small steps to liberalize finance have drawn a hostile reaction from supporters of state industry, foreshadowing the possible opposition to bigger changes.

Last month, a commentator for state television criticized popular online finance ventures set up by companies such as Alibaba Group, China’s e-commerce giant, as “financial parasites.”

Alibaba’s Yu’ebao, launched last year, has attracted billions of dollars in deposits by paying interest rates of up to 6 per cent on mobile phone-accessible accounts — double the best return a state bank pays on money locked up in a one-year certificate of deposit. Online rivals such as Tencent Holdings Ltd. and Sina Corp. are launching similar services.

Anyone expecting abrupt “Big Bang” changes from the legislative meeting is likely to be disappointed. Communist leaders follow a time-tested strategy of patiently experimenting with a possible reform in a single city or province. They study the results before rolling out change nationwide.

“This will take at least five years,” said Xie. “China is like a supertanker. It turns slowly.”