BEIJING (Reuters) - Reform-minded members of China’s Communist Party hierarchy this week argued for far-reaching changes to the country’s financial system in order to help fix broader social problems, like a divisive gap between rich and poor, and ruin of the environment.
Making their pitch at a gathering of the twice a decade party congress which will climax on Thursday when a new leadership line-up is unveiled, the advocates of change warned China’s economic star would fade without pro market reforms.
Contained in otherwise bland statements meant to project an image of unity, the reformers struck at the heart of state economic planning by urging for market forces to be given more influence over credit allocation, that could increase for example innovation in technology, and for restrictions on cross-border capital flows to be relaxed.
To argue their case, the reformists strove to connect their agenda, sometimes tenuously, to broader goals laid out in outgoing President Hu Jintao’s keynote speech to the opening of the Congress last Thursday.
Addressing the Congress shortly after Hu, the deputy governor of the People’s Bank of China (PBOC) and director of the State Administration of Foreign Exchange, Yi Gang used the president’s words to remind the party that the evolution of the financial system was pivotal to the Chinese people’s future.
“We all know that after 30 years of development, the gap with developed countries in terms of the food we eat and the clothes we wear isn’t very large,” Yi said.
”Where there’s still a pretty large gap is in terms of air quality, water quality, and other kinds of pollution and environmental problems.
“The construction of a civilised natural environment - this actually involves an incredibly broad range of areas, including how we shape our financial system.”
Buried in their carefully worded statements, reformers made veiled calls for further liberalisation of interest rates, which could increase private businesses access to capital, as well as increase interest income for China’s vast population of savings account holders.
Guo Shuqing, chairman of the China Securities Regulatory Commission, zeroed in on Hu’s call for the development of “multi-level capital markets”, arguing that such development would enable China’s economy to move up the value chain.
“The real economy is still focused on low value-added production. It is intimately related to the fact that our financial system is not developed. The real economy lags behind because financing is difficult and expensive,” Guo told the Congress.
Reformers hope to build on some recent progress. China has launched a high-yield bond market, and granted banks more flexibility to set loan and deposit rates, while there are also plans for the country’s domestic commodities exchange to begin trading crude oil futures soon.
According to industry sources, the Shanghai Futures Exchange has sounded out international trading houses which could be allowed to crude oil futures without having a presence in China.
“The speed of internationalisation is going to accelerate over the next few years, both for foreign firms trading into China and Chinese companies going into overseas exchanges,” Lili Wang, general manager at Nanhua Futures’ International Department, told Reuters.
Opposed to reform are powerful vested interests who benefit from the status quo.
Officials from the big state-owned firms, in their speeches to the Congress, also drew on Hu’s speech to argue for the preservation of their near-monopoly position, while calling for more investment in their companies.
Chongqing mayor Huang Qifan, widely seen as a conservative associated with disgraced former Chongqing party secretary Bo Xilai, highlighted the dangers of financial liberalization by pointing to failings in the U.S. financial markets that led to the global financial crisis.
“Everyone has seen what has happened in Western society during this crisis,” Huang said. “But it did not happen in China and will not happen.”
That, Huang said, was because the Communist Party promotes “the scientific outlook on development”, referring to Hu’s vision that the benefits of economic growth should be increasingly shared with workers and farmers.
In contrast, advocates of reform have made scant mention of the vague philosophy, which Hu sees as his lasting legacy.
At a media briefing on Sunday chaired by central bank governor Zhou Xiaochuan, not a single reference was made to any communist theories.
Zhou, traditionally a vocal advocate of capital market reform, suggested the pace of interest rate liberalisation should be gradually accelerated.
“If I had to choose between a faster or slower pace, I would say a moderate pace is best,” said the central bank chief. “However, we have picked up speed.”
Additional reporting by Fayen Wong and Ben Blanchard; Editing by Simon Cameron-Moore