China must embrace market economy: World Bank

(EconomicTimes) : China's economy is near a turning point that demands that it relax its grip on industry and move towards free markets, the World Bank said on Monday as it forecast the country would become the world's largest economy by 2030.

Calling on Beijing and its incoming leaders to overhaul the structure of the world's No. 2 economy to keep income and productivity rising in years ahead, the World Bank urged the government to have the will to bring about change.

Without new policies to ease income inequalities and foster sustainable domestic consumption, China could face social stresses at home while over-reliance on further building its export brawn could create unmanageable trade tensions abroad.

"As China's leaders know, the country's current growth model is unsustainable," World Bank President Robert Zoellick said in Beijing at the launch of the "China 2030 Report".

"This is not the time just for muddling through. It's time to get ahead of events and to adapt to major changes in the world and national economies."

The 468-page report had six broad recommendations for Beijing: strengthen a market-based economy, foster innovation, go "green", provide social security for all, improve the fiscal system and seek mutually beneficial relations with the world.

After growing an average annual 10 percent in the past 30 years and lifting over 500 million people out of poverty, China's economy may slow to grow just 5 percent a year by 2026-2030, from 8.5 percent in 2011-2015, the Bank said. The challenge for Beijing is to keep the slowdown smooth.

"Even if China's growth rate slows as projected, it would still replace the United States as the world's largest economy by 2030," the report said.

Among other specific recommendations, it urged Beijing to commercialise banks, allow interest rates to be set by the financial market, develop its private sector, protect farmers' rights, and cut local governments' dependence on land revenues.

These changes would produce a China that is more socially stable and equal in wealth distribution, relies less on exports and investment for economic growth, and more on domestic consumption that can be sustained, the Bank said.

MIDDLE-INCOME TRAP

A restructured economy would help China to make the leap to a high-income nation from a middle-income one, and thus avoid the "middle-income trap", where a country's income and productivity growth stall after its income hits a certain level.

In a worst-case scenario, China mismanages its slackening economic growth and an abrupt slowdown sets off fiscal and financial crises that jeopardise social stability.

Alternatively, China successfully remakes its economy and its income grows an average of between 6-7 percent in the next 20 years, the Bank said.

Rapid urbanisation that adds the equivalent of more than one Tokyo or Buenos Aires to China's urban population each year would aid the economy, the Bank said, raising the share of urban residents to near two-thirds of the population from one-half.

But such solid growth is not without a price. China's rising trade clout would fuel trade tensions as its share of the global export market rises to 20 percent by 2030, almost double the peak of Japan's market share in the mid-1980s.

" China's current trajectory, if continued, would cause

unmanageable trade frictions well before 2030 ," the report said. Other factors working against China are its shrinking labour force and a greying population that ages before it gets rich.

China's ratio of elderly residents to the young would double over the next 20 years to hit a level seen in Norway and Netherlands today, the Bank said, adding the labour force would start contracting after 2015.

"The reforms that launched China on its current growth trajectory were inspired by (late former leader) Deng Xiaoping who launched who played an important role in building consensus for a fundamental shift in the country's strategy," the report said.

"China has reached another turning point in its development path when a second strategic, and no less fundamental, shift is called for."

President Hu Jintao and Premier Wen Jiabao are scheduled to hand over power to a new leadership in the late autumn, by which time China should be well on course for its slowest full year of growth since they took office a decade ago.

Zoellick acknowledged that the World Bank and Beijing had disagreed over the contents of the report, which is prepared by the Bank and the Development Research Centre, a top Chinese think-tank that advises China's cabinet, the State Council.

But Zoellick said the report, as requested by Beijing, "stops short of being overly prescriptive".

"The report is realistic. Reforms are not easy. They often generate pushback," he said. "We have tried to recognise obstacles to reforms, suggest sequencing and quick wins, steps that can make reforms easier to implement."

The thrust of the World Bank's report is similar to one released by the International Monetary Fund in November that urged Beijing to free its financial markets to give investors, commercial banks and the central bank more autonomy.

But Beijing criticised some of the IMF's suggestions, saying they were not comprehensive and objective enough.

Dong Tao, an economist at Credit Suisse in Hong Kong, warned investors against thinking Beijing would adopt all of the World Bank's ideas, especially with regards to privatisation.

"As an economist, I'm a big fan of market-based economies. But Beijing needs to balance what is economically good with what is politically and socially practical," he said.