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Economy

China struggles to transition to market economy

TOKYO -- China is facing an uphill battle in its efforts to become an internationally recognized market economy, as local governments continue to put up vehement resistance to the country's badly-needed structural reforms.

"The market mechanism has become ineffective," Lian Weiliang, deputy head of the National Development and Reform Commission, frankly acknowledged, referring to the acute overcapacity in steel, coal and other industries.

The NDRC is in charge of formulating and implementing macroeconomic policies and other functions. Lian was speaking at a press conference at the State Council, China's cabinet, on Aug. 19.

He also said, "To cut excess capacity, we need both the market and the government ... and we need to solve (the overcapacity problem) with the help of government."

Lian's remarks do not mean that the Chinese government is rejecting a market economy.

In fact, President Xi Jinping's administration declared, at a key meeting of senior Communist Party officials in November 2013, that it would push ahead with reforms while emphasizing the role of the market.

It was the first time the Xi administration had unveiled such an important medium- and long-term economic policy.

Market economy status

The administration is also calling for the Chinese economy to be granted "market economy status" at the World Trade Organization, the Geneva-based watchdog on international commerce.

China joined the WTO in 2001. China's WTO accession protocol contains a provision that allows other WTO members to treat the country as a non-market economy. But this provision is set to expire in December 2016.

China says it should be automatically granted market economy status globally at the end of this year under the WTO rules. But Japan, the U.S. and the European Union plan to decide individually whether to recognize China as a market economy.

Granting China market economy status will make it difficult for Japan, the U.S. and other countries to impose anti-dumping measures on Chinese companies for dumping goods, or selling goods at unfairly low prices, in their markets.

So why does the Chinese government now emphasize the limits of the market? Some of Lian Weiliang's remarks at the Aug. 19 press conference help answer this question.

Lian said, "Some regions have completed their annual tasks. However, progress is not balanced among regions. A few regions that were slow in launching the work of cutting overcapacity need to quicken their pace."

One recent report provides clues about the meaning of the remarks by Lian.

In late July, the National Academy of Development and Strategy at Renmin University of China released a research report on Chinese "zombie" companies, which the Xi administration is seeking to kill as part of structural reform efforts.

Zombie companies, or companies that continue to survive despite bleeding red ink, have emerged as the most serious drag on the Chinese economy. Steel- and coal-related firms are at the heart of the issue.

A particularly important part of the research report by the National Academy of Development and Strategy is the institution's analysis of why zombie companies exist.

"Local governments give 'blood transfusions' in various forms to zombie companies teetering on the brink of bankruptcy," the report says.

Such "blood transfusions" include the cases of local governments putting pressure on financial institutions to extend loans to companies with close ties to themselves, preventing such firms from being forced to exit the market.

In China, the central government distrusts local governments as it seeks to resolve the problem of overcapacity. That is why the central government is now focusing on on-site inspections to see if facilities have actually been removed.

Killing zombies

The Chinese have saying: "The higher-ups have policies; the lower levels have countermeasures." Local governments are now taking countermeasures to cope with the central government's policy of killing zombies.

During its years of double-digit growth, China could afford to maintain its inefficient economic systems. But those days are gone. China can no longer afford to have excess facilities as its economy shows no sign of stopping slowing down.

Nevertheless, local governments' resistance to painful reforms remains strong. Highly alarmed by the current situation, Lian stressed the need to avoid "bad money driving out good money."

Unlike his predecessor Hu Jintao, Xi has significantly consolidated his grip on power. There are also growing concerns in the international community over Xi's high-handed political style.

Ironically, the Xi administration's strong political position may help break the deadlock over the country's overcapacity problem.

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