The market should be given a bigger role in cutting overcapacity and shutting inefficient zombie firms in China, a top macroeconomic policymaker has said.
Top-down administrative measures to dictate capacity cuts can achieve quick fixes but they are not long-lasting, Mr Yang Weimin, vice- minister of the Office of the Central Leading Group for Finance and Economic Affairs, said yesterday.
What China needs is a mechanism where the market is allowed to play its role in determining the amount and type of goods and services required, he said. This could take the form of corporate restructuring such as mergers and acquisitions, or even bankruptcies.
To do so, Beijing needs to "significantly reduce the government's involvement in allocating resources directly", Mr Yang said. This is the ultimate goal of the string of government reforms addressing structural imbalances, he said as part of a panel discussion.
But inertia at the local level for fear of social problems due to massive layoffs has been slowing the process.
Mr Yang was speaking at the China Development Forum, a high-level economic conference attended by senior officials, global business leaders and top economists.
He told the meeting that China is currently faced with both overcapacity and insufficient supply. Throughout the years of rapid growth, China has been producing goods for low-end consumption.
Today, with a growing middle class, the demand for higher-end products has surged. Yet, production could not keep up with changing consumption patterns, resulting in an overcapacity in low-end goods.
Mr Yang noted that there are still many mechanisms that need improvement, such as state-owned enterprises reform and fiscal and taxation system reforms.
The coal industry, for example, could not operate in a market-oriented manner simply because of the sheer number of state-owned players, which are largely inefficient and less profit-oriented.
As for shutting down zombie companies, the local governments will not be proactive in pursuing the policy if there are no major changes in the taxation system. For now, eliminating these companies will mean a reduction in tax revenues for the local governments.
Earlier this month, Premier Li Keqiang said in a speech at the National People's Congress that he would tackle "zombie enterprises" that are heavily indebted but kept afloat by loans from local governments and banks.
Speaking at the same session as Mr Yang, American economist Michael Spence said China urgently needs to speed up reforms in the financial system. "If you want an innovative, dynamic economy, you need the market to be decisive, you mainly need entry and exit."
This means the absence of market barriers, the ability for profitable companies to get financing, and the willingness of the government to let unprofitable companies fail or be restructured, he added.