China's Trapped Transition_ The Limits of Developmental Autocracy - Minxin Pei [6]
In the financial sector, reforms that would have transformed China’s dominant state-owned banks into commercial banks have made little progress. Despite the legacy of huge nonperforming loans in these banks, the government continues to use them to support unprofitable and even bankrupt SOEs and fund large fixed-asset investments that can inflate growth.37 As a result, mounting bad loans in state-owned banks, equivalent to more than 40 percent of GDP, threaten the country’s entire financial sector.38 The government’s reform of SOEs has also entered a difficult period.39 The rising level of unemployment, a direct result of SOE reforms, has forced the government to slow down the restructuring of SOEs out of fear of exacerbating incipient social unrest.40 Although many small and medium-sized SOEs were privatized in the late 1990s, the state maintained its ownership stakes in almost all large SOEs and is obliged to maintain their life support, thus causing further deterioration in China’s fiscal health.41 Genuine privatization of these large SOEs has yet to occur.
In addition, a quarter century of reform has not succeeded in breaking down state-owned monopolies in most key industries, such as banking, telecommunications, civil aviation, energy, rail transportation, tobacco, and wholesale trade on agricultural inputs and products. These markets remain distorted and inefficient. Barriers to market entry continue to be high because of political interference from local governments, which rely on the obstacles to protect their vested interests in local industries that constitute sources of local fiscal revenue and political patronage.
Toward the end of the 1990s, despite the proreform rhetoric and publicly announced ambitious goals of the Chinese government, the costs of the lagging institutional and structural reforms began to be reflected in the performance of the Chinese economy. In a wide-ranging study of the Chinese economy conducted in 2002, the Organisation for Economic Co-operation and Development (OECD) warned that “the important engines that have driven China’s growth in the past are losing their dynamism” because “China’s economy has become badly fragmented and segmented, and this has led to increasing under and inefficient utilisation of resources.”42 Among the critical weaknesses cited by the OECD study were anemic growth in the rural sector, inefficiency in SOEs, and weakness in the financial system. Such structural weaknesses contributed to the considerable slowdown of the Chinese economy in the late 1990s.43 An International Monctary Fund (IMF) study of the economy in 2003 found similar structural weaknesses and warned that, because the one-off productivity gains from earlier reforms had already been realized, China’s continual growth would depend on new and more difficult structural reforms.44
Even official Chinese statistics, which tend to be inflated, show that the double-digit growth in the early 1990s fell to the 7- to 8-percent range in the late 1990s. The real rate of growth is likely to have been even lower.45 Although China’s growth accelerated in 2002-2004, it was driven primarily by state-led fixed-asset investment.46 Such growth, occurring in a context of a lack of structural reforms, would likely exacerbate the distortions in the economy. Wu Jinglian, China’s most respected economist, repeatedly warned in 2004 that, because economic growth was driven by excessively high investment rates (more than 40 percent of GDP), this type of growth was low quality and unsustainable and would create new problems.47
The Lack of Political Reform
Signs of a trapped transition also permeate Chinese politics. It is worth noting that all the important institutional reforms in the political system—such as mandatory retirement of government officials, the strengthening of the National People’s Congress, legal reform, experiments in rural self-government, and loosening control of civil society groups—were all conceived and implemented in the 1980s—before China’s economic take-off.