China Mulls Restructuring

China has been attempting to restructure the State Council, its central cabinet, since reform and opening up were launched by Deng Xiaoping in the late 1970s to turn the command economy into a market oriented one.

The coming National People's Council, due to begin on 5 March, is expected to see the kickoff of yet another attempt. Given the depth of the special interests arrayed against change, while some reforms may be on the cards from a new and yet untested government, the odds are not good.

Six major restructures have occurred since 1982 to dismantle ministries running industrial production or to spin off their business operations. For instance, there are no longer ministries of electricity, petrochemicals or machinery industries. The People's Bank of China (PBOC) has spun off all of its commercial banking operations to remain the country's central bank. On the other hand, to cope with the development of the market economy, new departments have been set up under the State Council, such as the three top financial regulatory bodies.

But today the state still monopolizes businesses such as railways and tobacco. And because of the rapid change in the social and economic environment, the functions of some government departments increasingly overlap.

The new restructuring is expected to put the ideals of incoming Premier Li Keqiang into practice. The mild-appearing Li, nonetheless a protégé of the onetime "iron prime minister" Zhu Rongji, is said to strongly believe in "small government, big market and society" and reform. After the 18th Party Congress in November, he publicly said he favors a "service-type government" whose role is to serve society and economic development rather than to be master of them. Therefore, the general aim of the restructuring will be to "optimize the structure of the State Council and improve its efficiency."

Accordingly, the General Administration of Press and Publication and the State Administration of Radio, Film and Television likely will be merged into a Ministry of Culture. The State Administration for Religious Affairs and State Ethnic Affairs Commission could be merged into another super ministry overseeing ethnic and religious affairs.

In view of the economic impact, however, it would be more interesting to see whether a super ministry of energy would be set up to supervise oil, coal and electricity. At present, there is a Bureau of Energy under the National Development and Reform Commission. But it is a sub-ministerial-level body, too low in rank to supervise big state energy firms, some of which rank the same or higher - after all, China is still a hierarchical society.

Lack of coordinated supervision has resulted in some awkward problems. For instance, electricity charges are strictly regulated by the government. But coal prices are decided by the market. Many electricity plants are coal powered. Hence increases in coal price will hurt the profitability of power plants as they cannot increase their charges accordingly. At the end of each year, power plants must negotiate with coal producers for the coming year. Such negotiations are described as "battle-like," particularly because of the lack of a higher authority to mediate and coordinate. Coal and electricity are under the supervision of different authorities, each of which certainly would only serve the interest of the industry under its supervision.

Likewise, the oil industry is dominated by the three giants, PetroChina, SinoPec and CNOOC. There is a need for coordinated supervision. But the establishment of a super ministry of energy may not be as easy as it appears because it would hurt certain vested interest groups.

Wide attention has also been given to whether the mammoth Ministry of Railway would be merged into the Ministry of Transport, the most difficult reshuffle. That is because the Ministry of Railway operates like an independent, quasi-military kingdom that not only monopolizes the country's railway transport but runs its own police force, procuratorates and courts of law. It has never been touched in any previous reform.

Deadly accidents and exposure of huge corruption cases involving railway officials in recent years including that of former railway minister Liu Zhijun, who is awaiting trial, have prompted reform calls. Thus the upcoming restructuring seems to offer a good opportunity.

However, scrapping the Ministry of Railway would require a miniature Deng-style reform. Business operations would have to be spun off and taken over by a big SOE. Law enforcement would have to be dismantled or handed over to local government. Such radical change would inevitably hurt vested interests. Thus, compared with the establishment of a super ministry of energy, scrapping the Ministry of Railway and merging its regulation and supervision functions into the Ministry of Transport seems to be even more like a mission impossible.

Because of this, it seems unlikely that a super ministry of transport can be established soon. Reform will not take place overnight, but proceed step by step. For instance, the ministry might hand over law enforcement first and then spin off business operations one after another. Allowing some rail lines to go public like the Hong Kong-listed Guangshen Railway Co. Ltd. would create good opportunities for investors.

It also remains to be seen whether the restructuring would affect the State Tobacco Monopoly Administration, which is also identical with the China National Tobacco Corporation and which acts as the regulator and business operator for China's tobacco industry, producing and selling cigarettes and other tobacco products while overseeing industry control. This is often cited by critics to question China's sincerity in tobacco control.

Once more, huge vested interests are involved. China's tobacco industry contributed nearly RMB 500 billion in 2012 to state coffers, accounting for 6 percent of fiscal income. More than 1.3 million farmer households live on growing tobacco and 20 million employees are in tobacco-related businesses. It may not be easy for the government to give up its monopoly (even by now, the industry has not opened to private or foreign investors). In all, although high expectations have been placed on the restructuring, it is more realistic to say that Beijing will take a gradualist approach. It is unlikely to pursue ambitious goals simultaneously. More likely, it will proceed with the easier tasks (forming a super ministry of culture) and outlining plans for the tougher ones (reform of the railway). Especially if one considers that Li Keqiang needs time to consolidate his position and power after taking up the premiership.

The 18th Party Congress set an ambitious goal to double both the country's GDP and people's incomes by 2020 from 2010. According to the National Bureau of Statistics, China's 2010 GDP was RMB 39.8 trillion (averaging RMB 6.46:US$1 in that year), supplanting Japan as the world's second largest economy. If the goal is attained, China's GDP will grow to some RMB 80 trillion by 2020. This means average annual GDP growth should be higher than 7.5 percent.

Growing 9.7 percent in 2011 and 7.8 percent in 2012 respectively, China's GDP hit RMB 51.93 trillion by end 2012, or about US$8.3 trillion (at RMB 6.30:US$1), according to the National Bureau of Statistics' preliminary calculations. Given the economy's huge size, keeping it growing by over 7.5 percent per year over the next eight years will not be easy. Needless to say, boosting people's incomes is even a bigger challenge.

(Steve Wang is the chief China economist and research director for the Hong Kong-based REORIENT Securities Ltd.)