Remaking economy tops new leadership's agenda

CHANGES NEEDED

Chinese leaders seem aware of the risks.

The government has for years called for a transformation of the country's development pattern to make its economy more efficient, innovation-driven and reliant on consumption.

While the sheer size of China's economy makes it difficult for any changes to take hold quickly, more concrete moves should be made to facilitate that shift, economists have urged.

A major priority of the new government should be improving the country's scientific and technological prowess to increase productivity and offset rising labor costs, said Wang Tongsan.

Authorities have been stressing the role of innovation to boost efficiency. But the drive faces significant obstacles: an education system that values conformity more than individual innovation, a business environment that lacks protection of intellectual property rights, and a financial system that often fails to support the funding needs of private firms.

Authorities should create a level playing field for businesses, better protect intellectual property rights and reform the education system to cultivate innovation, in the view of Peter Fung, global chair of KPMG's Global China Practice.

The government must further increase spending on education and training so that China's manufacturing sector can move up the value chain, added the NDRC's Zhang.

Since China's rural labor surplus has not been exhausted, reforming the "hukou," or household registration system, should also be a priority to boost China's ongoing urbanization campaign and drive consumption-led growth, according to economists.

The hukou system splits China's 1.3 billion people into rural and non-rural residents, preventing rural migrants to cities from enjoying the same social welfare to which urbanites have access.

To fund public services for migrant workers, the government needs to overhaul its taxation system and social security network, said Ha Jiming, managing director of Goldman Sachs (Asia) investment management division.

State firms should be obligated to pay more dividends into government coffers to address the fiscal demand, he added.

To let the financial system play a better role in tapping the growth potential, the government should improve the efficiency of capital through better credit allocation, according to Kroeber.

All these issues have been acknowledged in a recently released government report that outlines this year's work. But whether and how they will be resolved will rely on the resolution of the leaders.

"The reforms means that the government needs to curtail its own powers. Difficulties will be greater than we can imagine," Zhang said.