Decentralization and supervision

In a set up where the banking sector was centrally controlled and monitored and most of the loans went to State-owned enterprises, investors at local level, both private and public, had to rely on shadow banking practices.

And once the 2008 sub-prime crisis hit China, the economy was faced with a new set of economic challenges. The subsequent fiscal stimulus package and shift in development strategy from the foreign direct investment model to boosting domestic consumption necessitated the introduction of a fresh round of decentralization to infuse new life into the Chinese economy.

In May, the State Council either removed the administrative approval requirements or delegated its power of administrative approval to lower-level authorities in respect of 117 items. These measures restricted approval authority of the National Development and Reform Commission.

Some of the crucial subjects that were removed from central approval list or delegated to local levels were related to sectors such as energy, rare earth mining and processing. In terms of business opportunities available for domestic and foreign investors, the new decentralization measures have made investments in projects such as oil, natural gas and petroleum projects, cold rolled steel projects, power projects procedurally less taxing and in the process more attractive.

The new rules have also led to the delegation of the State Administration for Industry and Commerce's powers to review and approve registration of resident representative offices for foreign companies and the verification of foreign companies to carry out manufacturing and operating activities in China to local bureaus for industry and commerce at the provincial level. The new measures have also done way with approvals from the Ministry of Commerce in cases where foreign companies entered into production sharing contracts with Chinese companies to exploit and develop oil, gas and coal-bed methane resources.

The new round of decentralization measures is also aimed at energizing the market by instilling new investor confidence in new industrialization, information, urbanization, and agricultural modernization, the so-called four modernizations.

But it has been observed that in China for many policies from top there is a counter policy at the local level. Therefore the central government will have to undertake political innovations and establish a new set of institutions to upgrade and facilitate supervision and management of the Chinese economy. The fact that these measures are bound to have a direct and indirect impact on the issues related to governance and social management make the task even more daunting.

The success of the latest decentralization measures will depend to great extent on the new leadership's ability to harmonize economic decentralization and political supervision.

The author is assistant professor at Indian Institute of Management, Kozhikode and adjunct fellow, Institute of Chinese Studies, Delhi.

(China Daily 11/05/2013 page9)