A new formula for China's next 5-year plan

              Nikkei Asia Review, 16/10/2015,

中国需要一个像样的经济衰退;

政府部门太多, 审批太多, 企业家被压得喘不过气来

Last month, I took a business partner to visit a relative who runs a small business in Shenzhen. My relative had been written about in the local media as a successful entrepreneur. But candid discussions quickly revealed that he is struggling: profits are elusive, debts are piling up and the outlook for his business is dire.

     He works 365 days a year, spending valuable time on each one entertaining bankers and officials. Due to a lack of sleep and exercise, he has gained a lot of weight and looked exhausted.

     He invited us to meet in the private dining room of a restaurant, but we were not the only group he was entertaining that night. He was first dining in an adjacent room with some public officials. Toward the end of our meal, he came back into our room to apologize: "These officials inspected my company today," he said, explaining that he was hoping they would grant him a certain categorization that would enable him to get a government subsidy.

     Whatever the original intention of China's many subsidy programs, in practice they distort corporate behavior. They are also fertile ground for corruption. Across China, millions of businesspeople work tirelessly under an inefficient system marked by a tedious approvals process, favoritism and corruption.

           Need for deregulation

With the Chinese Communist Party Central Committee's Fifth Plenum convening on Oct. 26, politicians would do well to consider ways to make life easier for millions of small businessmen like my kinsman.

     In the past few decades, small businesses have made a major contribution to the country's job growth, and their role will become more important in the future as the inefficient state sector faces up to its inevitable need to downsize. As Premier Li Keqiang ponders government priorities for the next five-year plan, which will be discussed at the plenum, nothing should stand out as much as deregulation and liberalization.

     The typical Chinese response to worries about an economic slowdown has been to cut interest rates and reduce banks' reserve requirements. Alternatively, the central bank announces plans to lend more to commercial banks in a Chinese form of quantitative easing, or the government boosts spending on infrastructure.

     These are only pragmatic responses because certainly it would be a much harder task to cut taxes, reduce red tape or minimize official harassment of business.

     In many cities in China, it takes months to have a business registered. I experienced this firsthand in Guangzhou and Chongqing a couple years ago. An endless series of hoops makes you want to give up halfway through the process, which I did. Doing almost anything requires official approval, and it is difficult to get straight answers. This endless ambiguity is a major killer of business appetite and efficiency.

In a widely publicized incident in April, Premier Li ridiculed a police department's demand that a man prove his mother was indeed his mother when listing her as an emergency contact on an application for overseas travel. In September, Li mocked -- and blocked -- plans by bureaucrats to establish a government-backed association for manicures that would require all nail shops to gain accreditation.

     In the 1980s and even the 1990s, China's economy took off mainly because of liberalization. When the shackles of communist ideology were discarded, there was no red tape yet in place to throttle those who were brave and daring.

     Since then, however, layer upon layer of mostly unnecessary rules have been imposed to slow things down, add costs to doing business and create room for dangerous liaisons between businessmen and public officials. In May, Li lambasted junior ministry officials for erecting roadblocks to the implementation of top-level decisions.

     Every year, government departments across the country proudly announce the annulment of thousands of rules, policies and decrees to show that they are pro-business. Unfortunately, a larger number of new rules quietly creeps in to take their place. One businessman complained to me that he much preferred working with the old rules. "I love those because at least I am familiar with them," he said. "It is a challenge to have to constantly learn new rules and find ways to deal with them."

            Better than it looks

Growth in China is certainly slowing. But if the country has to endure a recession or depression, the best possible time is now. At the moment, despite the recent market roller coaster, the government still commands popular support and is in good control of the economy. Moreover, the pressure of joblessness has eased considerably thanks to a major demographic shift: The number of new entrants to the labor force is moderating as a result of the "one-child policy" that started three decades ago.

     After decades of credit expanding at breakneck speed, the country is now choking on it as much as it chokes on smog. A break for reflection is sorely needed. China's continued trade surplus suggests that the yuan remains in a broadly fair range and may be undervalued.

     It is also worth noting that the central government's budget is still broadly balanced. This is a big luxury that most governments around the world can only envy. Even when it comes to the huge debts of local governments, there is no real cause for concern. Governments at every level have vast business holdings and, if necessary, could divest them for cash. At present, they are under no duress.

     After all, local government debts are literally things of the past: Whatever happened to the borrowed money has already happened. In other words, the dilutive effect of the borrowed money on the yuan's purchasing power, both at home and abroad, has taken place and been absorbed by the system. These debts will in all probability be written off in the same way the country's banks were bailed out in 1999-2000 -- eventually and gradually. Those who liken the debts to a time bomb fail to see that in the Chinese system, there was never any illusion that these debts would be repaid.

     If the current recession drags on or gets worse, that would be a blessing in disguise for China. The government and the public would have to re-evaluate their ways of doing business. In fact, they seem to be doing a bit of it already.

     Without the constraints of parliamentary democracy, Beijing is certainly capable of further priming the pumps. Many local officials and analysts have urged stimulus. Now that equity market manipulation and exchange rate tinkering have both shown themselves unsuccessful, the realistic choice is between further slowdown or structural reforms.

     Fortunately, there is a lot Beijing can do. Taxes are too high and stifling; the labor market -- at least in the vast state sector -- is bloated; and red tape is ripe for heavy cuts. Any reforms in these three areas will be more effective and rewarding than tinkering with the currency, the stock market or interest rates.

     The slowdown in China at present is unpleasant for the country's major trading partners as well its own citizens. But it may very well prove to hold a silver lining. If, as I expect, structural reforms are phased in soon, a revitalized Chinese economy will prove to be a more powerful engine for the world economy in five to 10 years.

Joe Zhang is chairman of China Smartpay and author of "Party Man, Company Man: Is China's State Capitalism Doomed?"