World Bank to China: Reform your economy or face collapse

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finance.yahoo.com

The World Bank and a Chinese think tank have a stern warning in store for China's government: Transition to a freer commercial system, or else face an impending economic crisis.

The "China 2030" report, released by the World Bank on Monday, recommends China enact reforms promoting a freer economy. Those reforms include a major overhaul turning China's powerful state-owned companies into commercial enterprises.

The report is compiled by the World Bank and the Development Research Center, a research group that reports directly to China's State Council. It encourages China to also promote innovation, competition and entrepreneurship as a means of economic growth, rather than allowing growth to be primarily government engineered.

The world's second largest economy has been rising rapidly, averaging around 10% growth a year for the last three decades. Much of that momentum has come as China's rural population moves into the cities and as the government has funded massive infrastructure projects and retained a powerful influence over the country's biggest companies.

State-owned companies dominate China's banking, energy, telecom, health care and technology sectors. Overall, they account for about 40% of the country's gross domestic product, estimate Andrew Szamosszegi and Cole Kyle, who have researched the topic for the U.S.-China Economic and Security Review Commission.

Their latest report to the commission puts it bluntly: The Chinese government has not "expressed an interest in becoming a bastion of free market capitalism."

Critics point out that China cannot keep up its rapid growth under this system forever. Emerging economies tend to start slowing when their economy reaches about $16,740 per capita, according to research by economists Barry Eichengreen of the University of California at Berkeley, Donghyun Park of the Asian Development Bank and Kwanho Shin of Korea University.

They suspect China will hit that point around 2015. The report forecasts that economic growth in China will gradually slow, from an average of 8.6% in 2011-2015 to an average of 5% in 2026-2030. Without the reforms, the report said China would be on an even slower growth path.

The World Bank's report also suggested China should separate "ownership from management" of state-owned enterprises.

China has four major asset management companies that it originally created to oversee bad loans spun off from its four major banks. Currently, they're 100% owned by the Chinese government.

The report said the government should consider establishing state asset management companies that would represent the government as a shareholder, but would "independently and professionally" manage and trade assets in financial markets.

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