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China Eyes Fiscal, Pricing Reforms to Help Economy

China must continue to liberalize its exchange rate regime and key areas of the economy to ward off overheating but should be cautious about opening strategic sectors to foreign investment, a top official said on Tuesday.

Vice Premier Zeng Peiyan, in an essay published in the ruling Communist Party's mouthpiece, the People's Daily, said China had to tackle rapid investment growth, a record trade surplus and excessive growth in money and credit.

"It is still a difficult and onerous task to prevent rather fast growth from becoming over-heated," wrote Zeng, who is in charge of economic planning.

China's fiscal system, which gives local governments incentives to build factories to generate tax revenue, is a major obstacle to slowing the world's fourth-largest economy, he said.

"Without fiscal and tax reform ... it will be difficult to realize rapid but sound economic development," Zeng said.

Critics have long pointed out that Beijing mandates local governments to provide public services such as health and primary education but starves them of the necessary fiscal revenues.

Zeng acknowledged that the fiscal rights and duties of the central and local governments "are not matched". "Experience has shown that the current fiscal and tax system cannot stop some local governments from blindly developing industries, especially heavy industries, to increase their tax revenues at the cost of resources and the environment," he said.

To make growth more sustainable, critical economic inputs, from labor to water, need to be decided by market forces, Zeng added.

Zeng was commenting on what he had learned at the recently concluded Communist Party Congress, where greener growth was a central theme of President Hu Jintao's report to delegates.

"A key point at the moment is to reform water, power, oil, gas and land prices, and deepen pricing reforms of capital and foreign exchange, to promote stable interest rate liberalization and continue to improve the yuan's exchange rate formation mechanism," Zeng wrote.

He reiterated the urgency of letting consumption play a bigger role in driving overall economic growth. To that end, China needed to boost people's incomes.

To achieve more balanced growth, he said China also needed to shut down obsolete plants producing steel, non-ferrous metals, chemicals, construction materials, coal and power.

Zeng said China should be cautious about opening up sensitive sectors to foreign investment to minimize international risks and to protect its national security.

"The more we open up, the more serious the problem of safeguarding our national economic security and our trade interests," Zeng said.