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Strategies & Market Trends : Asia Forum -- Ignore unavailable to you. Want to Upgrade?

To: Jack Clarke who wrote (2502)	3/4/1998 11:44:00 AM
From: Mohan Marette	Respond to of 9980

China-Major Reorganization in the offing. Jack and thread: Here is an interesting situation that is developing in China I believe for the better? [For private use only-source Morgan stanley] China: National People's Congress: Reorganizing the Government Andy Xie (Hong Kong) Key Points: ú The forthcoming National People's Congress will endorse a major reorganization of the government in order to meet the needs of a new economy and to facilitate the structural reforms. The size of the government could be retrenched by 40% over three years. ú The major personnel changes, including the elevation of Mr. Zhu Rongji to the premiership, will enhance the quality of leadership at a time that China must undertake difficult structural reforms in an adverse international environment. ú The approach to SOE restructuring may be modified at this Congress. The initiative to create large diversified conglomerates a la Korea is likely to receive less emphasis. ú China's apparent fiscal approach to resolving NPLs in the banking system reduces the risk of a destabilizing inflationary solution but would create a significant fiscal burden that will only diminish over time with the expansion of the economy. Details: The most important development at the forthcoming National People's Congress is expected to be the reorganization of the central government. China's economy has changed dramatically in the past ten years. The existing government organization is no longer consistent with the new economy. China is expected to transform all line ministries into holding companies or industry associations and to merge the rest in line with better-delineated functional distribution. This would reduce the number of ministries to 29 from 40 now. Public sector (ex-SOEs) labor force (estimated now at 14% of non-farm labor force) would be reduced as a result of the reorganization. The magnitude of retrenchment could be as much as 40% to be phased over the next three years. This reorganization would restore China's historical preference for small government. Abolishing line ministries is a milestone in China's transition to a full market economy. It lays the groundwork for China to establish regulatory authorities independent of business interests, and paves the way for ownership change of large SOEs. The separation of government and business is essential to efficient markets. The NPC is also expected to endorse the major personnel changes recommended by the senior Party leadership. Mr. Zhu Rongji will assume premiership. He has a strong track record in pushing through difficult reforms and has demonstrated his capability in understanding the economic issues that must be addressed. The personnel changes are expected to elevate the quality of China's leadership to a very high level, which is so important to the country as it undertakes difficult structural changes in an adverse international environment. The Congress would also pass the other major reform measures initiated at the 15th Party Congress last year. These include SOE restructuring and banking sector reform. The 15th Party Congress initiated the program to privatize small and medium-sized SOEs and to consolidate and list large SOEs. In the aftermath of Korea's economic meltdown China appears now less enthusiastic about creating large diversified conglomerates with close linkages to the government and banks. Lack of emphasis on creating large SOEs at the NPC would confirm China's change of heart on this issue. The government recently proposed to recapitalize the state commercial banks by issuing treasury bonds, which will be well received by this Congress. The disastrous consequences of poor banking practices in other Asian economies have become a major concern in the country. China's apparent fiscal approach to the NPL problem in the banking system reduces the risk of monetizing NPLs through high inflation, which could be politically destabilizing. However, the interest burden of resolving the NPL problem will become a significant fiscal burden over time, as the experiences of other countries have shown, and would decline gradually as the economy expands.