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Businesses in EU Say China's Promised Reforms Moving too Slowly

Sept. 9, 2014
"The 'golden age' for business in China is drawing to a close," the European Union Chamber of Commerce in China said.

BEIJING -- European businesses in China on Tuesday warned the Communist Party urgently to implement promised reforms or risk seeing growth in the world's second-largest economy plummet and incomes stagnate.

"The 'golden age' for business in China is drawing to a close," the European Union Chamber of Commerce in China said.

"China is nearing the end of its window of opportunity to create the framework to rebalance the economy," it added in its annual European Business in China Position Paper.

"Unless China's current leadership maintains the requisite sense of urgency and is resolute in their pursuit of reform, there is the very real risk that China's economic sunrise could dawn into a middle-income trap."

The Communist Party announced a blueprint for far-reaching reform at the end of a key meeting in November known as the Third Plenum. It called for allowing market forces to play a "decisive role" in resource allocation, a bigger function for private capital and further financial and currency reforms.

But it also said the dominant role of state-owned enterprises (SOEs) was the "foundation of the socialist market economy", raising questions about competitive fairness.

The Third Plenum document was generally well-received, although economists and business executives have warned that its implementation would need to be closely watched.

The 1,800-member EU Chamber expressed doubts over how committed authorities are to the "decisive role" pledge, questioned whether foreign industry can ever achieve equal treatment with Chinese counterparts and raised concerns over the position of SOEs.

"The problem we have is that the implementation is not clear yet," Joerg Wuttke, president of the EU Chamber, said ahead of the paper's release. "We have seen very few steps in the financial sector where the reforms actually have taken place, hence, the members clearly see a sense of urgency."

The pledges were laudable, he said, but "China just has to move faster on implementing the laws and the market reforms that they have outlined."

Among steps mentioned in the report are further interest rate liberalization, allowing more foreign banks to operate, and stricter enforcement of often-ignored environmental standards.

Middle Income Trap

Wuttke, an executive with German chemical company BASF, said nothing less than the successful transformation of China's economy was at stake.

China's leaders say they want to make private demand the key driver of the economy, moving away from over-reliance on huge and often wasteful state-backed investment projects that have formed the basis for decades of expansion.

Such a transformation is expected to result in slower but more stable and sustainable growth in the long run. China in March set its annual growth target for this year at about 7.5 percent, the same as last year.

If the long-promised makeover succeeded, Wuttke said, China could maintain annual economic expansion of six to seven percent in the coming years, what he called a "natural growth corridor".

If not, it risked seeing rates slip to somewhere between  3% and 5%. "Gone are the days of double-digit growth," Wuttke said.

In a survey released in May, the chamber said only 59% of its member companies reported increased revenues in the 2013 financial year, down from 75% two years before.

Now China faces a middle income trap -- an economy failing to move from a low-cost to a high-value model and getting stuck at a certain level -- "if they don't work on their strengthening of the institutions, if they don't work on the rule of law, if they don't open up the market", he said.

South Korea and Taiwan had successfully avoided the pitfall, he added.

China recently carried out high-profile probes into alleged anti-competitive practices at a host of foreign companies, including European automakers Mercedes-Benz and Audi.

"The problem is the lack of transparency, which actually leaves a lot of speculation on what possibly was the intention," Wuttke told reporters at the launch of the document.

But Wuttke said earlier that the issue posed little threat to European decisions to invest in China.

"The real game-changer is where is the economy heading. If there is no reform in the economy in the next years then actually the economy is heading for a much slower growth pattern and that actually really has an impact on foreign investment in China," he said.

- Kelly Olsen, AFP

Copyright Agence France-Presse, 2014

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