Global Economics

China's Economic Policy Factory: The NDRC


High-rises in the Central district of Hong Kong tower above Victoria Harbour

Photograph by Lam Yik Fei/Bloomberg

High-rises in the Central district of Hong Kong tower above Victoria Harbour

Who decides the size of Shanghai Disneyland (116 hectares, now under construction), how thin plastic bags should be (no less than 0.025 millimeters), sets gasoline prices and taxi fares, and recently used its sweeping power to fine China’s two best-known liquor companies 449 million yuan ($73.25 million)? It’s the National Development and Reform Commission, the biggest, most powerful Chinese bureaucracy, with responsibility over broad swathes of China’s $8.5 trillion economy, and day-to-day authority that sometimes rivals that of Premier Li Keqiang’s State Council, its putative boss.

Now, the commission may get its wings clipped. Reuters reported in late May that newly appointed Premier Li had rejected an urbanization proposal drafted by the commission for not being reform-oriented enough. That sparked a flurry of Chinese news reports that culminated in top commission officials publicly denying their plan is in jeopardy.

The State Council is expected to announce proposals later this year to make China’s economy more market-oriented. In May it slashed bureaucratic red tape by eliminating or delegating to lower levels 117 different administrative approvals, including some for large oil and gas projects. As a result, that same month the commission approved only four new projects, compared with 239 in May of last year, reported the Shanghai-based National Business Daily. The reform commission did not respond to Bloomberg Businessweek’s fax and phone calls requesting comment.

The superministry was born in 1952, when Mao Zedong and other top party officials created its predecessor, the Soviet-inspired State Planning Commission. Its original mandate was setting production targets for everything from steel to wheat and rolling out the Five Year Plans for economic growth still used today. That role remained pretty much unchanged until China began to open its economy in the 1980s. “Its origins are very much in China’s command-and-control economic past,” says Willy Lam, a professor in the history department at the Chinese University of Hong Kong.

As the need grew for an agency to help guide economic liberalization, in 1998 it was renamed the State Development Planning Commission and its scope was enlarged. Then in 2003 it bulked up further: An economic reform office under the direction of the State Council, as well as part of another commission focused on industrial policy, were rolled into the expanded organization, which was given its present name. Earlier this year, it took over responsibility for setting population targets from the National Population and Family Planning Commission, which in turn was merged with the Ministry of Health.

Today, as many as 30,000 bureaucrats are employed at the NDRC’s headquarters and its local branches across China, estimates Wang Kan, a professor at the Institute of Industrial Relations in Beijing. They work in a head-spinning number of departments—more than two dozen, responsible for everything from drug price reviews and national energy conservation to rural development and the revitalization of China’s northeast. Chief among the agency’s daily responsibilities is approving large infrastructure and manufacturing projects, including new auto factories, bridges, and theme parks, and signing off on large overseas acquisitions and investments by Chinese companies. Equally important is its role in setting prices for key commodities, including electricity and gas, as well as offering suggestions on the pricing of other necessities, such as train tickets, pork, and cooking oil. Although the commission doesn’t have absolute authority to set prices when it provides guidance, it has such clout over large producers that they tend to listen.

With responsibility for coordinating policies across industries and regions, the NDRC is unrivaled in its influence and ability to push its ingrained preference for a government-led economic system. “They believe in state-based solutions and in reshaping the state to make it more effective,” says Kenneth Lieberthal, senior fellow in the John L. Thornton China Center at the Brookings Institution in Washington. “It’s clearly the most powerful force among all the ministries,” he says. When the commission was charged with helping prepare China for a more market-oriented economy, “it had been expected that reform would take the lead over planning; that didn’t happen,” says the Royal Bank of Scotland’s (RBS) Louis Kuijs, who had extensive contact with the agency in his previous job as economist at the World Bank in Beijing.

In a sign the NDRC’s role is changing, its new chairman, 61-year-old Xu Shaoshi, a former minister of land and resources who took charge in March, has never worked in the agency. By contrast, Ma Kai, one of its most powerful former chairmen, started his career in a district office in Beijing before rising to the top in 2003, 20 years later. “Perhaps Li Keqiang thought that, as an outsider, Xu would be able to come up with new ideas,” says Chinese University of Hong Kong’s Lam. “Almost all other directors and vice directors have risen up through the ranks.”

A growing chorus of reform-minded economists, entrepreneurs, and regular Chinese citizens is criticizing the commission as a backward holdover from China’s command economy. Earlier this year public anger flared on China’s social media sites, including Sina Weibo, after the commission raised gasoline prices, even as they were lowered in Taiwan. In response to the uproar, it has promised to adjust prices more frequently to reflect the constant shifts in the international price of oil. “Fuel consumption is in the interests of millions of households. And I’ve heard and quite understood the criticism against the current pricing mechanism,” the outgoing chairman, Zhang Ping, said on March 6, according to a report by the official Xinhua News Agency. Peking University economist Zhang Weiying, at a forum in Beijing on March 24, criticized the commission for its role in supporting industries now facing overcapacity, such as solar panel manufacturers.

In line with Li’s push for economic liberalization, the commission in May released a report detailing this year’s reform objectives, which gained much attention in China’s state-controlled media. It’s taking a stronger role in fining companies for price violations under China’s 1998 Price Law and the 2008 Anti-Monopoly Law, says Michael Gu, a partner at Beijing-based AnJie Law Firm. Gu cites the commission’s record-breaking fine against the Chinese liquor companies in February for monopolistic behavior and price-fixing penalties totaling 353 million yuan imposed two and a half months earlier on LCD manufacturers, including Samsung Electronics (005930:KS), LG Electronics (066570:KS), and four Taiwanese companies including Chi Mei. In the Chinese political system, any effort to lessen its influence would require “a complicated process of consensus-building,” among China’s top leaders, says Brookings’s Lieberthal.

Whether the NDRC remains so powerful will depend on China’s economy. Continued weakness will no doubt alarm China’s leaders, who are intent on ensuring sufficient jobs for the hundreds of millions of farmers still expected to leave the countryside. That would likely drive Beijing to once again pump up state-led investment in the same way it did following the 2008 global economic crisis. As the leading agency in charge of approving new projects, the commission would be strengthened, predicts Lam.

“This is an incredible powerhouse of an organization that somehow has to have a much lighter touch on the steering wheel going forward,” says James McGregor, senior counselor at Apco Worldwide China, a business consultant in Beijing. “But once you have a bureaucracy in place that has been given a lot of power, in any country, in any sector, it’s always really hard to pull it away.”

The bottom line: With vast powers over the economy, the NDRC is drawing the scrutiny and anger of academics and ordinary Chinese.

Dexter_roberts
Roberts is Bloomberg Businessweek's Asia News Editor and China bureau chief.

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