Think big, act small

China's next reform: more central planning

A few weeks ago, Li Keqiang told businessmen in southern China that he wanted to make "the market more vigorous". On Friday, the Chinese premier's market vision took the form of a heavy dose of central planning. The Ministry of Industry and Information Technology ordered 1,400 basic industry companies to reduce capacity - with plants idle by September, and closed down for good by the end of the year.

The excess was created by the free market at work. As entrepreneurs and enthusiastic local governments exploited opportunities, production expanded wildly in such basic industries as steel, glass and cement. Now supply is larger than demand and market forces have been pushed back by subsidies from solicitous local authorities and cheap loans from complacent, state-controlled banks. Inefficient facilities are kept alive. The results are low prices, large inventories, underutilised capital equipment and inadequate spending on pollution reduction and safety.

If Chinese GDP were still growing fast, this subsidised overcapacity would be just a temporary problem. Adverse side effects could be written off as a cost of development. But Li wants slower and higher-quality growth. The old factories do not fit with that vision.

Ideally, Li would use regulations to restrain local governments, and he would force banks out of extend-and-pretend financing. However, in China the rule of law and the sway of markets remain underdeveloped. So the government is turning to the traditional technique of central planners: authoritarian micro-management.

For now, the government's dedication to its ideology of pragmatism is not a problem. On the contrary, if it can prevail over recalcitrant and often wily local leaders, China will be more efficient and less polluted, in line with the objectives of Li and his boss, President Xi Jinping.

However, the government's commands undercut its more important objective of building strong institutions - including bureaucracies that regulate effectively, banks that follow commercial logic and markets that work. The latest move is a sign of how far China still has to go.