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World Bank Mulling Sweeping Proposals for China Reform

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The World Bank is putting together sweeping proposals for China to privatize a major bank and allow farmers to sell their land, according to officials familiar with the plans, changes that could upend decades-old Communist Party ideology if implemented.

A farmer planting corn in central China's Henan Province.

The recommendations are part of a reform agenda the World Bank is hammering out with one of the Chinese government's top think tanks, the Development Research Center. Chinese Premier Li Keqiang specifically requested the two institutions to work on urbanization issues together. The work will feed into Beijing's effort to create a reform plan in time for a party conclave this year. The aim: to stave off a sharper slowdown in growth and put the economy on a sustainable path.

It is too early to tell whether the World Bank will formally endorse the recommendations now being formulated or win approval of its DRC partner, or whether they will be adopted by the Chinese leadership. The focus on privatization may also be a step too far for Beijing, but by advocating deeper change, some at the bank hope China will go further than it otherwise might.

"International experts tend to be timid around China; they don't push China enough," said an official familiar with such initiatives. China's experts are strong at diagnosing problems, but balk when it comes to finding solutions, the official said.

Mr. Li's request for World Bank input reflects a long history of China's leaders turning to the bank for advice. When China started to open up its economy, it had little ability to do economic analysis and often enlisted the bank for help. Former World Bank President Robert Zoellick would often talk of what he called a "floating seminar for days down the Yangtze River" in 1985 where World Bank and Chinese officials swapped ideas about reform. The World Bank's first resident representative in China, Edwin Lim, still plays an important role in organizing groups of foreign economists to advise Chinese leaders.

Last year, the World Bank and the DRC—which reports to China's State Council, the government's top policy-making body—came up with a long-term road map for reform at Beijing's request, and the DRC's participation signaled that Beijing's new leaders take its recommendations seriously.

Klaus Rohland, director of the World Bank's China office, said discussions are at an early stage and the proposals don't have the imprimatur of the World Bank or DRC. Privatization "is an idea that circulates every so often," he said. "These things always have a pro and con. I'd want to think it through thoroughly." DRC officials didn't respond to requests to comment.

A key motivation for the project is the growing sense in economic and policy circles that China has reached an inflection point, where old approaches to driving growth no longer work. Growth fell to 7.5% year-over-year in the second quarter, down sharply from the double-digit rates of a few years ago, amid concerns about wasteful investment and growing debt.

The push for privatization—long a forbidden subject in China—shows the depth of the changes that many involved in the World Bank project think China must make if it is to stem its declining growth rate and reach the ranks of wealthy nations over time.

Economists inside and outside China have long argued that state control of important sectors of the Chinese economy hinders competition and innovation.

"The working hypothesis of the proposed program of policy analysis is that the role of government will change as it will rely on market mechanisms," said a World Bank-DRC paper on their plans for recommendations on urbanization, which was reviewed by The Wall Street Journal. Those recommendations are scheduled to be published in the fall. A financial-sector report was due in the spring; it isn't clear whether that report will be published, said an official involved in the World Bank effort.

The World Bank is considering proposals for China to privatize parts of its financial sector, said policy experts involved with the plan. That would be a sharp departure for China, which insisted on keeping control of its banks when it started selling shares in Hong Kong and Shanghai over the past decade. It was part of a strategy of retaining the "commanding heights" of the economy in state hands. For example, the Communist Party's Organization Department appoints the heads of China's major banks.

According to one policy official, China would choose one major state bank to privatize. Bank of China Ltd. 601988.SH +0.37% and Bank of Communications Co. 601328.SH +0.26% would be logical candidates, the person said. Bank of China has a large international presence, while the state's stake in Bank of Communications had dropped to about 26.5% by the end of 2012—though it is still the largest shareholder. Bank of China declined to comment, while Bocom didn't respond.

There are some privately owned banks in China but most are considerably smaller than the state giants. "The idea is to move toward a privatized banking sector and allow foreign competitors to come in and have the banks answer less to the party and more to their shareholders," said Vernon Henderson, a professor at the London School of Economics and one of the contributors to the World Bank effort. Chinese banks and their government regulators are likely to oppose such a change, which would diminish their influence. Still, such a proposal could give a boost to the efforts by some officials to pressure state banks to accept more competition from international financial institutions as a kind of compromise.

World Bank officials and consultants are also putting together proposals that would let China's hundreds of millions of peasant farmers sell their land, as a way to boost rural incomes, encourage migration to cities and consolidate agricultural land. Privatizing rural land has long been taboo in China, where the Communist Party came to power promising to rid the country of rapacious landlords and where agricultural land is collectively owned.

To deal with ideological opposition, some involved in the World Bank effort are trying to root the proposal in Communist Party history, saying that private sales would represent the "third exit" of the state from collectively owned land.

By that retelling, the first exit was when Mao Zedong allowed farmers to forgo communal dining halls in 1958 and eat in their homes as a way to conserve food during a time of famine, said James Wen, an economist at Trinity College in Hartford, Conn., whose work underpins much of the World Bank's land discussions. The second exit was in the late 1970s and early 1980s when farmers were allowed to farm a portion of the land and keep the proceeds. The third exit would allow farmers to quit the collective and sell their land or rent it. Others involved in the project say some World Bank officials and consultants backs Mr. Wen's recommendations and logic.

Strict controls on the movement of people, a government monopoly on land and a heavy hand for the state in the financial system helped support China's three decades of breakneck growth. But those controls also brought considerable costs. China's migrant workforce provided cheap labor, but with wages and benefits low they did little to support consumption, which lags at about 36% of GDP compared with close to 70% in the U.S. Land grabs by local governments have become a key source of social unrest, and cheap land has contributed to overbuilding and urban sprawl.Lending directed by political rather than financial logic has left the banks exposed to risks from highly indebted local government borrowers.

Any plan to privatize land is bound to raise practical as well as ideological opposition. Local government officials, who get revenue by seizing land at a discount and selling to real-estate developers "won't agree to privatization," said another adviser to the World Bank project, Fudan University economist Ming Lu.

Write to Bob Davis at bob.davis@wsj.com and Tom Orlik at Thomas.orlik@wsj.com

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