Improving prospects for market-based reform in China

Ahead of attending the Cambridge-Beijing Forum on market reforms in China, hosted by Cambridge Judge Business School next month in Beijing, I thought I should check the official Chinese government position. The Chinese Premier (head of the State Council, loosely “Prime Minister”) annually reports on the work of government to the National People’s Congress (NPC). The NPC is China’s representative assembly or parliament and meets annually in March. Premier Li Keqiang’s report is helpfully published in English as well as Chinese and the Wall Street Journal China provide a link here. Note that ultimate power lies with the Communist Party, whose General Secretary is the Chinese President, Xi Jinping, and China’s paramount leader.

Following the rhetoric around reform and a greater emphasis on market forces when the new President and Premier took power in 2013, expectations have been high for the government to deliver. The new report is fairly encouraging. In the opening section, Premier Li writes:

“We need to ensure that the market plays the decisive role in allocating resources and make the government better play its role, vigorously advance reforms conducive to economic structural adjustment, remove constraints on market actors and efficiently allocating factors of production, fully tap the creative potential in society, promote fairness and justice, and enable everyone to share in the fruits of reform and development.”

At the start of Part III, Major Tasks for 2014 we find: 1. Making breakthroughs in reform in important areas. The areas of reform listed include: the administrative system, devolution of power to lower-level government, investment appraisal, fiscal and tax systems, the budget system, local government debt, the introduction of deposit insurance, capital markets, Internet banking and financial risk. Non-state capital will be allowed into central government investment projectsm, specifically the railway system.

Of equal interest are Task 2 (Ushering in a new phase of China’s opening to the outside world and ensuring its high standard performance) and Task 3 (Making domestic demand the main engine driving growth). Other tasks include the agriculture, urbanisation, innovation, health and education, wellbeing and the environment (9. Building China into a beautifUl homeland with a sound ecological environment). Task 9 will perhaps be one of the most challenging, in light of recent reportson air quality in Beijing.

As Ryan Rutkowski at the Peterson Institute notes, the placing of the list of reforms at the start of the document signals a higher importance than in previous years. He helpfully tabulates the themes of Premier Li’s report against those of his predecessor Wen Jiabao in 2013. To the extent that political statements give us a clue to actual intent, Premier Li seems to be giving reform and the greater use of market forces a greater emphasis than before.

In conflict with the constitution?

The emphasis on market forces appears welcome and perhaps uncontroversial to western readers. But it seems to fly in the face of the Chinese constitution. Article 6 reads: The basis of the socialist economic system of the People’s Republic of China is socialist public ownership of the means of production. Article 11 allows that The individual economy of urban and rural working people, operated within the limits prescribed by law, is a complement to the socialist public economySo market forces are permitted, implicitly, though it’s not clear that large private corporations are what the authors of “individual economy” had in mind.

But the private sector already accounts for 54% of fixed asset investment in the Chinese economy. Despite the Constitution, various other Communist Party statements have long since acknowledged and even welcomed non-public ownership. Parts of the Chinese economy remain dominated by state-owned enterprises (SOEs) which are corporations, typically quoted on the stock market and with foreign shareholders, but still under the control of the government. The landmark World Bank study China 2030, written with the Development Research Centre of China’s State Council, emphasised the need for three things to allow the private enterprise sector to achieve its growth and productivity potential:

1. Improve technical and allocative efficiency by restructuring the state sector and further enhancing competition between state-owned and private firms, especially by scaling back the state sector and tackling
“administrative monopolies.”
2. Improve allocative efficiency by further leveling the playing field, especially between small and large firms, and implicitly between state and nonstate firms.
3. Meet new challenges and improve the business environment by moving to more limited, consistent, predictable, and market friendly industrial interventions. (p.110)

All of these are likely to involve reducing the power and income of vested interests, which is why reform is so difficult to do (look at Italy for example). These vested interests are represented at the highest levels of the Communist Party and government, so driving reform is a formidable political challenge.

To a non-Chinese economist like me, the intentions of the Chinese government are opaque to say the least. But it seems there are grounds to believe that the government really is likely to accelerate the role of the private sector and of market reform in the economy. That is a necessary, though not sufficient, condition for China to keep growing in the longer term and achieve a western level standard of living for most of its people.

Leave a reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.

We are using cookies on our website

Are you happy to accept our analytics cookies, which help us learn about our website visitors and their use of this site? Learn how to disable all cookies.