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Economy

Supersize It, Please

Nov 12, 2020
  • Zhang Monan

    Senior Fellow, China Center for International Economic Exchanges

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The Fifth Plenary Session of the 19th Central Committee of the Communist Party of China, which concluded recently in Beijing, adopted proposals for formulating the 14th Five-Year Plan (2021-25) and set development targets for 2035.

Under the proposals, the country will strive to achieve a moderately developed economy in terms of per capita GDP and build a supersized market by 2035. But to build a supersized market, China must remove barriers to market entry and institutional obstacles that impede closer connections between domestic and international markets.  

China’s “dual circulation” strategy is a response to the structural traps in its economic model that have been driven by exports for decades. Since joining the World Trade Organization in late 2001, the country has become integrated into the world economy. By establishing a presence in global industrial chains, supply chains and value chains, it has chalked up more than two decades of impressive growth. But the dividends delivered by its production factors and market system, made possible by cheap labor and market reform, have been on the decline in recent years.

In addition, the reduction of domestic surplus labor and population aging are accompanied by growing protectionism around the world. All these problems add to the difficulty of increasing China’s global market share and underscore the strategic significance of building and stimulating a supersized domestic market.

In fact, China now has what it takes to build a supersized market. In 2019, its total retail sales of consumer goods hit $5.96 trillion, compared with $6.22 trillion in the United States. In addition, China is the world’s second-largest importer, after the U.S. Its proportion of global imports increased from 3.8 percent in 2001 to 10.8 percent in 2019 — close to the 12.3 percent of the U.S.

As the world’s first major economy to grow after the outbreak of the coronavirus pandemic, China has the potential to overtake the United States as the largest consumer market and importer. In particular, there has been a growing capacity for consumption of high-quality goods and services in China in recent years. Moreover, the penetration rate of transnational corporations in the Chinese consumer market is much higher than in their home markets, and the spillover effect of the huge market is growing significantly.

China is a major developing country with notable strengths in population, industrial capability, resource endowments, economic size and market potential. Going forward, it will continue to expand reform and opening-up to build a developed economy driven by both the domestic and international markets. In doing so, it will definitely deliver benefits to other economies across the globe.

But becoming a supersized market doesn’t depend on its current market size alone. Many issues, including a mismatch between supply and demand and impediments to internal circulation, remain big obstacles to unlocking the potential of the huge market.

First, an important institutional obstacle to the release of consumption demand is unbalanced distribution of national income. Today, China’s household consumption accounts for 39 percent of GDP, compared with 68 percent in the U.S. and 55 percent in Japan. Saving as a percentage of GDP stands at around 44 percent in China, well above the world average (27 percent) and the average of the developed world (23 percent). To improve income distribution, it is important to increase the share of household income and consequently reduce the share of government revenue and enterprise income in national income.

Second, there are many systemic and institutional barriers in the flow of production factors within the domestic market. One of the most pressing issues is that tough competition at the local level has led to the fragmentation of the domestic market, inefficient movement of factors of production and waste and misallocation of resources. 

Third, much remains to be done if China is to meet international economic standards. Since 2018, a number of free trade agreements have been signed between major economies, including the CPTPP, EPA and USMCA. These agreements are characterized by comprehensive coverage and high standards, and they reflect trends in rules of origin, IP protection, opening of the service sector, digital trade, environmental protection, labor rights, competition policy and reform of state-owned enterprises. They pose a challenge to the improvement of the market system in China.

Fourth, there is much room for improvement in the development of an open economy. Today, China hasn’t achieved full trade liberalization, and its average tariff level remains higher than middle- and high-income countries and is not commensurate with its status as a country ready to join the ranks of the world’s high-income countries. In fact, its average tariff level is still more than double that of developed countries, meaning there is considerable room for tariff reductions.

When measured by new multilateral trade rules, China’s services trade is not adequately liberated. It needs to do more to enhance IP protection and join the WTO’s Government Procurement Agreement at an early date. The business environment and market access, are impeded by less-than-desirable rules, laws and regulations, and the international community is concerned about transparency.

All this means that China must move robustly to remove policy constraints by pushing forward structural reforms and efficient allocation of domestic resources. It must build a unified single market driven by healthy competition.

Currently, new negative lists for foreign investment have been rolled out to open wider to global investment such sectors as infrastructure development, finance, communication and culture. Ultimately, these will create opportunities to introduce global rules of fair competition and increase market efficiency.

Going forward, as it works to build an open economy, China will not only ensure the free flow of goods and services, as well as factors of production, but it will also build rules-based institutions. In addition, it will not only reduce tariffs, but also improve the transparency of domestic rules and regulations. That is how it can grow into a globally influential supersized market. 

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