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Three Thrusts of China’s New Reforms

Mar 12 , 2013
  • Zhang Monan

    Senior Fellow, China Int'l Economic Exchanges Center

As the last three decades have shown, China is the largest beneficiary of reform and opening-up. However, no reform can be done once and for all. It must evolve. When incomplete past reforms become obstacles to socio-economic development, China needs to define and implement new reforms.

First, new reforms must target vested interests. From such statements as “reform is the biggest dividend for China” and “making empty talk is harmful to the nation while doing practical jobs can help it thrive” to General Secretary Xi Jinping re-taking Deng Xiaoping’s 1992 southern tour, the new administration has released signals for a new round of reform. What will be the thrust of the new reforms? There are many different voices, but ultimately the reform has to be on vested interests. Reform by its nature is the redistribution of interests and change of existing patterns.

Since Deng Xiaoping’s 1992 southern tour, reforms have taken place in tax-sharing, state-owned enterprises, housing, arable land protection and other areas. Many of them went halfway. With vested interests to protect, some beneficiaries of reform have hoped to maintain or expand the dual-track system where administrative powers extensively intervene in the market and economic operations.

A most salient problem appears in the housing sector. To really tackle the underlying contradiction of the housing market, the question of local government finance supported by land sales must be resolved and comprehensive public policies formulate. Such reforms will involve readjustment and redistribution of land, taxes, social security and other financial policies, a task hardly achievable without impacting well-established resources and interests. Likewise, breakthroughs have to be made in a few core fields.

Second, new reforms must be aimed at not only efficiency but also equity. In the past 30 years, we have witnessed the breaking of egalitarianism and the introduction of distribution according to work; then, emerging recognition of the efficiency/equity relationship and gradual establishment of “putting efficiency first with due consideration to equity”. As a profound systemic change, reform and opening-up has injected huge impetus to Chinese economic growth. It is fair to claim that driven by reform and opening-up China’s national economy has been made larger in the past decades, reflecting increased efficiency.

However, dividends of reform have not been rationally distributed among the people, leading to increased inequality. The original power establishment has been further strengthened, with power rent-seeking and resource monopoly being fixated into it. Those who monopolize privileges and resources quickly accumulate enormous wealth. Those who hold power use it to intervene in income distribution, resource allocation and various other socio-economic activities. In other words, power plays a huge role in wealth adjustment. In this situation, new reforms must break resource monopoly and power cycle, therefore making room for economic and social equity as well as providing equal opportunities.

Third, new reforms must restore due functions to the government and the market respectively. The report of the 18th National Congress of the Communist Party of China makes it clear that China will “stick to the path of new industrialization, informatization, urbanization and agricultural modernization with Chinese characteristics”. The key of “new four modernizations” is to follow market rules. As a matter of fact, the main theme of development in the past decades has been market-oriented reforms, which have helped to release a huge and vibrant space for sustained high growth. However, dualism has also become apparent in this process, with overregulation leading to sectoral monopoly and regulatory barriers on the one hand; under-regulation and regulatory inaction giving rise to disorderly competition on the other.

The dualistic feature of the market is closely linked to how the government positions itself. Prompt resource mobilization by the powerful government has been key to China’s growth miracle. However, the problem is the government must not become a substitute for the market by institutionalizing intervention in the economy and resource mobilization. Governments at different levels are now expanding their power, leading the market space to shrink. Direct intervention in and regulation of the micro economy and provision of stealth subsidies for the state-owned enterprises to a certain extent substitute and squeeze out the market, distorting resource allocation and market signals. On the other hand, the government is often absent in providing public goods (such as social security, health service, education and housing) and creating market order and rules (such as rule of law and social credit system). Like market failure, government failure adds negative externalities and frictions, decreasing the efficiency of economic operations.

In the final analysis, to promote economic restructuring, resources must be re-allocated to enhance efficiency, which can only be realized with the market playing its basic role in resource allocation. Therefore, what is most needed in China is not government bailout or relief but rather breaking of resource and power monopoly and deepening of market-oriented reforms over factor prices such as labor, resources and interest and exchange rates. And that will have to involve greater reform of the government itself and real cut of its power, one of the few system dividends China can really create.

Zhang Monan is Deputy Director of the Division of World Economy in the Economic Forecast Department at the State Information Centre.

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