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A Decisive Market will Bring Significant Changes

Nov 16, 2013
  • He Weiwen

    Senior Fellow, Center for China and Globalization, CCG

The 3rd Plenary Session of the 18th CPC Central Committee approved a decision on “major issues concerning comprehensively deepening reforms” in economic, political, cultural, social and ecological areas, and set forth that “decisive results must be achieved in key sectors by 2020”. The decision gives a broad blueprint for China’s reforms and development for the next few years and will have profound implications for China and the world.

He Weiwen

The decision, while covering all areas of reforms, has pinpointed explicitly that economic reform is the key, and the core of the economic reform is the proper relationship between the government and the market, leaving the market to play a decisive role in allocating resources, and the government to play a better role. The role of the market has thus been elevated to a “decisive” position, a big jump from the “basic” role approved by the 3rd Plenary Session of the 14th CPC Central Committee 20 years ago. While only a one-word difference, it is a fundamental key tone and will lead to a series of changes ahead.

Wider Market Access and Fair Competition

First, energy and infrastructure. Since the market, instead of the government, has the final say, either state-owned, private or foreign companies, should have equal chances and access to resources. By far the most essential resource in economic growth, energy, including oil and gas, power generation and supply, will allow private and foreign investors access to exploitation, refining, transport, wholesale and retail sales. The monopoly of China Oil, Sinopec and CNNOC will ultimately be broken. Retail prices of fuel will no longer be decided by the National Development and Reform Commission, but by the market. Power supply will also be diversified. Infrastructure construction will also encourage private and foreign participation. All business entities should have fair and open competition, so as to reach the best mix of market resources and result in the highest possible productivity, with minimum cost and maximum returns.

Second, trade and investment. The government should not intervene excessively in trade and investment, but rather leave it to the market to determine fair competition. The threshold of investment will be lowered (no minimum capital requirements, for instance). As a rule, the negative list mode will gradually be applied to the whole country.

Third, a cure for overcapacity. The existing serious overcapacity in a number of industries has actually been the direct result of too much government intervention. The local governments, in particular, have pursued growth through excessive investment, not caring about real market needs and returns. As the market will decide the supply and demand of resources, all investment projects have to be based on strict, scientific market feasibilities and returns, instead of government will. The excessive investment will only lead to investor losses, and will gradually be wiped out by the market.

Fourth, financial liberalization. The real economy, once operating on a market basis, will inevitably require a compatible banking and financial system. The latter, in turn, will support the real economy. Therefore, Chinese banking and the financial system will see significant change in the years ahead. The supply of financial resources will be oriented to market demands, with no discrimination against small and medium-sized enterprises. Bank lending rates should also be decided by the market, or by negotiations between lender and borrower. Full market competition will gradually evolve among state-owned, private, foreign, state-private partnership, or private-foreign partnership banks. The government will step back, with its governance role limited . The current monopoly of state-owned commercial banks will lose its legal basis.

Fifth, innovation. Innovation, the key for China’s restructuring and upgrading, will increasingly rely on market forces, instead of government handpicking. The recent boom in Internet shopping on Nov 11, showed how market forces can trigger major innovation. It is thus expected that more innovations will happen and new markets will be created.

Sixth, public goods. The government should offer public goods, such as affordable housing, education, medical services, physical training and community services. On the other hand, however, they are also resources and thus should be decided by the market. It does not mean that they will all be commercialized. The government will still run part of the services, as in all other countries. The private and foreign investors will be allowed access to those sectors as well, offering adequate, best quality supplies, while the government will procure most of them, and then provide to the people.

Opening the Door Wider to the World

As the world economy becomes increasingly inter-connected with the growth of global industries, and as the global value chain extends to different parts of the globe, China is an indispensible part of the global economy. The world market will also play a decisive role in the international allocation of resources. China needs all the best resources in the world, including energy, products, technology, services, capital, management, knowledge and so on. Therefore, the Third Plenary Session promoted further economic opening. The plenum’s decision stipulates the lowering of the threshold for foreign investment, promoting the development of free trade zones and opening up inland, coastal and border areas. In other words, different parts of the country should open to foreign investors and to flows of merchandise, services, financial resources, technologies and talents with a minimum amount of government intervention. This will undoubtedly lead to a new phase of opening and international cooperation across the whole country.

The reforms will add a strong and long lasting impetus to China’s FTAs efforts. Besides strong support for the Doha round, it will promote regional and bilateral FTA negotiations in full swing, including CJK with Japan and South Korea, RCEP with ASEAN 10, FTA with Australia, and BIT with the US and EU. This will all promote a much larger free trade marketplace and benefit China’s trade partners.

While the domestic reforms need a compatible modern financial system, the opening to and integration with the world economy is also pressing for an open, international, compatible financial system. The RMB exchange rate mechanism will be increasingly open to international market forces. Interest rates in international business will be liberalized, based on market forces. Full RMB convertibility will also be on the agenda. During this process, China should lose no time in improving its international monetary management and risk control.

Changes in China, Chances for World

There is little doubt that all of the above-mentioned reforms, if realized, will considerably raise China’s economic productivity, and ensure a strong, sustainable, balanced growth, with the ultimate goal of a better life for all. As the world second largest economy, growth in China will spill over to China’s trading partners in particular, and to the world at large. China will most likely account for 12% of the world’s total GDP in 2013. A 7% annual growth in the rest of the decade will add 0.84 pct to world growth each year, or add $ 600 billion to China’s market size. With increasing numbers of sectors open for foreign investment or operation, foreign companies will have chances for many years to come. According to the latest MOFCOM data, China’s FDI inflows from the world hit $88.6 billion in Jan.-Sep. 2013, an increase of 6.22% over a year ago; US FDI increased by 21.3%; and EU FDI was up by 23.0%. GM, for example, had a China market sales volume of 2.9 million units in 2012, outstripping home sales (2.6 million), and thus made a huge profit of $9.19 billion. As a result, GM bought back all government shares and rebounded strongly from bankruptcy protection just 4 years ago.

A decisive role for the market will also promote Chinese companies investing worldwide, thus benefiting host countries all over the world. During the first 9 months, China’s outbound non-financial investment reached $61.6 billion, 17.4% over a year ago. Chinese direct investment in the US shot up by 250%, and in the EU up by 108.1%. According to a Rhodium Group estimate, every billion dollar investment from China could create 2,000 jobs in the US. It can be expected that, with progressive reform, China’s outbound investment volume will surpass its inbound investment, and thus become a net capital exporting country in a couple of years. It will create tens of thousands of jobs and add billions of dollars in economic growth to various host countries and make a lasting contribution to strong, sustainable and balanced economic growth in the world.

He Weiwen is co-director, China-US/EU Study Center, China Association of International Trade.

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