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Christopher A. McNally (China Opening)

Mar 28, 2018

It will be difficult to change long-held opinions on the openness of Chinese markets. Naturally, different segments of the international community will vary in their views. Countries in Southeast Asia, for example, could see benefits from Chinese initiatives to accelerate the building of regional free trade areas. Financial services firms in the West also stand to benefit from removing caps on foreign stakes in banks, securities brokerage houses, and fund management firms. However, on balance, it will be hard to “exceed the expectations of the international community.” China is facing an uphill battle due to three reasons.

First, surveys by the Chambers of Commerce of the United States and European Union reflect that perceptions of market access barriers in China are deeply ingrained. To change the international business community’s view would take a massive new push to open Chinese markets. This is unlikely.

Second, China’s political economy is based on the unique balancing of state-coordination with bottom-up initiative and private entrepreneurship. Each step at market liberalization has thus been paired with steps to strengthen state capacity. This is likely to continue, as announced reforms seek to centralize the state’s role in various sectors of the economy.

While more effective state governance is needed for markets to efficiently function, the role of the state in China will continue to loom large. Consequently, Western notions of market liberalization will be hard to fulfill.

Finally, even if market openings are substantial, they will occur in sectors where Chinese domestic competitors have had time to establish themselves. Unseating these increasingly powerful incumbents will be difficult. Compared to an earlier era of reform and opening, foreign investors will face massive competitive pressures. The Chinese financial sector is a case in point. Therefore, even substantial market liberalization measures are unlikely to impress large segments of the international business community.

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