Let the Market Play a Decisive Role

DEVELOPMENT is the key to solving China’s problems... economic restructuring will be the central task， and reform of the economic system will provide a firm footing for making relations of production adaptable to productive forces， and the superstructure congruous with the economic base， promoting healthy， sustainable development of the society and economy.” Such statements made at the Third Plenary Session of the 18th CPC Central Committee signify the paramount importance the ruling party places on China’s economic development.

In reiterating that development is China’s number-one priority and reform its impetus， the tone of such statements is reassuring to all levels of Chinese society， according to Wang Jun， a deputy department chief of China Center for International Economic Exchanges （CCIEE）.

The economic system has hitherto been the focus of China’s reforms， which is decided in accordance with the nation’s current stage of development. Having risen to become the world’s second largest economy 35 years after bringing into effect the reform and opening-up policy， China must still overcome through its future reforms the problems of an imperfect market system， flabby domestically-generated growth， and a waning potential growth rate.

Visible vs Invisible Hand

The Chinese leadership acknowledges that continued economic restructuring is critical to comprehensive deepening of all other reforms in the nation. The key issue in this regard is appropriate handling of the government-market relationship and allowing the market to play a decisive role in resource allocation， meanwhile allowing the government to better perform its duty. Premier Li Keqiang was quoted as saying，“The market is the invisible hand and the government， a visible hand. We should not let the visible hand constantly meddle.”

From 1978， the planned economy was predominant over the market economy. It was in 1992 that China first announced that the market， under state macroeconomic control， should be the basic means of allocating resources. “But as the market was only given a basic role in resource allocation， the government was justified in intervening in prices whenever it felt this was necessary， in the name of macroeconomic control，” said Shi Hongxiu， professor of economics at the Chinese Academy of Governance.

According to Wang Jun， the decision by the Third Plenum of the 18th CPC Central Committee to upgrade the role of the market in national economy reveals the central authorities’ resolve to continue with the marketization process， so giving good reason to anticipate breakthroughs in China’s economic reform in the coming years.

In 2003 alone， the central government scrapped or relegated to local authorities 300 or more items requiring administrative approval as part of its effort to give the market a freer rein in allocating resources.“The next step is pricing reform of electricity， mineral resources – including coal， water supply， sewage treatment and other public utilities. Gradually， their prices will be decided by the market，” Prof. Shi predicted.

Reforms on resource pricing have escalated since 1993， changes to coal pricing taking the lead. So far， controls on crude oil prices have been lifted and， in light of changes in the global market， retail prices for gasoline and diesel floated under government guidance. Pilot programs of tiered pricing for electricity and of allowing big consumers to negotiate with power plants are extending to more parts of the country. Tiered pricing has also been adopted by the natural gas and water sectors.

While stressing the decisive role of the market， it is equally important to ensure that the government does a better job. In the view of Pan Jiahua， director of the Institute for Urban and Environmental Studies， Chinese Academy of Social Sciences （CASS）， the reforms are intended to reduce and eventually eliminate the government’s authorization to take arbitrary decisions and actions. The government should instead conduct thorough supervision and law enforcement， fulfilling its obligations but not overstepping them， so guaranteeing orderly operation of the market economy.

Public vs Non-public Sectors

The communiqué released after the Third Plenary Session of the 18th CPC Central Committee states that an economic system where the public sector is the major force and other ownerships co-exist and grow together is a key pillar of socialism with Chinese characteristics， and also the foundation of the country’s socialist market economy system. The document vowed to stimulate the vitality and creativity of non-public sectors.

Anticipated progress in the protection of property rights and the development of mixed ownership economy are expected to expand the space for growth of private businesses within industries monopolized by state-owned enterprises （SOE）. Zhu Boshan， general manager of Shanghai-based Tacter Consulting， hailed this move as conducive to reversing the trend in past years of an expanding public sector in opposition to retreating non-public sectors. “Inadequate protection of property rights in the past few years has led to inequality between public and non-public economies， depriving the latter of the right to attain the same status and benefits as the former，” Zhu said. “The decision by the Third Plenary Session to better protect property rights and actively develop an economy of diverse ownership forms encourages and facilitates private capital buying into SOEs.”

SOEs still play a key role in Chinese economy. Among the 89 Chinese companies （from both the mainland and Hong Kong） that made the Fortune magazine 2013 Global 500 list， 67 are state-owned. Ministry of Finance statistics show that in the first three quarters of 2013， non-financial SOEs paid RMB 2.694 trillion in tax， accounting for one third of total national tax revenues for the period.

The marketization reform of SOEs has yielded tangible achievements in recent years. According to the State-owned Assets Supervision and Administration Commission （SASAC） of the State Council， the number of SOEs directly under the central government has been reduced to 112， mostly in strategic industries involved in national security and national economy， like defense， energy， communications and transportation. As much as 90 percent of non-financial stateowned and state-controlled enterprises have been transformed into share-holding companies. For SOEs under the SASAC， which are among the largest in China， the figure is 89 percent. By the end of September 2013， 57 percent of SOEs directly under the central government and their subsidiaries had taken on private investment.

Meanwhile， the management of SOEs has been reformed in light of market rules and international practices： 52 SOEs directly under the central government and some local ones have set up boards of directors. Global applications are invited for 141 positions within SOEs directly under the central government， and 600，000 of their managerial jobs are open for contention.

Zhang Chunxiao， a research fellow at the Chinese Academy of Governance and member of the SASAC expert panel， advocates serious thought before allowing private investment in the industrial chain via market-based means and forms， excluding spheres of national and social core interests， national security， fundamental infrastructure and major natural resources.

In the financial and fiscal sectors China has eliminated the lower limit on bank lending rates， replaced business tax with value-added tax to reduce tax burden on corporations， and slashed or exempted taxes on micro and small businesses. These measures all boost the growth of China’s private companies， whose number now approaches 10 million.

Seeking Domestic Driving Force

The urban-rural dual structure has historically been a major barrier to integration of China’s development. Urbanization is hence expected to become another propeller of China’s economic growth. Li Yang， vice president of CASS， holds that the general “urbanrural integration” concept better covers such items as urbanization， equalization of public services and agricultural modernization， and is a more mature outlook than the single concept of urbanization. “If China plans its development solely from the perspective of urbanization， it’s quite likely to plunge the whole country into a city-building campaign that would likely infringe on farmers’ interests. Moreover， such a process would make it hard for China to pinpoint the fundamental issues of urban-rural integration， such as improving efficiency of land use in particular， and so solve them，” Li said.

In addition， the plenum proposed to establish a unified urban-rural land market for construction and allow farmers better property rights – a measure that is sure to have positive impact on farmers’ income and buying power. At present， Chinese farmers’ property income mainly comes from their right to use collective farmland and forestland. Expediting the registration and confirmation process of rural land-use rights and helping farmers increase their property income through land transfer， or more market-oriented methods， therefore， will help improve farmers’ livelihoods and provide them with more security. It will also facilitate tapping into China’s huge rural market， and thus the sustainable development of China’s economy.

The Third Plenary Session of the 18th CPC Central Committee coincided with China’s annual shopping spree on “Double 11 Day” （November 11）. Promoted by China’s e-commerce platforms， this year’s event attracted world attention once more. At the third symposium on the economic situation that he presided over since taking office， Chinese Premier Li Keqiang spoke highly of the “Double 11 Shopping Carnival” initiated by well-known Chinese online shopping site ， praising it for the excellent shopping opportunity it created. Ma Yun， Taobao’s founder， and other entrepreneurs and scholars attended the meeting.

The Double 11 shopping spree was initiated by Tmall of Taobao in 2009. Its sales volume on the first day hit RMB 52 million. This in itself was an impressive figure， but no one could have forecast that in 2013 the figure would skyrocket to RMB 35.019 billion， surpassing half of September’s daily average retail sales of consumption goods. China’s other e-commerce giants like ， and followed suit. In light of online prices， in-store discounts and promotions also featured that day in well-known chain stores like Suning and Gome， to maintain a competitive edge.

Currently， around nine million companies have online shops on ， about three million of them proactive in offering special deals. Ma anticipated that Taobao’s 2013 total sales would account for over 10 percent of China’s total retail sales of consumer goods. He thinks of the Double 11 Day Shopping Carnival not， like certain outsiders， as an “e-commerce war，” but as a sign of China’s economic transition from the traditional commercial modes to a new one.

Enterprises supplying online shops have surged in the Yangtze River Delta and the Pearl River Delta areas. One big attraction of this format is that an online shop can reduce its inventory or have no stock at all， so slashing the running period of the whole supply chain. Meanwhile， personalized customization targeting ordinary consumers is offered through e-commerce platforms.

In spite of the government’s urge to speed up transformation of the country’s economic development mode， the contribution of China’s consumption to its economic growth has not been significant. But the rise of e-commerce could possibly inject fresh vitality into domestic consumption.

Opening Wider to Seek Win-Win Results

The plenum proposed that China should push forward mutual promotion of its opening-up and domestic development， and combine the notions of“bringing in” and “going global.” This will promote the orderly free flow of international and domestic factors， efficient allocation of resources and in-depth market integration. It will also speed up the nurturing of China’s new competitive edge in international economic cooperation so as to advance reform and better adapt to the new situation of economic globalization. China will relax investment rules， expedite the building of free trade zones and further open up hinterland and border areas.

Hu Angang， director of the Center for China Studies of Tsinghua University， holds that the plenum’s decision is an “upgrade” of China’s policies of reform and opening-up. In the 35 years since these policies were initiated， China has been taking aggressive steps to attract foreign investment， and for that reason has become the developing country with the largest foreign investment in the world. As they mature， however， Chinese enterprises should also go global.

In 2012， China’s foreign trade stood at US $3.86676 trillion， with exports valued at US $2.04893 trillion and imports at US $1.81783 trillion. The World Investment Report 2013 issued by the United Nations Conference on Trade and Development （UNCTAD） shows that China attracted foreign investment of US $121 billion in 2012， lower by two percent than in 2011， while its outward foreign direct investment （OFDI） set a record of US $84 billion， making the country the world’s third largest country for OFDI.

In the first month of its operation， the Shanghai Pilot Free Trade Zone （FTZ） registered 21 newlyestablished foreign firms with an average registration capital of US $25 million， sevenfold last year’s figure in the region. The main attractions of the FTZ to foreign firms include the “negative list” of specific items， entities， products in which foreign investment will be banned or restricted， but whereby no permission is required to invest in any other sector. The management mode and trade supervision mode of “entering first， clearance later” that could reduce companies’ operation costs， and six additional opening fields， including the financial sector， are also new advantages.

Hu said that if the Shanghai FTZ succeeds there could in the future be an Urumqi FTZ in Xinjiang， and a Chongqing or Chengdu FTZ in southwest China. Shanghai’s experience in its construction and opening of the FTZ could thus be swiftly applied nationwide.

In addition， this year witnessed the signing of free trade agreements between China and Iceland and between China and Switzerland. Progress has also been made in negotiations on free trade zones between China and Australia， China and South Korea， and China， Japan and South Korea. In September， China proposed building the Silk Road Economic Belt， and in October it raised the upgrading of the China-ASEAN（Association of Southeast Asian Nations） Free Trade Area. All are significant measures to further China’s opening-up and empower its economic cooperation with the world.

The first three quarters of 2013 saw China’s trade with nine countries and regions with which it has signed free trade agreements， including ASEAN， Chile and Pakistan， increase by 17 percent， 9.3 percentage points higher than China’s overall foreign trade growth in the same period. Opening wider will not only provide various world economic entities with opportunities to cooperate with China， but will also be a cast-iron chance for China to promote its reforms.