Looming economic reforms in China are once again creating fanfare, prompting outside observers to ask what will come of China’s economic reforms in 2018. At the Davos Forum in January 2018, Xi Jinping’s top economic adviser and Politburo member, Liu He told audience members to expect big progress on China’s economic reforms in 2018. Xi Jinping’s government is aware of the perception of lackluster performance on implementing the market reforms announced in 2013. The recent trade dispute between the US and China, as well as Xi Jinping’s consolidation of power, may have given further impetus to engage in structural reforms.
China now has external impetus to commit to pro-market reforms. Though already well into 2018, the trade tensions between the US and China that began in early April has sparked announcements from officials regarding further China’s economic reforms. On April 10th, Xi Jinping announced further opening of the Chinese economy by strengthening the IP protection of foreign companies and lower tariff on auto imports. Nonetheless, there is internal pressure to continue pro-market reforms to put the Chinese economy on a more sustainable growth path.
The rhetoric on China’s reforms in the last few years from the Chinese government, on one side, and international media and the foreign business community, on the other, could not be more different. The Chinese government states that economic reform in recent years has been a tremendous success. On the other hand, international media outlets claim that there has been little real pro-market economic reform. Additionally, the foreign business community claims that there is an increasing amount of state interference in the economy at the expense of foreign businesses.
There are two main reasons for this difference in interpretation surround reforms between the Chinese government and outside observers. First, there is a lack of information and transparency about the reform process. Foreign observers can often do little more than approximate what is really happening in the Chinese political economy. One of the only ways that they can proxy the progress in pro-market reforms is by looking at the experience of foreign companies in China. Similarly, without institutions that create government transparency, the Chinese government can do little more than tell outside observers to take their word for it. Second, there is a difference in how China and the rest of the world define reforms. Western media and business think of reforms as market liberalization, in one form or another. On the other hand, China increasingly defines reform as enhancing bureaucratic efficacy and adjusting decision-making mechanisms, even if that has nothing to do with marketization. Thus, by its own definition, China almost certainly can claim the success of recent reforms. Nevertheless, the Chinese government in 2013 did emphasize the plan for pro-market reforms and, thus, there is some convergence between the Chinese government and outside observers on what reform should look like.
As early as the mid-2000s, the Chinese government began considering the need for major structural reforms, recognizing that the present Chinese growth model was unsustainable and in need of adjustment. The Five Year Plan released in 2011 contained plans to address a number of these challenges including income inequality as a politically and socially destabilizing force, as well as the need to shift from production to consumption. The Third Plenum in 2013 offered more specific commitments for major pro-market reforms. In the subsequent years, there seems to have been very little implementation of these reforms or at least, their result has done fairly little to marketize the economy and decreasing the role of the state. For example, the role of state-owned enterprises is more central to the economy now than it was in 2013. Additionally, according to the Carnegie Endowment Think Tank, committees of the Chinese Communist Party within state-owned enterprises have strengthened their influence. Nonetheless, there have been some efforts to liberalize price controls on commodities.
Gauging the Prospects of Reform
Understanding the pace of reforms remains a tricky matter because, as mentioned above, China’s system remains opaque. Therefore, it is difficult to tell how much of the reform rhetoric is simply rhetoric to woo investors and stem capital flight, and how much of it suggests substantive reforms yet to come. Additionally, even if substantive changes are reported on, it is unlikely that the world will be able to get a clear picture of many of those changes due to lack of transparency. This is particularly the case for campaigns against official corruption and reforms of the Party apparatus, where the jury remains out.
Some analysts argue that the strengthening of Xi Jinping’s rule with the abolition of term limits will encourage reforms. The argument for this is that economic reform in the past has stalled because of the power of vested interests. With centres of power tied to China’s previous leaders nearly fatally weakened, the current Chinese government may have an easier time overcoming those interests. While this may turn out to be the case, it is little more than speculation at this point.
Dr. Feigenbaum of the Carnegie Endowment for International Peace suggests that, in fact, the biggest vested interest is the Chinese state itself. This would suggest that there is a built-in barrier to reforms when the state plays such a heavy role in administering and planning the economy. Thus, reforms require a Chinese state that is not focused on economic administration but simply regulation. Therefore, China’s economic reforms, in this view, would have to be predicated upon sweeping government reforms.
Economic Reforms and Foreign Businesses in China
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Market liberalization in China is of great importance to foreign companies in China, in a time when foreign businesses claim to feel “less welcome in China”. Some foreign companies fail in the market against domestic competitors for reasons that they cannot quite trace. Foreign businesses in China are concerned that the regulatory environment is designed to ensure that Chinese firms win in China and then dominate the market globally. Therefore, foreign businesses interested in China should be more concerned about regulatory protectionism, subsidies, and industrial policy, which are part of a highly sophisticated system in China than merely tariffs.
Coming economic reforms will also change the administrative and regulatory environment that businesses will have to comply with. While this may cut red tape and make business administration easier, it may require some initial adjustments. For example, the five-in-one business license was just introduced which will allow businesses to complete registration online with one application. However, existing businesses will need to update their business licenses and move to the digital system.