The correct prescription

Updated: 2014-04-04 08:01

By Martin Banks (China Daily Europe)

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 The correct prescription

Some of the participants in the two-day seminar at the College of Europe in Bruges on China's reform and its global implications. Fu Jing / China Daily

Despite the complexity of china's rapidly changing economy, many international experts believe proposed reforms are what it needs

It's called the Chinese dream, but what does the red dragon's reform process mean for China and the world?

The language of the "Decision on Major Issues Concerning Comprehensively Deepening Reforms" may not be filled with specifics, but there is no escaping the global significance of the latest wave of Chinese reforms.

This was underlined at a high-level seminar at the College of Europe in Bruges on April 1 and 2, where scholars, experts and politicians spoke of the potential impact of these reforms not just on China but on the rest of the world.

They included former World Trade Organization director-general and European Union trade commissioner Pascal Lamy who, while cautioning against reform "for reform's sake" highlighted the correlation between the various measures agreed on last November and continued economic growth and prosperity.

The blueprint for the next round of reforms proposes a transformation of "imperative and administrative governance" to "governance by law".

China has, essentially, set two goals: to double its GDP and per capital income between 2010 and 2020 and "to build China into a modernized socialist country which is prosperous, strong, democratic and harmonious".

The plan is to increase urbanization by 64 per cent by 2030 and invest more than 600 billion euros ($825 billion) in environmental protection up to 2020.

Most new reforms, which will be spearheaded by a leading team, are likely to be gradually become policy over the next five to 10 years.

Based on the 3-8-3 Plan, the proposals have been shaped by Chinese think tanks and will focus on eight sectors and involve three reform packages.

The correct prescription

The reforms cover the market, government and companies. In each case, the goal is to reduce the government's role in the economy. The eight core sectors comprise finance, taxation, state assets, social welfare, land, foreign investment, innovation and good governance.

In turn, the reform packages seek to relax control over market access, improve social security and allow sales of collectively owned rural land. The household registration system (hukou), which continues to discourage migration, will be phased out by easier access to urban hukou.

Achieving these goals will without doubt require some very careful rebalancing between consumption and investment, internal and external demand, and the ecology and the economy.

One of the most striking features of the Chinese economy is the low amount of consumption. At present, for example, private consumption is about 35 per cent of GDP, roughly half the share in the United States.

As the Bruges seminar heard, China's reforms over more than 30 years have not only transformed the country, but also exerted a strong impact on the world. In the coming years, this reform process will, without doubt, exert an even more significant influence.

And, as Lamy and others pointed out, all the issues on the reform list - from the economic development model, progress in technological innovation, to trade, investment and the role of culture and education - concern not just China and its society, but also the EU and the world at large.

As part of China's moves toward becoming a moderately prosperous society, the focus has been on banking and infrastructure reform. But what, for example, about the role of services in China's reforms?

Despite China's economic upgrade, the share of services in the economy or employment is still similar to some less-developing countries.

The services sector still has a significantly smaller share of GDP than in almost all other economies and many doubt that employment, growth or welfare can be increased in China without substantive reforms of the services markets.

The third plenum statement on coming reforms in November detailed ambitious intentions on financial reforms, foreign investment and liberalization of utilities, including transport and telecoms.

However, many still doubt China's ability to open up. There are many questions around China's intention to join the Trade In Services Agreement negotiations, and China's willingness to address its foreign equity caps through investment treaties.

What, for example, are the potential barriers in Chinese services markets? What will be the trajectory of reforms for the service industry in the new reform agenda? What role will foreign-invested firms play in China? What role will China play in the international services trade?

Yes, China has clearly made huge economic and social progress but this has not been without high environmental costs, due to wasteful models of development and inappropriate industrial structures.

In recent years, China has suffered heavy smog in many parts of the country, not least in Beijing where it has become part of everyday life. This has caused widespread concern and is one reason why the Chinese government has declared war on pollution.

But while focusing on megacities and regions that suffer frequent smog, the need should be to concentrate on industrial structures, energy efficiency, carbon emissions, dust and other key areas.

The problem, though, is that the need for more investment to combat local pollution has a side effect: it makes the rebalancing of the economy more difficult.

The reform emphasis is very much on the market playing a "decisive" role in resource allocation but there are other areas of the economy that cannot be left to market forces alone: industries like telecoms, gas, electricity and water tend to become monopolistic if left to the market so these sectors have to be regulated and supervised. Well-run economies achieve higher levels of welfare not because there is less regulation, but because they have more efficient regulation.

China, it is argued, still presents relevant restrictions for European companies in doing business - problems like state-owned enterprises getting advantages that make competition unfair and uncertainty about the rule of law regarding patents and, more generally, the fact that this uncertainty discourages EU companies from investing in China.

Some executives, like IMEC CEO Luc Van Den Hove, a panelist at the Bruges seminar, believe problems with intellectual property rights are "greatly overstated" but, even so, China still has to encourage market-oriented reforms because foreign investment brings know-how and expertise that will increase the productivity of China's companies.

Without doubt, the biggest area in need of reform is finance, a sector that requires a more nuanced approach than merely liberalizing market forces and opening to the outside world.

The global financial crisis has confirmed once more that the financial market requires tight supervision if it is to work well. It is difficult to overstate the importance of financial markets for China and the global economy.

China has reached a crossroads in terms of making the reforms necessary for continued growth and better productivity. Continuing in the direction so far pursued with remarkable success, namely giving the market a greater role and opening up to the rest of the world, might no longer be sufficient.

It can be argued that combating pollution, for example, requires more state intervention, not less. Similarly, strengthening a huge, potentially unstable financial system requires stronger oversight and some continuing separation from the global financial system. Steering this change in the right direction will be crucial not only for China, but also for the global economy.

Yet China is changing fast.

Thirty-four years after Deng Xiaoping's opening-up, millions have been lifted out of poverty - more than 500 million since 1990 alone - and modernization of agriculture and industry have returned the country to the world power status it enjoyed until 1840.

What is clear is that this tremendously ambitious reform blueprint clearly recognizes the need for decisive action in response to the challenges faced.

China Daily

(China Daily European Weekly 04/04/2014 page22)