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Shanghai (source: Pixbay)

China’s Economic Transition: An Unfinished Journey

By Kong Tianping, Professor, Institute of European Studies, CASS; Visiting Fellow, CASE

China began implementing market-oriented economic reforms in 1978. These reforms are still underway today. As the largest transition economy, it has made tremendous achievements over the last 38 years. In terms of economic growth, China has shown itself to be a success story. It has maintained the highest economic growth rate in the world for more than three decades — lifting more than 800 million people out of poverty. Recently, China’s catching-up process has accelerated, and it has narrowed the gaps with advanced countries. It surpassed Japan to become the second-largest economy in the world in 2010. By 2015, it had met all its Millennium Development Goals. In 2016, 110 Chinese companies were listed in the Fortune Global 500, as compared with 1996, when only three Chinese companies made this list. China has successfully modernized its metro, highway, high-speed train, and airport infrastructure in a short span of time.

Despite the above-mentioned achievements, China still faces many problems. Per capita income is lower in China than in advanced economies: in 2015, China was globally ranked 71st (based on current prices) and 93rd (based on purchasing power parity). The number of people in poverty is still significant. According to China’s current poverty standard (per capita rural net income of RMB 2,300 per year in 2010 constant prices), there were 70.17 million poor in rural areas in 2014. Income inequality between coastal and inland regions, between urban and rural areas, and between certain industries remains large. It is estimated that the Gini coefficient is close to 0.5. This rapid economic development has resulted in the spread of “urban diseases” — overpopulation, traffic congestion, air pollution, and the insufficient supply of healthcare and schools. Furthermore, migration from rural to urban areas creates additional social problems.

From the perspective of economic systems, China is a market economy — albeit an immature one. There are various terminologies used to describe China’s economic system, including “state capitalism,” “crony capitalism,” “the China model,” and “a market economy with Chinese characteristics.” According to Professor Wu Jinglian, China’s economic system is at the initial stage of a market economy, and carries many vestiges of its old economic system. The state still dominates the economy and is involved in and restricts the role of the market in the allocation of its resources. Bureaucratic regulations and an administrative monopoly hinder competition. The government overextended its influence on the economy using directives, resulting in market disorder. Market fragmentation remains a problem due to the protection of certain regions and industries. This unbalanced development poses a threat to the functioning of the market system. In this regard, the commodities market is in a better position than the factors of production markets. The land market is not well developed and the capital market lags behind.

When Mr. Xi Jinping came into power in late 2012, China restarted its economic reforms in a different context. China’s economic slowdown became the reality in 2011, and is now viewed as the new normal in China. The demographic dividend has been used up since 2012, and the working-age population decreases by several million annually. Industry overcapacity has set off alarm bells for the economy. China’s many problems have compounded — the buildup of debt, the housing bubble, income disparity, environmental degradation, and social tension. China’s new normal has met the “new mediocre” of the world — the current external environment is certainly less favorable for China.

The Third Plenary Session of the 18th Central Committee of the Chinese Communist Party, held in November 2013, passed a milestone resolution deepening reforms and setting the principles of the new economic reforms. The Leading Group on Comprehensive Deepening of Economic Reform is responsible for economic reform, and President Xi Jinping serves as its head. Reform is introduced in a top-down manner, as reform in China has entered a deep-water zone — economic reform must take into account strong-vested interests. Furthermore, economic reform in this new context is more complicated and difficult than before. A main tenet of this reform is to allow the market to play a decisive role in the allocation of resources. This is one step more than the former description of the market as having “a basic role” in the allocation of resources. The new round of reforms ensures that the state protects property rights and ensures equal access to the factors of production under various types of ownership. Concerning state-owned enterprise (SOE) reform, China has decided to create several state-owned asset management companies, transforming SOEs into state capital investment companies. State capital gains transferred to the social security fund will be increased from a variable level of 0 to 20 percent to 30 percent by 2020. The development of a mixed economy by means of the cross-shareholding of state capital, collective capital, and private capital is encouraged. China commits to further liberalize its pricing system — any price that can be formed by the market must be left to the market. Price reforms regarding water, oil and natural gas, electricity, transportation, and telecommunication are on the agenda. China has redefined the role of the government — the government will withdraw from business activities that can be regulated by market rules. In terms of economic policy, China is focusing on supply-side structural reform; specifically, cutting overcapacity, destocking the housing supply overhang, and deleveraging are the main policy measures. The government has introduced policy measures to streamline regulation and to encourage mass start-ups (entrepreneurship) and innovation. China is dedicated to realizing its transformation from a producer-driven to a consumer-driven economy.

If these measures are not distorted, China’s reforms will bear fruit. The key is to ensure that the market plays a decisive role in the allocation of resources and to rightly define the role of state.

CASE — Center for Social and Economic Research is an independent, non-profit economic and public policy research institution, established in 1991 in Warsaw.

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