By Adam Hersh
WASHINGTON, D.C. (May 1, 2014) — Last year’s announcements of a new Shanghai Pilot Free Trade Zone and a new economic governing agenda at the Communist Party’s Third Plenum under President Xi Jinping and Premier Li Keqiang offered hope of a new direction in China’s economic reform.
This Third Plenum decision document promised to clean up the problems widely associated with ongoing state involvement in and control over China’s economy, including inefficient subsidies to state-owned enterprises, or SOEs; control and ownership of the financial system; price interventions that skew incentives and distort not just China’s markets but global markets as well; and the rampant and related problems of environmental degradation and corruption.
Many in China and around the world applauded the Chinese leadership’s overture to reform, which China proclaimed would establish a “decisive role for the market” in its economy. The positive response came even as China simultaneously pledged to uphold and strengthen the economic role of the state in the Third Plenum decision, as the reform nonetheless signaled a landmark shift in the direction of China’s fundamental economic institutions away from what the world has seen up to this point.
But while China watchers focus on the optimistic vision imbued in the reform agenda, more substantive questions remain: How will China’s reforms affect its nonmarket economic structure and, in turn, the commercial landscape for the United States and the rest of the global economic community? Can China’s leaders overcome the political and structural barriers that stand in reform’s way?
When China acceded to the World Trade Organization, or WTO, in December 2001, it did so after all members of the world trading community agreed that, as a transitioning economy, China still operated on nonmarket principles. Because of its prevalent anti-competitive industrial policies and the contradictions between state control and market mechanisms built into its fundamental economic institutions, China’s economy could skew the commercial competitive environment for the entire global economy. As a result, the agreement provided member countries a means to take into account China’s nonmarket economy status for the purposes of monitoring and enforcing trade rules set under the WTO and other international agreements.
In addition to the benefits of greater market access to the WTO community and the ability to press their own grievances through the WTO dispute settlement mechanism, China got the opportunity to gradually phase in many of its market opening commitments to tariff and non-tariff barriers and investment restrictions. China was also able to keep in place many of its nonmarket institutions and policy levers. The mutual expectation upon the agreement’s negotiation held that, over time, China’s deepening commercial engagements with the global economy would nudge business practices toward international norms of competitive neutrality—perhaps even ahead of the phase-in schedule of commitments.
China grew rapidly following its WTO entry, quickly becoming the world’s second-largest economy and the largest trading nation, both as it developed its indigenous capacity and as many multinational investors relocated production to China’s shores. Although investment, exports, and growth surged, China’s economic development moved increasingly in a state-centered direction. In the words of China scholar Minxin Pei, “China’s reform died in the [2000s], following the country’s entry into the World Trade Organization (so much for the prognostication that WTO accession would spur reform).” The increasing non-marketization of China’s economy was so universally obvious that native Chinese speakers developed a token expression: guo jin min tui, which means, “the state advances while the private sector retreats.
President Xi and Premier Li’s agenda is ambitious, to say the least, and change is difficult in the world’s most populous country and second-largest and fastest-growing economy—even given that leaders are shooting for a target date of 2020 to launch all of the envisioned reforms. But questions remain about what specific reforms underway actually mean, how they will change China’s domestic economy, and in what ways they will affect the way Chinese producers compete on the global playing field.
This issue brief examines key documents from the Communist Party’s Third Plenum program, reform pronouncements in government bulletins, and work progress reports to assess how reforms will affect the way China’s economy works. The brief focuses specifically on several key aspects relevant to the ways in which China’s nonmarket economic structure affects the global commercial environment and assesses whether planned reforms will meet the standards of China’s partners in the global economy:
• The Communist Party, state ownership, and transactional relationships that drive China’s economy
• Market-access barriers and investment restrictions that deter imports and open investment into China’s domestic economy to support developing and diversifying into advanced domestic industries
• Financial reform and China’s “going out” strategy, which aims to invest Chinese capital abroad and to propel Chinese brands and companies to global prominence
On many fronts, China’s reform agenda is taking the right steps forward. But even if reforms are implemented fully sometime after 2020 or by the time President Xi and Premier Li hand over the mantle at the end of their 10-year terms, these reforms seem unlikely to fundamentally change the institutional foundations of China’s economy. Specifically, reforms will do little to change the state’s broad involvement in ownership, finance, and authority over key decisions and prices in China’s economy.
Read the full report at www.americanprogress.org/issues/economy/report/2014/05/01/88864/assessing-chinas-economic-reform-agenda.