China`s New Round of Reform

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China’s New Round of Reform: Perceptions and Prospects
Dr. QIN Xiao
Chairman, Boyuan Foundation
January 6, 2014 NYEX
Content
1.
China steps into an upgraded version of reform
2.
From government-dominated economy to market system
3.
The tough combats ahead
4.
The sources of reform dividends
2
China steps into an upgraded version of reform

The Decision inherited Deng Xiaoping’s legacy of reform and open up,
responded to major issues currently facing China’s economy and society,
and outlined reform programs to solve those long-term accumulated
economic and social problems.

All of these show that China’s new leaders are making the right choices at
historical moments, and China has entered into an enhanced version of
reform.
3
The main features of the new round of reform

Firstly, expand economic reform into political, social, cultural, and
ecological reforms, the so-called “five-in-one” all-round reform agenda;

Secondly, point the reform towards a modern market system;

Thirdly, confirm the measures, objectives and timetable; and

Fourthly, establish an authoritative organization - to guide and implement
the reform.
4
Content
1.
China steps into an upgraded version of reform
2.
From government-dominated economy to market system
3.
The tough combats ahead
4.
The sources of reform dividends
5
Economic reform remains the key focus

The key objective of the enhanced version of reform is to “promote the
modernization of state governance.” The economic system reform
remains the key focus of the “five-in-one” reform agenda. That is because:

Firstly, it is related to the direct benefit of the people;

Secondly, it has wider social consensus for economic problems that
exist in China;

Thirdly, economic reform is bound to touch on political, social and
value system issues, and therefore lay the foundation for orderly
reforms in these areas;

Still, we cannot rely purely on economic reform to complete social
transformation. The political and social reform should promote in a
gradual and continuous approach.
6
The market plays a decisive role

At the beginning when China was transforming from the planned economic
system, the government played a unique role in pushing forward transition
and fueling growth.

As the market developed, however, instead the government’s role being
fade out, it was enhanced by the interest groups. They advocated the
government’s role in resource allocation, and triggered a debate over the
so-called “China model” .

The Decision provides a clear description of the core of the economic
reform as “ allowing the market to play a decisive role in the allocation of
resources.”

Thus, the Decision offers a response to the “China model” debate, and
signals a turn from the "developmentalism state" to a true market
economy.
7
The logic and power of the market

The basic logic of the market system is to allow prices to be discovered by
free market transactions, and resource allocation to be determined by
price signals.

The key components of market system: fee free transaction, market price
and protection of property right.

The Decision removes government restrictions on transactions
(administrative approval, monopolization, etc.), deregulates price control
(factor market prices, such as prices of capital, resources, energy and
land), establishes a modern legal system in accordance with the rule of
law, and protects property rights.
8
Re-defining the role of the government


The Decision re-defines the function of the government, and announces
concrete reform measures, which include:

changing corporate registration, investment, and stock issuance from
administrative approval to registration systems;

formulating “negative lists”, allow state-owned, private and foreign
enterprises the equal status and freedom to enter unrestricted areas;

changing the performance appraisal and rating system of local
governments, which used to be dominated by GDP growth; and

enhancing the role of the government in providing public goods and
services.
In summary, the role of the government is to adjust fluctuations in macro
economic cycles, provide public goods and services, and maintain market
order through rule of law.
9
Rebuilding public finance and fiscal system

The Decision has laid out a comprehensive plan for fiscal reform.

The context of fiscal reform includes establishing a “comprehensive” and
“transparent” budget system.

“Comprehensive” should be an all-encompassing budget, which means
standardizing all kinds of revenue, spending and borrowing currently
outside of the budget system. “Transparency” means all fiscal information
is open and accessible. It might be difficult to achieve at the moment, and
will move forward step by step.
10
Fiscal reform measures

Increase the proportion of fiscal expenditure of public goods and services
related to people’s livelihood;

Standardize the government’s revenue, spending, borrowing and
investment;

Re-clarify the fiscal revenue and spending responsibilities between the
central and local government ;

Adjust the tax income structure: (1) replacing the business tax with a
value-added tax in the service industry; (2) raising the proportion of direct
taxation; and (3) increasing tax categories and tax rates for property,
resources and enviroment protection.

Reduce "macro taxation" burden, reduce and regulate various kinds of
administrative fees, and strictly control government officials’ consumption
expenditure.
11
Promoting financial reform


The Decision has set three major objectives for the financial industry
reform, namely

i) price reform, which includes the deregulation of interest rate and
exchange rate;

ii) opening up of the capital market and capital account convertibility;
and

iii) broaden market access.
These reforms have been under way in recent years. To achieve the
targets set in the Decision over the next three to five years is in prospect.
12
Reform of state-owned enterprises (SOEs)

The Decision extends equal treatment to enterprises of both public and
non-public ownership in terms of property rights protection, market access
and policy treatment. These reforms will help eliminate discrimination
against private enterprises.

Nevertheless, the Decision still uses ownership system to divide the two
types of enterprises, and reiterates the dominant position and function of
the state-owned economy. This conflicts with the goal of “equal
treatment” and “fair competition” among different ownerships. Obviously,
there remains much room for further reform.
13
Environmental protection

The Decision has recognized the importance of environmental protection,
and raised the significance of the “establishment of ecological civilization
systems” to the level paralleled with economic, political, social and cultural
reforms.

China has paid an enormous price in its environment, ecology and natural
resources for its high-speed economic growth. Not only does it endanger
the livelihood of the people, it will also have disastrous effect on their
descendants. The environment is an area of public interest and creates
huge fiscal burden and hidden debt.

No further delay would be allowed for solving this problem. The Decision
announces the new leadership’s determination to protect the environment.
However, concrete measures and policies are yet to be seen.
14
Other reforms that deserve special attention


Other major reform measures stated in the Decision which deserve special
attention include:

anti-coruption

the establishment of free trade zones;

reforms in areas such as education, healthcare;

easing of the one-child policy;

reform the current "Hu Ko" policy which divides the citizen in two
category: city and countryside;

extending the age of retirement, etc.
These reforms are bound to have profound impact on the development of
China’s society and economy.
15
Content
1.
China steps into an upgraded version of reform
2.
From government-dominated economy to market system
3.
The tough combats ahead
4.
The sources of reform dividends
16
The combat against powerful vested interests group

The Decision pledged to enhance the market's role - not the government's in allocating resources.

Nevertheless, history suggests there has been strong resistance from
ministries and local governments, SOE monopolies,which benefit from the
current system and refuse to give way.

China needs to shift away from traditional idiology, such as socialism vs.
capitalism, public vs. private ownership, party leadership vs. the rule of law,
etc.

The success of new reforms must conquer the resistance from these special
interest groups and emancipate the mind. It would require determination
and authority of politicians, social responsibilities and rationality of elitists
as well as public outcry and social pressure. Only then can the power of
reform deliver substantial results in this combat.
17
Properly manage the reform process

Reform need to maintain steady economic growth(6-7%) and adjust the
economic structure (curb excess capacity, high energy consumption and
high-polluting industries).

Reform might increase the costs for enterprises and generate a certain
level of economic and social risks. China’s leaders must carefully control the
costs and risks, narrow the income gap and let most people share the
benefits of the reform.
18
Political reform

China is at a critical turning-point from a transitional society to a modern
society. The market system is one key component of a modern society.

However, we wouldn’t see a well-functioned market system, sustainable
economic growth, legitimate wealth accumulation and fair income
distribution unless a democratic political system, the rule of law, a free,
diversified and inclusive market for ideas, and a harmonious society are in
place. In this sense, political reform is a crucial element to achieve the
transformation into a modern society.

China’s economic reform is bound to touch on political, social and value
system issues. Either economic growth leads to political reform, or the
political system would impede economic reform. The future of China
remains to be seen.
19
Content
1.
China steps into an upgraded version of reform
2.
From government-dominated economy to market system
3.
The tough combats ahead
4.
The sources of reform dividends
20
The sources of reform dividends

The main sources of reform dividends come from:

the transformation of government functions and a better legal system,
which effectively reduce market transaction fees, promote market
transactions, and provide incentives for innovation;

price reform, which facilitates effective allocation of resources, and
encourages the growth model to shift from factor inputs to improving
productivity;

fiscal reform, which enhances the government’s ability to provide
public goods and narrow income gap;
21
The sources of reform dividends (continued)
tax reform, which supports the development of the service industry,
and reduces the over-reliance on secondary industries;
 rural land reform, which shifts more income to rural households,
relaxes the rules for selling farmland, diversifies land supplies and curbs
rising houses prices; and
 environmental protection and ecological improvement, which not only
benefit the people, but also create investment opportunities in
environmental protection and new energy industries.
All these will benefit not only China by balanced and sustainable growth,
but also the U.S. and the rest of the world by creating more business
opportunities and less uncertainties.
Reform gives room to the creation of dividend. The extent of the creation
of reform dividend is determined by the effectiveness and success of the
reform. Reform dividend can only be obtained through competition and
innovation.



22
Thank you!
23
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