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China’s Bold Market Oriented Reforms

 

The Communist Party of China, which at one time sent tremors throughout the capitalist world particularly the Western countries, has just introduced another dramatic package of home-grown market-oriented reforms. In fact, the outcomes of the Third Plenary of the Central Committee of the Communist Party offer important insights for Sri Lanka. The Pathfinder Foundation (PF) is focusing on these reforms to convey the message that they offer considerable scope for being customized to reflect the specific conditions of the Sri Lankan economy. In considering these reforms, it is important to take into account the political and social characteristics of Sri Lanka. The level of ambition of the reforms that have just been announced by the Chinese authorities has surprised almost all commentators. Some skeptics claim that the actual implementation of the reforms will fall short of what is promised due to resistance from vested interests and/or a lack of political will. This is unlikely, particularly as President Xi Jinping has personally taken charge of the mechanisms that have been established to oversee these economic reforms. He will lead the group on “Comprehensive Deepening of Reforms” which has been tasked with implementing the planned changes. It is very unlikely that President Xi will compromise or back down now that he has staked his personal authority behind these reforms.

 

 

It is likely that the Chinese leadership fully understands that major reforms are needed to maintain the trust of the people. Its compact with the Chinese people depends on reforming the economic model to sustain the 7% - 8% growth necessary to create 10 million jobs per year required to provide opportunities for the new entrants to the labour force and maintain urban unemployment at 4%. Increasing concerns among the people regarding corruption, rising inequality, food safety and pollution have also convinced the leadership of the need for a major reform package to maintain the trust of its citizens which has been based on the capability of the Communist Party to deliver impressive development outcomes.

 

 

The cumulative effects of the proposed reforms will transform the Chinese economy by 2020.

 

 

$1         ·         Market forces will be given a greater role in the economy through wide ranging de-regulation. Already 221 administrative approval procedures have been removed.

 

            ·   SOE’s will be forced to operate on a more commercial basis and the private sector’s role in the economy will be expanded. A key demonstration of the government’s desire to move towards the market is the decision to corporatize the Railways Department which employs 2 million workers, while administering only 100,000 km of rail (compared to 250,000 km in the US).

 

           ·  A strong link has also been announced between wage increases and productivity, with priority being attached to continuing education and skills training 

 

  •       ·  In addition, SME’s earning less than 20,000 Yuan per year have been exempted from VAT and income tax as a means of stimulating the market-oriented segment of the economy 
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      ·   A market for rural land will be established.

 

$          ·       The restrictions on rural migrants living in urban areas will be eased in phases.

 

 

$          ·      The relationship between Central, Provincial and Local governments will be re-structured with the latter two levels of government gaining a greater share of tax revenues.

 

 

$          ·       Reforms will be introduced to remove distortions in the financial sector.

 

 

$          ·       The one child policy is also been relaxed to mitigate the challenges of aging.

 

 

The Chinese authorities have also identified a number of “breakthrough areas:

 

    • Retirement and healthcare have been identified as key drivers of the service economy.
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    • A major low-income housing program has been launched to build 36 million public housing units (currently 40 million people are supported in such public housing, 70% of whom are retirees).
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    • While continuing to welcome FDI, the Chinese will also promote outward investment (“going out” strategy for its corporates).
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    • Priority has been attached to social security, pensions and healthcare reforms to strengthen the social safety-net.
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    • This would also serve to moderate China’s extremely high savings rate thereby boosting consumption. This will assist in the authorities’ overall objective of rebalancing between external and domestic demand. Currently, there are 20 million urban poor and another 5 million rural poor who require social protection.
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    • Infrastructure development in the hinterland (Central and Western areas away from the fast-growing coastal regions) where per capita income is half the national average. In contrast, the coastal areas are now moving into the higher middle-income bracket. The Chinese authorities see the potential to catch up in the lagging regions as an important source of growth in the future. China has the fiscal muscle to make this a reality.
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    • China will be granting 4G broadband licenses soon. E-commerce in China is expected to overtake the US in 2014.

China will emerge with a more vibrant private sector. It is also expected that better quality growth would be achieved, with positive outcomes for the environment and income distribution.

 

 

These reforms will not only restructure the Chinese economy but they will also widen China’s impact on the rest of the world. Up to now, China has imported primary commodities; intermediate goods for export processing platforms; and capital goods for industrial expansion and the real estate sector. In future, China’s import structure will shift towards more consumer goods. In addition, FDI and portfolio investment flows out of China will become more significant. There will also be rising demand for services. In addition, China will also become more competitive in an increasing range of higher value economic activities which will create greater competition for countries involved in these sectors.

 

 

China has embarked upon an ambitious reform program. It will transform its economy and have a significant impact on the rest of the world. Above all, China’s reform program provides important insights for countries like Sri Lanka regarding the merits of pressing ahead with structural reforms at the beginning of a political cycle.

 

 

Above all it is important to note that some major countries, including USA and UK have already embarked upon initiatives at the highest levels to take advantage of new opportunities that are likely to arise from China’s wide ranging reforms. The visits of the US Vice President and British Prime Minister to China are good examples of this. 

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