Thursday, Apr 2, 2015, 3:21 PM CST – China


From “Market-oriented” to “Market-based”

Despite decades of market-oriented reform, government intervention has become embedded in every aspect of the economy.

As China’s leadership prepares to convene in November to set the tone of national policy for the next few years, it has been reported that “market-based” reform, an escalation of the current “market-oriented” approach, may be on the cards. Although details of the reform are yet to be disclosed, the reform, should it materialize, is expected to help China achieve much-needed economic restructuring, laying the foundations for another decade of economic growth.

But for any such reform to be successful, three goals must be achieved: reforming the pricing mechanism of major production factors to be truly market-based; breaking State monopolies over key service industries; and reducing government intervention in the market.

In recent decades, as major production factors, including land, energy and capital, have all been controlled by the State, their prices have skewed in favor of the State sector. The result is that the State has commanded a much larger share of national wealth than the populace, leading to low consumption and an investment-driven growth model. Since this model can now no longer sustain itself, it is time to fix the distorted pricing mechanism.

Another major problem with China’s economy is unbalanced development between the manufacturing and service industries. The fundamental reason is that major service industries, including finance and telecommunication, are monopolized by State-owned enterprises, which have little incentive to compete or innovate.

At the Summer Davos Forum held in September, Chinese Premier Li Keqiang said that China will lower the entry threshold for private capital in a wide range of industries, including finance, energy, transportation, telecommunication, and public facilities. But similar promises in the past have come to nothing. Although the government has lifted legal barriers for private capital to enter these industries, there remain administrative barriers at both the local and provincial level.

Since assuming power, Premier Li has repeatedly emphasized that the administration will focus on decentralization and the streamlining bureaucracy, and within this year, the government has removed mandatory administrative approvals in many industries. However, despite decades of market-oriented reform, government intervention has become embedded in every aspect of the economy. There is no way that isolated efforts can lead to substantial change.

Now, the leadership has a golden opportunity to tackle this issue systematically. By escalating reform from “market-oriented” to “market-based,” the leadership should set a clear line between the “invisible hand” of the market and the “visible hand” of government intervention. Only this way can the Chinese economy regain its momentum and achieve its much-vaunted goal of economic restructuring.


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