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Assessing China’s Economic Reform Agenda

Assessing China’s Economic Reform Agenda

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Chinese President Xi Jinping and Premier Li Keqiang face daunting challenges in reforming the world’s second largest economy, but reforms on the agenda only scratch the surface of China’s nonmarket economy.
Chinese President Xi Jinping and Premier Li Keqiang face daunting challenges in reforming the world’s second largest economy, but reforms on the agenda only scratch the surface of China’s nonmarket economy.

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Published by: Center for American Progress on Apr 30, 2014
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1 Center for American Progress | Assessing China’s Economic Reform Agenda
Assessing China’s Economic Reform Agenda
Even with New Reform Efforts, The State, Not Market, Still Poised to Drive China’s Economy
By Adam S. Hersh May 1, 2014
Las year’s announcemens o a new Shanghai Pilo Free rade Zone and a new eco-nomic governing agenda a he Communis Parys Tird Plenum under Presiden Xi  Jinping and Premier Li Keqiang offered hope o a new direcion in Chinas economic reorm. Tis Tird Plenum decision documen promised o clean up he problems  widely associaed wih ongoing sae involvemen in and conrol over Chinas economy, including inefficien subsidies o sae-owned enerprises, or SOEs; conrol and owner-ship o he financial sysem; price inervenions ha skew incenives and disor no jus China’s markes bu global markes as well; and he rampan and relaed problems o environmenal degradaion and corrupion.
 Many in China and around he world applauded he Chinese leadership’s overure o reorm, which China proclaimed would esablish a “decisive role or he marke” in is economy.
 Te posiive response came even as China simulaneously pledged o uphold and srenghen he economic role o he sae in he Tird Plenum decision, as he reorm noneheless signaled a landmark shif in he direcion o China’s undamenal economic insiuions away rom wha he world has seen up o his poin. Bu while China wachers ocus on he opimisic vision imbued in he reorm agenda, more subsanive quesions remain: How will China’s reorms affec is nonmarke economic srucure and, in urn, he commercial landscape or he Unied Saes and he res o he global economic communiy? Can China’s leaders overcome he poliical and srucural barriers ha sand in reorm’s way? When China acceded o he World rade Organizaion, or WO, in December 2001, i did so afer all members o he world rading communiy agreed ha, as a ransiion-ing economy, China sill operaed on nonmarke principles. Because o is prevalen ani-compeiive indusrial policies and he conradicions beween sae conrol and marke mechanisms buil ino is undamenal economic insiuions, China’s economy could skew he commercial compeiive environmen or he enire global economy. As a resul, he agreemen provided member counries a means o ake ino accoun China’s nonmarke economy saus or he purposes o monioring and enorcing rade rules se under he WO and oher inernaional agreemens.
2 Center for American Progress | Assessing China’s Economic Reform Agenda
In addiion o he benefis o greaer marke access o he WO communiy and he abiliy o press heir own grievances hrough he WO dispue setlemen mechanism, China go he opporuniy o gradually phase in many o is marke opening commi-mens o ariff and non-ariff barriers and invesmen resricions. China was also able o keep in place many o is nonmarke insiuions and policy levers. Te muual expeca-ion upon he agreemen’s negoiaion held ha, over ime, China’s deepening com-mercial engagemens wih he global economy would nudge business pracices oward inernaional norms o compeiive neuraliy󲀔perhaps even ahead o he phase-in schedule o commimens. China grew rapidly ollowing is WO enry, quickly becoming he world’s second-larges economy and he larges rading naion, boh as i developed is indigenous capaciy and as many mulinaional invesors relocaed producion o China’s shores.
  Alhough invesmen, expors, and growh surged, Chinas economic developmen moved increasingly in a sae-cenered direcion. In he words o China scholar Minxin Pei, “China’s reorm died in he [2000s], ollowing he counry’s enry ino he World rade Organizaion (so much or he prognosicaion ha WO accession would spur reorm).”
 Te increasing non-markeizaion o China’s economy was so universally obvious ha naive Chinese speakers developed a oken expression: guo jin min ui,  which means, “he sae advances while he privae secor rereas.Presiden Xi and Premier Li’s agenda is ambiious, o say he leas, and change is di-ficul in he world’s mos populous counry and second-larges and ases-growing economy󲀔even given ha leaders are shooing or a arge dae o 2020 o launch all o he envisioned reorms. Bu quesions remain abou wha specific reorms underway acually mean, how hey will change China’s domesic economy, and in wha ways hey  will affec he way Chinese producers compee on he global playing field.Tis issue brie examines key documens rom he Communis Parys Tird Plenum program, reorm pronouncemens in governmen bulleins, and work progress repors o assess how reorms will affec he way China’s economy works. Te brie ocuses specifically on several key aspecs relevan o he ways in which China’s nonmarke economic srucure affecs he global commercial environmen and assesses wheher planned reorms will mee he sandards o China’s parners in he global economy:Te Communis Pary, sae ownership, and ransacional relaionships ha drive China’s economy Marke-access barriers and invesmen resricions ha deer impors and open inves-men ino China’s domesic economy o suppor developing and diversiying ino advanced domesic indusries
3 Center for American Progress | Assessing China’s Economic Reform Agenda
Financial reorm and China’s “going ou” sraegy, which aims o inves Chinese capial abroad and o propel Chinese brands and companies o global prominenceOn many rons, China’s reorm agenda is aking he righ seps orward. Bu even i reorms are implemened ully someime afer 2020 or by he ime Presiden Xi and Premier Li hand over he manle a he end o heir 10-year erms, hese reorms seem unlikely o undamenally change he insiuional oundaions o China’s economy. Specifically, reorms will do litle o change he saes broad involvemen in ownership, finance, and auhoriy over key decisions and prices in China’s economy.
Party, state ownership, and transactional relationships
Undersanding how China’s economy works necessiaes an in-deph look a how is poliical sysem works, as well as a he inerwining poliical and personal relaionships ha permeae China’s economy. Even as China’s economic insiuions have evolved away rom cenralized economic planning since 1978, he poliical insiuions ha govern China’s economy endure and have calcified.
 Governance in China begins wih he Communis Pary, which exiss above he auhoriy o he sae and rules wih an unchecked monopoly on power. Te sae insiuions adminiser he pary’s rule and provide a veil or one-pary conrol. Economic reorms since 1978 have ransormed China’s economic landscape in ways ha would have been unimaginable o he prior generaion’s leaders; hese changes  yielded an unprecedened sreak o economic developmen never beore seen in human hisory.
 From an economic perspecive, wha maters mos or how China’s economy  works is who holds conrol over he naions economic resources and wha incenives and consrains hey ace in making basic economic decisions󲀔namely, where and in  wha o inves. Bu reorms underway do litle o change he exising sysem o exensive sae involvemen in direc and indirec conrol over China’s economy.
Social structure of China’s state ownership and economic governance
Te ormal insiuions ha comprise China’s governance srucure can ofen mask he underlying dynamics o poliical power.
 Te reach o he parys organizaion ino China’s economic lie is exensive, including household decisions on reproducion and where people can live, work, and go o school; where and wha invesmens can  be made; and pary work commitees and he managemen and boards o sae-owned and privae enerprises. Te pary also has conrol over seting prices or key economic inpus such as energy, as well as inermediae manuacured and oher inpus in indus-ries deemed sraegic or he naional economy, such as finance, seel, chemicals, renew-able energy, and he nearly 24 oher “commanding heighs” indusries China views as essenial o is naional economic securiy.

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