21 February 2020
China's leader Xi Jinping aims to let market forces play a bigger role in steering the economy. Photo: Reuters
China's leader Xi Jinping aims to let market forces play a bigger role in steering the economy. Photo: Reuters

POLICY WATCH: Market economy the catchword in Xi’s reform path

Market economy has emerged as the key word in the communique issued by the Communist Party of China (CPC) after its four-day plenum, with top leaders apparently recognizing that the government shouldn’t be both a referee and a player in the market. The comments have sparked fresh hopes that Beijing will let market forces play a bigger role in various sectors and that the protective grip on state enterprises will ease.

The Third Plenary Session of the 18th CPC Central Committee, which concluded Tuesday, has acknowledged the market’s “decisive” role in allocating resources. The government would need to transform its function to avoid market intervention.

The administration led by President Xi Jinping {習近平} and Premier Li Keqiang {李克強} has come in for praise from several analysts and economists, who believe the new leaders have a sound understanding of what a market economy is and what role the government should play.

However, the experts say the government will need time to reduce its influence in the market, given the current situation where state-owned enterprises dominate sectors such as telecommunications, energy and public utilities. The administration will need to demonstrate its commitment and act decisively on reforms such as privatization of state-owned firms or allowing private players to compete with the incumbents.

Under the new policy agenda, state-owned firms will be required to catch up with market forces, and their businesses will no longer be guaranteed by public money.

“The government has done a good job but sometimes intervened too much, which led to high administrative costs, low efficiency and corruption,” said Xie Chuntao {謝春濤}, an expert from the Party School of the CPC. “I think the leadership understands what the problems are.”

Government intervention is not the best solution to adjust the market; it will only have lot of negative effects such as corruption, higher administrative costs as well as poor efficiency, Xie told the Xinhua news agency.

In the communique, the CPC admitted that the core of economic reform is proper relationship between government and market.

“The reform should let the market play a decisive role in allocation of resources while the government should perform its duties better,” the document said.

To ensure proper and optimum allocation of resources, the primary task is to build an open and unified market with orderly competition.

While the CPC pledged to clear barriers in the market and improve the efficiency and fairness in the allocation of resources, it is still difficult to predict how deep such reform will go, given the various entrenched vested interests who will oppose any major overhaul. That will be one of the obstacles the leaders need to deal with.

In the communique, the CPC said it will also create fair, open and transparent market rules and improve the market price mechanism.

While upgrading the role of the market, the government will transform its functions and improve the macro-regulatory system and governance.

The CPC also pledged to deepen reforms in the administrative system and enhance the credibility and execution capability of the government.

Beijing has, in fact, already introduced several rounds of market-oriented reform in the past few months. In July, the central bank canceled the floor on lending rates, paving the way for interest rate liberalization. Meanwhile, the pilot free trade zone launched in Shanghai in September is expected to become a test bed for convertibility of the Chinese currency and the deregulation of interest rates.

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EJ Insight writer