Loading...


2017 January
Home >  CGCC Vision > 
New Approach of Reform in China Flourishing Diversified Economy

Lin Yifu, Professor and Honorary Director of the National School of Development, Peking University

 

As the world’s second largest economy, China must adopt a reform and liberalization policy that keeps up with the latest development. The Free Trade Zone (FTZ) policy and the “Belt and Road” initiative, for example, are strong answers to our time. As the new approach of reform arrives, mutually beneficial outcomes between China and other countries, as well as a bright, diversified future are expected.

 

Over the past three decades or so, China is the one and only emerging power nation where no systemic financial or economic crisis had occurred. The accomplishments made since the country’s reform and liberalization are indeed an unprecedented miracle in economic history.

 

A pragmatic approach facilitated the rise of China

Why did China make such achievement possible in its transformation when Russia and Eastern Europe faced repeated economic slumps, stagnation and crises? The difference has primarily stemmed from the open-mindedness and pragmatic approach adopted by China during its dual-track and gradual transformation.

 

Why did China make such achievement possible in its transformation when Russia and Eastern Europe faced repeated economic slumps, stagnation and crises? The difference has primarily stemmed from the open-mindedness and pragmatic approach adopted by China during its dual-track and gradual transformation.

 

China’s opening to the outside world followed a similar principle. For industrial areas where China did not have a competitive edge, necessary protection was offered and access by foreign capital was restricted. Labor-intensive industries with competitive advantages, on the other hand, were liberalized and investment promotion was done to attract business collaboration. Foreign operators and domestic private capital were both welcome to enter the market, and competition was encouraged.

 

Such a gradual and dual-track reform and liberalization approach gave China stability and rapid growth as it transformed from a planned economy to a market economy. Yet, the existence of various market intervention resulted in issues such as rent-seeking, corruption and uneven distribution of income; this was the price to pay for the above-mentioned distinguished accomplishments.

 

From protection to liberalization

China has grown from a low-income country to an upper-middle one. Certain capital-intensive industries have now become its competitive advantages. Already self-reliant in an open and competitive market, companies in these industries should be able to sustain profit on their own by maintaining good management. At the Third Plenary Session of the 18th Central Committee of the Communist Party of China (CPC), deepening the reform from all aspects was proposed. Domestically, the distortions left behind by the dual-track transformation system must be cleaned up; the price must be determined by the market, which could then play its decisive role in the distribution of resources.

 

Liberalization must be comprehensively deepened and reformed, not only domestically but also externally. The proposal of free trade zones is made to explore how to eliminate investment restrictions. Except for a few areas that involve national security which must be controlled, other areas should be liberalized. At the same time, the current capital accounts should be opened up to allow free-flow of capital.

 

To roll out these reform measures, China first conducted regional pilots in designated locations. If the outcomes turned out to be satisfactory, the testing area would be extended or even lifted to the national level. Pilots with unfavorable impacts, on the other hand, would be risk-controlled within the experimental zone.

 

Going international to vie for a bigger right to speak

Based on the experience in reform and liberalization, China should make fuller use of the domestic and international markets, as well as the domestic and international resources. Internationally, China should undertake its corresponding responsibilities; it should also possess the corresponding influence and right to speak on international affairs and the formulation of rules.

 

At present, the international rules, which conform to the interests and demands of developed countries, were made by developed countries headed by the US after World War II. If China is expected to fulfill bigger obligation in response to the changes in the global economic plates, then it should be given a bigger right to speak. China is now the world’s top trading nation; it is either the first or the second biggest trading partner for countries within and around the Pacific region. Yet, China was not invited to negotiate in the Trans-Pacific Partnership, a new trade framework led by the US. Obviously, this is America’s move to protect its strategic advantage in the Asia-Pacific region, as well as to ensure the geopolitical and economical interests of the US.

 

The concept and implementation of Xi Jinping

Responding to this international setup, President Xi Jinping proposed the “Belt and Road” initiative to establish a collaborative network to foster regional development that spans from the East to the West, covering Asia and reaching Africa and Europe. This initiative branches off from infrastructure construction and revolves around the Asian Infrastructure Investment Bank (AIIB) and the Silk Road Fund built for supporting it.

 

Developing countries in the Asia-Pacific region desperately need to get rid of the bottleneck of their infrastructures, a point well noted and understood by the Americans. To promote the construction of the “Belt and Road” project, China founded the AIIB. Even when the US has put pressure on its allies and opposed to their joining, 57 countries are now taking part in AIIB.

 

The three competitive edges of China

China has three competitive edges when it proposed the “Belt and Road” initiative. First of all, it enjoys a competitive advantage on the construction of infrastructure. Secondly, China has sufficient funds to invest on the infrastructure construction needed by the “Belt and Road” initiative. Thirdly, China has an edge in the development stage; it is able to make use of the infrastructure constructed for the “Belt and Road” to help countries along the Belt to take up labor-intensive industries. This in turn creates employment opportunities and improves export. Experience gained since WWII suggests that developing countries that could seize the window of opportunity in labor-intensive industries to transform at the international level will be able to experience rapid growth over the next 20 or 30 years, steering away from poverty, and becoming medium or even high income countries. The accelerated growth of these developing countries will also be bringing constantly expanding markets that are much sought after by developed countries.

 

“Belt and Road” helps establish a peaceful growth environment

According to the third national industrial census, the Chinese manufacturing industry now employs 125 million people. There are adequate opportunities to allow all the developing countries along the “Belt and Road” to achieve industrialization and modernization at the same time. The “Belt and Road” initiative has received enthusiastic responses from many countries since its inception because it is not only beneficial for China, but is also able to create a peaceful global growth environment. In turn, China could make better use of the domestic and international markets and resources at home and abroad. The initiative also poses a once-in-a-life-time growth opportunity for developing countries, helping them to achieve their dreams of industrialization and modernization. The industrialization, modernization and sustainable growth of various developing countries will drive the export, employment and growth of advanced countries such as the US, Europe and Japan. This will help them reinvigorate their lackluster economy since the financial crisis in 2008, taking them back on the normal track of growth.

To conclude, the FTZ policy and the “Belt and Road” initiative are both new reform and liberalization strategies that progress with time. The implementation of these strategies could enable a more comprehensive market economy system in China, and at the same time, create a better external environment for China, helping other developing countries achieve their dreams of national industrialization and modernization. They may also help developed countries to come out of their current predicaments. The implementation of the “Belt and Road” initiative will bring about a new order and layout that features international peace, development and benefits for all nations.