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Reforming China’s Economy in 2014 and Beyond

Volume 6, 2013

 “Economic reform is the key of the entire reform drive while a proper relationship between the market and government remains the core of China’s economic reform… China has to follow the basic law of the market economy and work on the problems of an underdeveloped market system, excessive government intervention and weak supervision of the market.” – China’s President Xi Jinping explains the major upcoming reforms to the Third Plenary Session of the 18th CPC Central Committee, held in November, 2013.

“Comprehensively Deepening Reforms” is the slogan that emerged from the Third Plenum to define the path of economic transformation that China will now follow under the guidance of its new leaders. Liberalization of the financial sector; policies easing the way for rural residents to resettle in smaller cities; a gradual easing of the One Child Policy; and measures to improve transparency and quality of economic development at the local government level are among the 60 areas approved for reform that are expected to be implemented by 2020. CEIBS Professors John Cai, Xu Bin and Zhu Tian along with Executive Deputy Director of the CEIBS Lujiazui Institute of International Finance (CLIIF) Dr Gary Liu share their thoughts with TheLINK on what the central government’s reform plans will likely mean for China’s economy in 2014 and beyond.

INCREASING EFFICIENCY

 

Feature, Volume 6, 2013

“There are many things that the government really needs to do to encourage economic growth. Basically, you just have to increase efficiency, particularly investment efficiency. For example the state sectors are not really as efficient as they should be. There’s a lot of work to do to reform the state sectors, and to open up more industries for private sector investment. Right now there are many industries that are not completely open to private sector investment; basically the government is restricting the supply of certain industries, like healthcare and education, they are not completely open to private investment. Making [private sector] entry into many industries easier, and reforming and reducing the weight of the state sector in the whole economy is something that the government should continue to do.”
 – Professor of Economics Zhu Tian

 

Feature, Volume 6, 2013

“If we can combine private capital and public capital it will maximize the efficiency of public money, and give opportunities to the private sector. If public money can be partnered with private money, then the efficiency will be much higher, because usually the efficiency of government spending is low.”
 – Dr Gary Liu, Executive Deputy Director of the CEIBS Lujiazui Institute of International Finance (CLIIF)

 

Feature, Volume 6, 2013

“Until now the government has monopolized the medical resources and left little room for private enterprises or for the market to function. As the Chinese economy has grown, people’s incomes have increased, China’s population is aging and the demands on the healthcare system have increased tremendously, far exceeding the available resources. Though many other sectors face issues of over-capacity, there is a huge shortage of healthcare services. This is due, to a great extent, to the government’s control of the healthcare sector. Government controls can no longer provide adequate resources; therefore it is necessary to open the door to private capital. According to a document issued by the State Council in early October 2013, it is expected that the percentage of private hospital beds can be increased to 20% from the current 10%, and there will be more opportunities for private and social capital to participate in the healthcare sector.”
– Director of the CEIBS Centre for Healthcare Management and Policy Prof John Cai

HEALTHIER LOCAL GROWTH

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 “Ultimately, the solution for China’s local government debt problem is to have healthy growth at the local level. Local governments need to generate income to pay back their debts. They cannot get rid of debt by asking the central government to pay for it. Local governments should be responsible for what they do. The solution is to have them follow a healthier path to generate income at the local level. Local governments need to find new sources of revenue; one area that is recommended is to levy property taxes, which of course can be a major source of revenue.”
 – Professor of Economics and Finance Xu Bin

BOOSTING INNOVATION AND ENTREPRENEURSHIP

 “The upgraded economy should be innovation driven, not resource or investment driven… An upgraded economy will mean upgraded demands. When people move from rural areas to cities, and when people’s incomes rise, they will upgrade their demand. In this process we will see a bigger demand for the service sector and the service economy. But if we want to develop the service sector, the most important thing we need to do is to encourage innovation to reduce transaction costs. If the transaction cost is very high, then it’s very difficult to develop a service economy.”
 – Dr Gary Liu, Executive Deputy 
Director of the CEIBS Lujiazui Institute of International Finance (CLIIF)

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 “The goal of China’s new round of reform is to create a market-oriented economic system that reduces the role of the government and expands the role of the market. This may touch on many interests, for example the financial sector is mainly dominated by the state-owned banks, so if you want to introduce private banks into this sector it will meet with a lot of resistance. But this is something that China has to do. Many companies in China, especially small companies, cannot get a loan from the bank. Reforming the financial sector to lower the barriers so that private and foreign companies can access financing, will allow small companies and entrepreneurs to become a new engine of growth for China.”
– Professor of Economics and Finance Xu Bin

HUKOU REFORM

 “Tackling the hukou system is really at the centre of changing China’s economic growth model. In order to transition the Chinese economy towards a new growth model [away from investment and export], we need to have more equal income distribution. One major reason that income is so unequally distributed in China is the hukou system, which currently does not grant rural migrants living in cities the same social welfare rights as urban citizens. They are doing the low-paid jobs in the cities, with very low income and limited welfare and it is actually limiting their involvement in urban consumption.”
– Professor of Economics and Finance Xu Bin

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BOOSTING HEALTHCARE SECTOR DEVELOPMENT

“China’s economy has seen year-on-year annual increases of more than 10% over the last 30 years, mainly due to investment and exports; however these two engines cannot continue driving growth like before. China needs to rely on its domestic consumption to maintain economic growth and increase employment. The Chinese government realizes that healthcare should be the next important growth sector to help both the economy and the employment rate grow. Therefore by the end of 2020 it is expected that the healthcare sector will continue to account for about 8 to 9% of total GDP, up from the current 5%.”
 – Director of the CEIBS Centre for Healthcare Management and Policy Prof John Cai

IMPROVED SOCIAL WELFARE SYSTEM

 “The distributional issues, the environment issues, those are issues that the government has to do something about, because it will not come naturally as a result of economic development… Distributional issues are very important. China has been a fast-growing major economy, really the fastest if you look back over the past 30 years. In terms of the average living standards, it’s just like the difference between heaven and earth if you compare things today to 30 years ago. But somehow many people are not really happier; that says something about the economic outcome. The fruits of the reforms and development over the years have not been equally shared. The government has been working on this for the past five or six years, but they should continue to do it in a more effective way, to rebuild the social welfare system in China. It should be broad and with more substance.”
 – Professor of Economics Zhu Tian

Feature, Volume 6, 2013

   “China must build a very strong social safety network to help people to consume. The savings ratio in China is very high, one of the highest in the world. Why do people in China save so much? It’s because we don’t have a very strong social safety network. If there is a very high rate of unemployment in China there will be a very serious social crisis. The government needs to invest a lot of money in the pension system, in the medical care system, and education system. If the Chinese government can build a strong social safety network then people will have a much bigger incentive to consume. There is a lot of room for Chinese consumption to grow, which is very important.”
 – Dr Gary Liu, Executive Deputy Director of the CEIBS Lujiazui Institute of International Finance (CLIIF)