Quick Take: What's New with China's Latest Roadmap to Marketize Production Factors?

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Quick Takes


  • China issues a new roadmap to marketize production factors, including land, labor, capital, and data – a new addition.
  • While much of these proposed reforms have been debated for decades, the economic impact of the virus may create renewed political will to move forward.
  • If successfully implemented, these changes would be transformational for the Chinese economy.

On April 9, the Chinese Communist Party Central Committee and the State Council issued a directive, called the Guidelines on Improving Mechanisms for Market-based Allocation of Production Factors, that said that the free market will play a more important role in the allocation of the inputs for production – land, labor, capital, and data. This is part of the relief package aimed at stimulating the economy as it reopens for business after the impact of COVID-19. While not receiving much attention, this plan is a roadmap for significant reform of China’s economy, if successfully implemented.

To be fair, there are a few issues in this announcement that are new. China has long needed to reform state-owned enterprises (SOE) to ensure they are more market-oriented, to allow for migrant works to travel to where the jobs are and receive benefits even when relocated, and for farmers to be allowed private plots for their farming. Furthermore, sectors need to be opened to best-in-class foreign players to created needed competition. The private sector access to production factors has long been a challenge as the state-owned enterprises received them at preferential rates. These are all issues that have been the subject of debate for almost two decades; some for more.

The question this time around is whether the economic crisis that China is facing makes it more likely that President Xi Jinping will be able to push through these reforms. He has made similar sweeping announcements before, including in his first major “manifesto”, the Third Plenum document released in November 2013 which made the pledge – yet to be implemented – that the market would be the “deciding factor” in economic decision-making. There are powerful vested interests, such as the SOEs, opposed to a bigger role for markets in the economy, and Xi has shown that he favors continued involvement of the state and the Communist Party in the economy, including in the private sector.

Yet, in order to stimulate the economy this time around, China must take these steps. So, it may be that this crisis is giving Xi the opportunity to overcome the hurdles that have long stood in the way of making these necessary reforms, but it will require a good dose of political will to ensure it happens.

If Xi is successful, these changes will have an important impact on the traditional Chinese “socialist” economy. There are parts of these reforms that will also benefit foreign firms, and fortunately, these are some of the easier. The Chinese government is still moving forward with its commitments, including agricultural purchases, under the Phase One agreement. And it has been reaching out to foreign firms to encourage additional investment in China or to halt the decoupling of the supply chains.

Here is a summary of some of the main points of the guidelines:

  • Household registration system (Hukou): in order to allow labor to move to where the jobs are, China is allowing domestic migrants to relocated and to take their social benefits with them or access them where they work, except to the major cities such as Beijing and Shanghai. Reform of the hukousystem is long overdue and will have an important impact on employment as well as eliminating the underground economy and population, which was becoming a significant social and economic issue for the leadership.
  • At times, there could be over 300 million domestic migrants traveling along the coast in China seeking jobs.
  • This will also help boost domestic consumption, which is one of the key ways that China is hoping to grow the economy.
  • Freeing of rural land restrictions:China intends to change the way that rural land can be sold and also how it can be used for commercial purposes. The market will be allowed to determine rural and acquisition and sales, which appears to address a long debate in China over allowing the private ownership of land.
  • This will allow for the sale of land in the countryside, especially outside major cities, which will relieve some pressure on housing prices.
  • Financial markets:The government has already taken steps to allow 100% foreign ownership for securities, futures, and fund management. It intends to improve the functioning of the stock markets, especially issuances, trading, and listing, combined with more regulatory oversight, hasten and broaden the development of the bond markets with additional offerings, and encourage Chinese financial institutions to adopt global best practices and trade in global markets. They will benchmark lending and deposit rates with market rates to become more market-driven, which has been a long-time goal.
  • New infrastructure:To promote more efficiencies and lay the infrastructure for a digital economy, the government will invest in a significant build-out of 5G, data centers, and artificial intelligence. It will apply these new technologies to help update the fields of agriculture, manufacturing, transportation, and education to name a few. China has announced a new plan for intellectual property protection that includes new protections for data, new standards for data security, and increased enforcement.

The guidelines also addressed the controversial issue of pricing. It announced increased regulation of monopolies as well as noting that private companies should have access to factors of production on the same terms as state-owned companies. By introducing new market-based pricing in combination with an intention to shut down “zombie” firms, the hope is that these steps can help bring the issues of overcapacity in certain sectors under control.

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