China’s Reform Focuses on Streamlining Government
By Chi Fulin

China’s speedy accommodation to WTO rules created opportunities for embarking on a new stage of reform. China now plans to abandon administrative interventions and to adapt government functions to a market-dominated economy. The government will therefore confine its role to overseeing fair competition, reducing social inequalities, and performing other functions characteristic of a modern state.

Driven by China’s accession to the WTO, the government expects to make significant progress in the following fields:

• Increasing numbers of state enterprises will sell their assets to private firms and become mixed companies, that is, jointly owned by entrepreneurs and the state. In 1990 mixed companies accounted for only 9 percent of all businesses, but now account for 40 percent; however, on a per capita asset basis China’s top 500 businesses account for only 1.6 percent of the world’s top 500 businesses. If Chinese businesses want to compete with foreign businesses in both the domestic and international arenas, they will have to enlarge their scale of operations and enhance their competitiveness. One way that China could achieve this is by developing the mixed sector of the economy. The proportion of jointly-owned enterprises could increase to around 60 percent of all businesses in the next five years, which would dramatically increase both the scale and competitiveness of Chinese businesses.

• Reforms of state-run monopolies, especially in the service industry, will accelerate in the next three years. For many years the restructuring of monopolies in telecommunications, civil aviation, railways, banking, and insurance faced great difficulties, but with the drafting of a new antimonopoly law, the situation looks brighter. China Telcom has already been deprived of its nationwide monopoly, and two regional companies have been created in its place. The firm operating in the southern provinces retained China Telecom as its name, while the northern company, which consists of what was formerly China Netcom and Jitong, became China Netcom. Whether real competition will develop between the two companies is as yet unknown.

• Government pursuit of deregulation will be enhanced, for example, by streamlining regulations and simplifying administrative processes. Currently 60 ministries and departments are entitled to issue some 4,000 different types of permits and authorizations, of which 789 will be eliminated this year. The State Council has also announced that it will abolish several administrative regulations issued before 2001.

Streamlining the government has become an important priority during this new stage of reform. Changes over the past 20 years have mainly involved state-owned enterprises, but the current focus is on what role the government should play in a market economy versus its role in a command economy. Certainly it should no longer intervene directly in the market, but formulate rules and oversee their observance.

Reform of the government, in particular, the separation of ownership and management functions, had been on the agenda for some time, but a number of proposals have stalled because of the self-interest of bureaucrats who were trying to expand their administrative power. Reform hurts the vested interests of those used to the uncontrolled use of administrative power who could use this power to derive personal gain through corrupt activities.

According to the report of the 16th Party Congress, the best approach is to strengthen supervision over government authorities and to establish an operational mechanism that is rational in structure, scientific in configuration, tight in procedure, and effective in checks and balances. Enhanced supervision of decision making and implementation should benefit the public. To this end government reform should expand to the following areas:

• The market should dominate the economy, not the government. To adapt to changes brought about by China’s accession to the WTO it should take advantage of lessons learned from other countries. In a number of East Asian economies, including Japan and South Korea, the government dominates the market economy. In South Korea this became a root cause for many problems. In Japan, the Koizumi government also realizes that structural reform is a way out of the country’s present difficulties.

• The government should focus on solving social issues. The state can effectively stimulate economic growth only if it deals with such issues as unemployment, income distribution, trust, and market rules. If it can deal with these issues, the resulting favorable social environment will help stimulate economic development, and in its turn, economic growth can foster social stability.

• The government should be transformed into a forward-looking, law–based, modern administration that fosters the free flow of factors of production (capital, labor, land) and eliminates top-down bureaucratic interventions. Relations between the government and enterprises, the government and the market, and the government and intermediaries should be changed. In those areas where the government is holding back rather than encouraging development, market actors and intermediaries should be given a free hand. For its part the government should be more effective in improving legislation and promoting the rule of law in areas such as ownership, bank credit, and contracts. The government should maintain market order, ensure fair competition, promote a just social security regime, improve social services, provide public utilities, and ensure the transparency of government activities. Use of the Internet could greatly assist it in these endeavors.

The government needs to deal with several other issues in the post-WTO membership era. During the current stage of China’s transformation, much depends on how the government can motivate entrepreneurs to play a larger role in economic development. To date the government has issued national bonds worth 600 billion yuan (about $72 billion). I have suggested in the past that the government use, say, one-third of national bonds as subsidies to encourage private investment in infrastructure. Unfortunately, this has not been done. Another issue is how to reconcile the principle of participation in distributing such factors of production as labor, capital, technology, and management—as proposed by the 16th Party Congress—with private ownership. In my opinion the solution is to reform the property rights regime.

The current relaxed monetary policy is in contradiction with commercial banks’ practices. Businesses, especially private businesses are unable to get access to bank loans, because most bank managements are unwilling to take responsibility for the loans. The banks will not benefit from any profits, but they will be held accountable if the loans turn out to be nonperforming. Another pertinent issue in this context is the favoritism exhibited by state-owned banks toward state-owned enterprises. This is also a serious issue in Japan and South Korea.

Another serious problem is the huge income gap between urban and rural residents. According to conservative estimates the gap is 4:1, but others believe it is as large as 6:1. The gap between western and eastern rural areas is also considerable. Therefore drastic measures will be necessary to lower this gap, including eliminating various taxes on agricultural activities, such as slaughtering or producing specialized products (see the box). Another issue is whether maintaining large administrations at the township level is absolutely necessary or whether they could become offices of the county government. In addition, property rights in relation to rural land should be transferred to farmers as soon as possible so they can use the land as security to borrow money and develop their farms.

Economic restructuring should go hand-in-hand with political reform to, among other things, address such issues as reforming the way in which officials are appointed. Such restructuring should be based on the rule of law and aimed at fighting corruption.

The author is the executive director of the Haikou-based China Institute for Reform and Development, 57 Renmin Avenue, Haikou, Hainan, 570208, China; tel.: 86-898-625-8793, fax: 86-898-625-8777, email: cird2@public.hk.hi.cn.