China’s economic woes demand renewal of pro-market reforms, prominent scholar says

Wang Xiaolu, a researcher known for his pro-market views, has urged Beijing to commit to structural reform at its agenda-setting third plenum

China’s third plenum

Frank Tangin Beijing

Published: 7:30pm, 18 Jun 2024

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The third plenum of the Central Committee of China’s Communist Party, scheduled for next month, is expected to set the tone for the country’s economic policy for the next several years. In advance of that meeting, the Post is reviewing the work of notable scholars and observers about their own expectations – as well as their thoughts on China’s economy at large. The second part of this series can be found here and the third here.

As policymakers prepare to lay out China’s economic agenda for the coming years at a high-level gathering next month, a prominent scholar has called for Beijing to recommit itself to pro-business reforms and uphold its 2013 pledge to let the market play a “decisive role” in the allocation of resources.

The exhortations from Wang Xiaolu, deputy director of the National Economic Research Institute, come as expectations reach a fever pitch for substantial government action to address the issues bedevilling the world’s second-largest economy, including a slump in the property market, unease among private firms and increasingly onerous trade restrictions from the West.

“Economic reform in the past four decades transitioned from a government-led [resource allocation] to a market-oriented one … The core is marketisation,” he told the Post in an interview ahead of the third plenum of the Communist Party’s Central Committee in July, a meeting where economic policy has typically taken centre stage.

“We should continue unfinished tasks.”

Wang, who gained prominence among market-minded reformists thanks to his work on the country’s rural economy in the early 1980s, has developed indices to measure China’s level of marketisation and the state of the business environment over the past 25 years.

His research team found that China’s marketisation index showed a drop in 2019, with the government-market relations sub-index deteriorating fast and accelerating a downward trend that would persist through subsequent years.

Proportions of fiscal expenditure vis-a-vis gross domestic product, survey-based measurements of government intervention into corporate activities and estimates of government size are the three parameters Wang and his team have primarily used to gauge the state of relations.

The sub-index started its decline in 2008, when the government took a firmer hand to steady the economy in the wake of the global financial crisis. A massive stimulus package gave local government financing vehicles responsibility for funding much of the balance, spurring a frenzy of activity.

“There were rounds of competition for investment and duplication of construction between local governments in the past, which resulted in excess production capacity,” Wang said. “Such [government-led] investments generate no return, but losses.”

China’s rapid economic growth in the past four decades was not because of stimulus, but marketisation and reforms

Wang Xiaolu

Wang credited the embrace of the market and support for private businesses with China’s rapid GDP growth over the past four decades. Currently, the private sector contributes to more than 60 per cent of national GDP and creates over 80 per cent of all urban jobs.

Long-term monetary stimulus was also explicitly opposed by Wang, who instead called for economic reforms to unleash growth potential.

“China’s rapid economic growth in the past four decades was not because of stimulus, but marketisation and reforms,” Wang said.

“[Persistent] stimulus measures would make the economy increasingly ineffective, its structure unbalanced, and slow growth further.”

Wang’s research arrived at a pivotal moment in China’s economic development, as growth threatens to drop to a level that could jeopardise a national effort to double the country’s 2020 GDP by 2035 – a goal that would require annual average compound growth to hold at 4.8 per cent or more for the next 11 years.

Experts are debating the best way to address the issue, with one camp calling for larger government stimulus to keep the economy growing and another insisting on painful structural reforms.

Like many of his like-minded colleagues, Wang has called for a return to the spirit of a document from the third plenum in 2013 which detailed 336 tasks to put the Chinese economy on a more market-driven path.

“Many problems can be solved according to this principle,” he said.

Wang also cautioned against an overreliance on government guidance in the development of advanced tech – an approach used early in the country’s history, when direct state administration was in place to oversee work on atomic bombs and satellites – even as US-led restrictions on trade make domestic production all the more essential.

“It would mean a retreat to the planned economy era, where government takes care of everything,” he warned.

Though he did say Chinese authorities can play an active role in promoting scientific and technological progress, he added “the main driving force comes from the market, not from the government.”

Wang and his team found that government intervention into corporations – inspections, verbal instructions, fines and other actions – had increased significantly despite an overhaul of administrative approval from Beijing as it works to renew its appeal to businesses.

Chinese authorities launched a charm offensive to court both private entrepreneurs and foreign firms last year, but investor confidence remains weak.

“The best way is, of course, to protect the legitimate rights and interests of enterprises,” he said. “But what matters is not what you’ve said, but what you actually do.”