China’s Reform: Progress and Challenges

 

Over the two decades since the reform and opening-up policies were introduced, China has initially established the basic framework of a socialist market economy system, and entered the new stage of perfecting the socialist economic order and improving fundamental social and economic systems. However, we must be fully aware that China has not basically solved the deep-seated contradictions in social and economic operations, and the restructuring process centered on government transformation has not started -- China’s reform still has a long road to go. In particular, as China’s economic and social development have entered the new stage of readjusting crucial interest relations, the degree of reform difficulty has increased, and the driving force from all aspects, especially from the common people, is not adequate. In the spring and summer of 2004, the “discussion on property rights reform” roused great popular interest, along with disputes over the road China’s reform has taken for the past 20-odd years, even evoking some doubts about and censure of marketization reform. In such special circumstances, it is necessary and urgent to make an independent and objective evaluation of China’s reform in 2004. Therefore, the China Institute for Reform and Development (CIRD) has compiled the 2005 Evaluation Report on China’s Reform, making an objective evaluation of China’s reform in key fields in 2004, and putting forward relevant policy suggestions for the reference of the decision-making bodies and society as a whole.

 

How we evaluate China’s reform in 2004 to a large extent depends on the basic analysis and judgment of the new macro control. The problems reflected in this macro control are apparently connected with systems problems, and the tardiness of the reform is the root of the conspicuous contradictions and problems in economic life and operations. Macro control has reflected and exposed three big problems -- the mode of economic growth, economic structure and economic operation mechanism, which, fundamentally speaking, are problems of the mechanism or the system. To solve these problems thoroughly, the essential approach is one of reform. The practice of the 2004 reform shows that reform in each field is centered to different degrees on this macro control. Rural reform has played quite an important role in the initial achievements of macro control, and has effectively promoted the development of the rural economy. Most financial reform, reform of enterprises, investment system reform, and financial and taxation system reform are being undertaken during the process of improving the macro-control system and curbing overheated investment in some industries. It can be said that 2004 was a year in which reform was given prominence, and marked a turning point in the course of China’s reform.

 

Centered on “striking reforms in macro control,” this report evaluates the rural reform, reform of enterprises, financial reform, market building, social system reform and government transformation in 2004, and conspicuous problems to be tackled.

 

Rural Reform  The year 2004 marked a turning point in China’s rural reform. It was also a year of new starting points and new breakthroughs in the history of China’s rural reform. Rural reform was the brightest aspect of the reform in 2004. Driven by the “Agriculture, Countryside, and Farmers” issue set forth at the Fourth Plenary Session of the 16th CPC Central Committee, and guided by the idea of the new Central Government to develop the rural and urban areas in a coordinated way and build a harmonious society with industry assisting agriculture and the urban areas promoting the rural areas, China made historical breakthroughs in rural reform. First, there was a substantial breakthrough in rural tax reform, with orderly promotion of reform for the reduction of and exemption from agricultural taxes. At the beginning of 2004, the Central Government issued its “Document No.1,” 18 years after the previous one, making a breakthrough in adjusting critical agricultural policies. Then, policies to increase farmers’ incomes were successively promulgated and actively implemented, and the reform of the market-oriented grain circulation system took a decisive step. Second, China implemented the “New Rural Policy,” and established the strategy of “Industry Assisting Agriculture.” Third, China adhered to a people-oriented reform conception, promoted the balanced development of rural and urban areas, and made new breakthroughs in coordinated development. With Premier Wen Jiabao demanding the payment of migrant workers as the turning point, the protection of migrant workers’ rights and interests developed from demanding wages to seeking legal guarantees. In addition, initial progress was made in reform of the rural public service product supply system, represented by optimizing the new cooperative medical care system in rural areas. However, we must be fully aware that some problems which have cropped up in rural reform, especially coordinated reforms required by rural tax reform, demonstrate the complexity of rural reform. It is unavoidable for an isolated reform to be incompatible with the former system, and hence conflict arises between the systems. Rural reform must be undertaken in a comprehensive manner, and pushed forward in coordination with supplementary reforms. Otherwise, the reform achievements will be diminished, and even offset. And so, we should experiment with the comprehensive rural system to test the compatibility between each reform achievement, and then push forward rural economic and social reforms in an overall manner, so as to take a new reform road of unifying rural and urban systems, and promoting the coordinated development of rural and urban areas.

 

Reform of Enterprises  The year 2004 was one in which enterprise reform made progress in spite of hardships. As for the reform of state-owned enterprises, it has come to the stage of tackling thorny problems with emphasis on property rights reform. Enterprise reform in 2004 centered on two aspects: First, vigorous attempts were made for reform to standardize the property rights system. The “first year of MBO” at the beginning of 2004 and the “halting of MBO” at the end of that year made people realize the difficulty of property rights reform in state-owned enterprises. And related policies directed against irregular transfer and transactions of state-owned assets, unfair pricing in the process of the transactions, and misuse of power showed the determination of the Central Government to solve the problems bedeviling state-owned enterprises and assets. Second is to establish and improve the management system of state-owned enterprises and assets, and explore new management methods for state-owned assets. Coordinated provincial-level organs of the State-owned Assets Supervision and Administration Commission (SASAC) of the State Council have been put into operation successively, and vertical administrative organs of the SASAC at the district or municipal level are being set up. Enterprises directly affiliated to the Central Government have strengthened the reform of their administration and investment management systems to separate auxiliary businesses from main businesses, showing that China has embarked on a new path for managing state-owned assets -- transforming from simply managing assets to managing capital. And the public selection of managerial personnel for state-owned enterprises shows that the management of state-owned enterprises is moving forward in the direction of building teams of professional managers. However, 2004 also saw a freeze in the reform of state-owned enterprises, because MBO was stopped, and the “big discussion of property rights reform” brought unprecedented difficulties and challenges for the reform of state-owned enterprises. We must be fully aware that the direction of the market-oriented reform of state-owned enterprises is correct, and we should not deviate from it. Pushing forward property rights reform unswervingly is the fundamental direction for the reform of state-owned enterprises, and the key to the next stage of the reform is the finding of an effective approach for standardized property rights reform of state-owned enterprises.

 

Regarding the reform in the non-public sectors of the economy, a new stage has been reached in perfecting the system. In 2004, governments at all levels issued many policies and documents concerning property rights protection and the establishment of a truly fair market economy system, further affirming the position and function of the non-public sectors of the economy. However, the problems revealed by the expansion of those sectors in 2004 demonstrated the urgency of reform. We must further the reform, and provide a more flexible institutional environment and basic service regulations for the non-public sectors of the economy.

 

Financial Reform  Financial reform in 2004, confronted with both domestic and foreign pressures, quickened its pace considerably combined with a new round of macro control, and made important progress in many aspects. First, came the reform of state-owned commercial banks. After over 10 years of dispute and discussion, China has taken substantial measures to push forward the orientation toward joint-stock banks. The Bank of China and China Construction Bank, with the orderly promotion of pilot joint-stock reform, completed the initial task of financial restructuring on the basis of government funding, and proposed a plan and timetable for going public. Reform of the administrative structure of corporate legal persons is underway. At the same time, reform of the Agricultural Bank of China and the Industrial and Commercial Bank of China has been put on the agenda. However, we must be fully aware that the core of the reform of state-owned commercial banks is to establish complete administrative structures for these banks. Second, interest rate liberalization made an important step. The government restricts one side of deposit and loan interest rates (prescribing the minimum of loan interest rate and the maximum of deposit interest rate) i.e. loosening control over the upper limit of loan interest rate and the lower limit of deposit interest rate. Third, an increasingly flexible foreign exchange control system is being put in place. But the pressure brought by the deteriorating foreign trade conditions and of the appreciation of the Renminbi have raised new demands for China’s reform of the exchange rate formation mechanism. Fourth, the financial supervision system has started to improve, and financial supervision has yielded initial results. However, we cannot ignore the fact that there still exist deep-seated contradictions and problems in the financial system and in financial operations. Also, the factors hindering financial liberalization have not been completely eradicated. In particular, new problems and new trends in the financial sector have brought new challenges for China’s financial system. Thus, it is still an arduous task to actively promote financial system reform, so as to maintain steady economic development.

 

Market Building  The year 2004 was a year in which the Chinese market tackled challenges in an all-round way. To meet the demand for integration into the world market after China’s entry into the WTO, China made standardization reforms to different degrees in many aspects of the market system, which were centered on the capital and land markets. The large-scale reform of the capital market was mainly centered on market transparency and the opening of multiple capital channels, and did not deal with the basic system of the capital market -- the problem of unequal rights to stock ownership. So the next step in tackling problems of the capital market will be mainly concerned with system reform. Concerning the land market, outstanding achievements have been made in the reform of land administration and requisition system, with standardization at the core. But this has not touched the root of the land problem -- the problem of land ownership. Problems accumulated in the sectors of market scope, organizational growth, transaction method and market order during the development of the market system are in urgent need of solution.

 

With regard to the foreign economy, China’s opening-up level was further enhanced in 2004, as sectors planned for opening were opened on schedule and some even fulfilled their WTO commitments ahead of time. Moreover, China further opened up the fields of agriculture, automobiles, telecommunications, banking, insurance, retail, intellectual property rights protection and the culture industry to different degrees. But, with the furthering of opening-up, China has come to a period involving more trade conflicts, and the dumping and anti-dumping issues have raised new challenges for China’s mechanism for coping with trade conflicts. At the same time, problems have cropped up: since market building has not been standardized, China faces challenges in an all-round way, while integrating itself into the world market, and therefore China should speed up the implementation of its foreign trade strategy and mechanism transformation.

 

Social System Reform  In 2004, China’s social system featured division and mingling, which illustrates that market reform has entered a new stage, and also symbolizes that China is developing toward a harmonious society. On the one hand, the conditions of some disadvantaged groups were improved, but the overall gap between the rich and the poor widened further. On the other hand, formation of interest groups was speeded up, split between the middle and lower classes widened, and the gap between elites and the public was more striking. In 2004, social reform mainly took place in three aspects: First, a social multi-center took shape; second, the government beefed up its support for disadvantaged groups; and third, the government adopted a more rational approach to dealing with some unexpected incidents. However, there still exist sharp contradictions in social development: The overall gap between the rich and the poor is still widening, and the division between social classes may threaten social stability. While continuing to implement reform measures, we must be fully aware that in the present era, when Chinese society is in transit from being a single-center society to a multi-center one, the core of social system reform is to establish an interest-balancing mechanism which can eradicate social contradictions through interest expression and competition, and in turn assist in building a harmonious society.

 

Government Reform  After 26 years of reform, contradictions within the government itself are now where all the contradictions cropping up in the reform process converge, and have become a critical factor hindering the whole process of China’s reform. The fact that reforms in many aspects of China’s economic system have not been put in place or cannot make substantial progress is directly and indirectly connected with inadequate government transformation. The SARS crisis of 2003 shows that the government’s functions in social administration and public service are in urgent need of strengthening. And the macro-control efforts of 2004 show that the government-led economic growth mode must be reformed without delay. Although in 2004 China started government reform in the investment, financial and taxation systems, and administrative examination and approval, and made valuable explorations in building up the government’s function as the provider of public services, no substantive breakthroughs were made in practical operations. The essential problem is that China，in the course of government transformation, in this stage finds it very difficult to break the concept of valuing political achievements by GDP and to readjust interest relations. Thus, in 2005, and for the duration of the 11th Five-Year Plan, China should consider government transformation as the center and emphasis for the next step in this reform, break through obstacles in practice and theory, and accelerate the process of strengthening the government’s role as the provider of public services.

 

In 2004, China’s economic system reform made marked progress, and substantive breakthroughs were seen in some essential aspects. But problems revealed by over-heated investment and macro control show the tardiness of the reform steps, especially those concerning government transformation. To solve these problems, China should rely on the deepening of reform. At present, the reform confronts difficulties and challenges in many aspects, the biggest challenge being that as China’s reform has entered the stage of readjusting crucial interest relations, the driving forces from all walks of life are not adequate. And thus, to push forward the reform unswervingly, we have to straighten out the relationship between the reform and the interests of most people in an all-round way, and, with a realistic and candid attitude, take a new look at the direction of reform, the stages of reform, the main body of reform, and the relationship between reform and the building of a harmonious society. Only with a clear aim and adequate driving force can we promote China’s reform in a standardized way, and make fewer detours in the process.

 

First, the market direction of China’s reform is not erroneous. We should adhere to the market direction of reform unswervingly. In the overall discussion concerning the property rights reform of state-owned enterprises in 2004, someone said that the market direction of China’s reform was wrong, because market reform caused polarization and corruption. In fact, problems of social unfairness and corruption are not the inevitable results of market reform; the inadequacy of the reform is the major reason. For example, in the 1990s social security system reform was proposed, and later put as a coordinated measure of the reform of state-owned enterprises, but no practical and effective measures were taken for its implementation. This was one of the important factors behind social contradictions and problems. The emergence of many social problems is connected with the tardiness of social reform and reform of the income distribution system. The corruption problem is directly linked to inadequate cadre system reform and political system reform.

 

Second, the reform has entered the tough stage of readjusting important interest relations, and still has a long way to go. Over the past two decades, China’s infrastructure reform has made marked progress, the position of the market as mainstay of the economy has been established, and a basic pattern with the market playing a fundamental role in allocating resources has taken shape. However, structural reform with government transformation as the emphasis is far away from even starting. This involves macro-economic reform and reform of the micro-market, economic system reform together with social system reform, and economic system reform together with political system reform. Furthermore, the income distribution gap at present in China continues to widen, as does the disadvantaged group. Hence, social interest relations are changing quickly, and public service demands are rising day by day. Therefore, we say that the present reform is in the tough stage of readjusting interest relations in an all-round way. The key to coordinating interest relations in an all-round way is to accelerate government transformation, and effectively push forward political system reform and social system reform, so as to build a harmonious society.

 

Third, the key to pushing forward the reform is government transformation. Problems which cropped up in the 2004 m acro-control adjustment revealed that it would be hard to continue with the government-led mode of economic growth, and immediate reform was necessary. Economic reform at the present stage is directly or indirectly related to government transformation, and to a certain degree depends upon the actual steps taken in government reform. For example, to advance the reform of state-owned enterprises and develop the non-governmental sectors of the economy, China needs to transform government functions, and equate the developing strategies of big enterprises with those of medium-sized and small ones, providing a good economic and market environment for the development of all types of enterprises. The essence of investment system reform is to standardize and limit the investment authority of the government, giving more scope to enterprises, especially private ones, in independent investment. Thus, at the 2004 Central Economic Work Conference a proposal was put forward that one important task of the reform in 2005 is to carry out the Central Government’s work plan on investment system reform. The key to accelerating finance and taxation system reform, financial system reform and market system building also lies in government transformation. The emphasis of government transformation should be to transform the government from one centered on economic construction to the provider of public services, from the mainstay of economic construction to the provider of economic public services, from being GDP-centered to being system innovation-centered, and from purely stressing economic growth to paying close attention to harmonious social development at the same time.

 

Fourth, the main body of the reform is the ordinary people, who are also the main recipients of the benefits of the achievements. The experience of 20-odd years of reform, especially the historical breakthroughs in the 2004 rural reform, and stagnation and discussion of the reform of state-owned enterprises, make us see clearly that the main body of the reform is the ordinary people, and the main recipients of the benefits of the reform are also the ordinary people. Any reform with measures giving priority to the ordinary people’s interests will engender a strong social driving force, is sure to succeed, and will be welcomed by the ordinary people. And vice versa. Premier Wen Jiabao put it quite clearly in his speech at the Reception to Mark the 55th Anniversary of the Founding of the People’s Republic of China: “Push forward the reform of the economic and political systems and the reforms of other fields, mobilize all positive elements to liberate and develop the productive forces, uphold social fairness and justice so as to let all workers and builders enjoy the fruits of economic development and social progress.” From the 2004 rural reform, which was widely acclaimed by farmers, we can sum up three experiences:

 

(1)                 It is necessary to establish a people-oriented reform conception, as people are both the aim and starting point of reform.

 

(2)                 We must let the people participate in the reform. Only with the majority of people taking part can the reform succeed.

 

(3)                 The success of the reform demands that its achievements be shared. Any reform either profits or harms the people, and it can be considered successful only when it results in profiting more people and harming fewer people. Thus a people-oriented reform is a good reform, a win-win reform, and one which benefits the most people.

 

Fifth, one aim of the reform is to build a harmonious society. In 2004, the Fourth Plenary Session of the 16th CPC Central Committee set the goal of building a harmonious society. Fundamentally, the reform is aimed at readjusting every aspect of interest relations, and benefit the most people. At present, there are prominent social contradictions and social problems in China, but, when analyzed objectively, these contradictions and problems are a direct result of inadequate reform. And therefore, to coordinate every aspect of interest relations and build a harmonious society, China should speed up reforms in all fields. The reform aims at promoting stability by “coordination.” Fundamentally, China’s reform provides a stable system guarantee, which in turn will lay a solid foundation for maintaining favorable and long-term social stability, and building a harmonious society.