On April 19, the Political Bureau of the Communist Party of China (CPC) Central Committee held a meeting to discuss the current economic situation, and to deploy economic work in order to prepare for the battle against poverty. Xi Jinping, General Secretary of the CPC Central Committee, presided over the meeting. The meeting suggests that the implementation of proactive fiscal policy and a prudent monetary policy in a timely and appropriate manner had maintained China's economy to be a stable operation in the first quarter, with better-than-expected growth rate setting a good start for the year.
From the meeting, one can observe that the confidence of China's top decision-making body is growing as China's economic growth reached 6.4% in the first quarter. Anbound's macro research team noted a subtle shift in the Politburo's judgment on the situation. The Politburo meeting pointed out: "It is necessary to be soberly aware that there are still many difficulties and problems in the economic operation. The external economic environment has generally slowed down, and there is downward pressure on the domestic economy. This is a link to the cyclical factors, but more to the structural and institutional factors."
It should be pointed out that in the past, institutional issues were mainly discussed in the academic circle. Now, for the first time, it is clear from the Politburo meeting that "structural" and "institutional" issues are the main causes of downward pressures on China's economy, and their impact goes beyond "cyclical" issues. What does this new formulation mean? How does it represent the policy makers' understanding of China's economic problems? What are the changes that will be included in China's reform work in the future? This is related not only to the formulation of future economic policies but also to the environmental improvement of industrial and business development within the country.
Decision-making comes from the understanding of the problem, and strategy comes from the judgment of the situation. Different analyses of downward pressure on China's economy will lead to different policy paths. Some researchers from Anbound's macro research team believe that "cyclical" factors refer to short-term fluctuations in demand. The team believes that the solution is to rely on monetary and fiscal policies to "hedge" fluctuations, also known as "counter-cyclical" adjustment. "Structural" factors refer to medium and long-term factors that cannot be easily changed, such as the population problem in the medium term. Structural issues are difficult to be hedged by economic policies and require relatively complex systematic adjustments. On the other hand, "institutional" factors refer to outdated institutional problems that can only be solved through radical reform.
By this logic, the Politburo's strong emphasis on institutional issues seems to offer the prospect of greater policy reform in the future. So, under the current political and economic developmentenvironment, what kind of institutional reform will China carry out in its next step? Among the many problems faced by China, institutional reform is needed in the following areas:
First, the relationship between the government and the market should be adjusted to guide China's economic reform with marketization. In our view, the core of China's reform is to adjust the relationship between the government and the market. Therefore, the government should vigorously promote market-oriented reform. As general secretary Xi Jinping pointed out, "To stick to the direction of socialist market economy reform, the core issue is to properly handle the relationship between the government and the market, so that the government can do a better job and the market plays a decisive role in the allocation of resources." The plan calls for market-oriented reforms to drive other reforms in China's economy, such as the reform of state-owned enterprises (SOEs) and financial reform.
Second, the reform of SOEs. The reform of SOEs is a difficult point in the systemic reform, and also a touchstone to judge whether China really promotes market-oriented reform. In reality, there are ideas and methods for SOE reform. The Third Plenary Session of the 18th Central Committee of the Communist Party of China (CPC) has pointed out that there are two paths for the SOE reform, i.e. the capital reform and the mixed reform of SOEs (the former is similar to the idea of a "mutual fund" proposed by Anbound). However, the progress has been slow and no breakthroughs have been made. So far, China has neither developed a group of powerful SOEs with international competitiveness or cultivated a vibrant and competitive market. Some market participants complain that despite years of talk to further reform SOEs, there is still no real breakthrough and in fact the situation has even moved backwards. Notably, the inclusion of SOE subsidies issue in China-U.S. trade negotiations is likely to be one of the reasons for SOE reform. SOE reform is a matter of political determination, not a matter of ideas and methods.
Third, moderate decentralization according to regional differences. China is a big country with significant regional differences, urban-rural differences and a significant gap between rich and poor. In the face of such a reality, it is not appropriate to take a central standard to manage everything in the country. For example, industrial policies and science and technology policies between southeast coastal areas (Shenzhen, Shanghai and others) and the western region (Qinghai, Gansu and others) are very different. If they all adopt a centralized and unified standard way of management, it may not work well in reality and might even create more problems. Therefore, adopting moderate decentralization and enabling local governments to formulate different policies according to local conditions would be more effective and more in line with the local people needs.
Lastly, the reform of the government's administrative system. The reform of the administrative system is an important part of the adjustment of government functions as well as the promotion of market-oriented reform. In the past, government departments attached great importance to take charge of resources and projects, and even directly participating in the market in terms of system setting and specific management. However, the government has intervened too much in things that shouldn't be intervened. On the other hand, when it comes to the most important public services such as health care, education, housing, pensions and the environment, the government hasn't managed them well, even making misjudgments in the process. Looking at the future, it is very important to adjust government functions and promote the reform of the administrative system.
Final analysis conclusion:
The problems facing China's economic development are mainly caused by structural and institutional factors, and the central policy makers' judgment is undoubtedly correct. But how does one carry out institutional reform in the coming steps? This tests the determination of decision makers and the wisdom of policy departments. One thing is certain: institutional reform has become an unavoidable point of difficulty in reform. Only by breaking through institutional obstacles and effectively promoting institutional reform can we clear away the obstacles for the sustained development of China's economy in the future.
