Some breakthroughs have been achieved in the transformation of government functions involved in delegating power to lower levels. The transformation of market supervision, however, has made little progress. In accordance with the new requirements that the market plays a decisive role in the distribution of resources, the focus for reform of the market supervision scheme is to change from an administrative-based system to one based on rule of law.

China's current market supervision scheme still combines government approval with supervision. Government approval and market supervision are two different things. Approval is within the power of the government, which must be clearly defined by law, while supervision should be based on the rule of law.

Excessive approval procedures have curbed market vitality and the supervisory authorities are unable to ensure the effectiveness of supervision. If the scheme of administrative-based supervision is not changed, it will be very difficult to realize effective supervision.

Hence, I suggest the government set advancing the transformation of administrative-based supervision to rule of law-based supervision as the primary goal of reforming the market supervision scheme. It should then formulate an action plan for the reform and restructure the overall market supervision scheme. Such an action plan could take the following steps.

Firstly, the government should adapt the "negative list" approach and establish a new scheme mainly relying on supervision. The number of approval procedures should be as few as possible. To the items necessarily subject to government approval, a "negative list" must be set up, and the government should try best to realize investment facilitation and give the go-ahead to all investment projects that are not on the list.

Secondly, the government must set up comprehensive and authoritative market supervisory authorities. The new authorities must be set up in accordance with laws, adopt a new mechanism that separates decision-making from implementation, and be highly professional. Such entities could take the form of a "State Council consumer market regulatory commission," which would be set up by integrating the supervisory functions of the State Administration for Industry and Commerce (SAIC) and the General Administration of Quality Supervision, Inspection and Quarantine, so as to make consumer market supervision more uniform and effective. The functions of the Anti-Monopoly Committee of the State Council must be intensified by integrating the executive power of the Ministry of Commerce, the National Development and Reform Commission and the SAIC.

Financial supervision should be strengthened by improving the coordination scheme among the People's Bank of China, China Banking Regulatory Commission, China Securities Regulatory Commission and China Insurance Regulatory Commission. Financial supervision would focus on financial behaviors instead of financial institutions and a model of integrated financial supervision should be established.

Thirdly, government supervision should be combined with industrial self-discipline and non-governmental supervision. In a market economy, government supervision must apply to numerous market players. If the supervision only relies on the government, effective supervision will be difficult. Therefore, the role of non-governmental organizations such as industrial associations should be fully realized in industrial supervision and the promotion of corporate self-discipline.

Measures could consist of accelerating the separation of government functions from industrial associations; supporting private enterprises in various industries to set up associations of their own; delegating industrial administrative functions to industrial associations; and strengthening industrial self-discipline and non-governmental supervision.

Lastly, it is necessary to establish legal frameworks for market supervision. This would require incorporating a "negative list" approach into the Administrative Licensing Law in order to provide legal grounds for the reform of administrative approval and supervision scheme. The Food Safety Law and the Drug Administration Law should be revised and the legal status of supervisory authorities should be made clear. A final pivotal step would be incorporating anti-administrative monopoly into the Anti-Monopoly Law.

This is an edited excerpt of an article by Chi Fulin, President of China Institute for Reform and Development, originally published in Economic Information Daily