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Print Edition> Business
UPDATED: July 28, 2014 NO. 31 JULY 31, 2014
Market Watch No. 31, 2014


Leveling the Playing Field

Chinese Premier Li Keqiang held a discussion with some of the country's top business leaders on the current economic conditions and difficulties on July 14. Dong Mingzhu, Chairwoman of Gree Electric Appliances, and Liu Yongxing, Chairman of East Hope Group, both stated that they want fair competition in the market rather than preferential industrial policies. Inspired by this, Premier Li has since called for government departments to devote more attention to this field.

The Chinese Government has kept a careful eye on industrial policies for some time and those policies were considered a vital means to cushion the impact of the global financial crisis. Those policies have enabled some considerable headway but also engendered several problems.

Firstly, supporting dominant, well-functioning companies is contradictory to the principle of fair market competition. Phrases such as "cultivating mega-sized conglomerates" can often be seen in development plans for many industries. Support for a small proportion of leading enterprises is needed, but this will spur newly founded firms, perhaps justifiably, to cry foul.

Secondly, too much government intervention has undermined the power of the market. For instance, the Chinese Government has stated overcapacity will be strictly controlled in government-formulated industrial development plans for heavy chemical industries, such as steel and non-ferrous metals. This is no doubt well-intentioned but market forces may run contrary to the policy's original purpose. A paradoxical situation has occurred in some regions where companies who comply with these regulations have suffered losses while companies who break these rules can still make a profit.

Thirdly, too much attention on the formulation of government documents leaves policy implementation sadly neglected. As was mentioned by Dong, subsidy for energy-saving electric appliances is a good move. But problems have arisen in the implementation of the policy. A notice from the National Audit Office in June last year shows many companies have handed in counterfeit application documents in order to cheat their way to a subsidy.

Another example is that some local governments use Central Government-formulated preferential policies for emerging industries as a front to issue subsidies to local firms. Market competition has thus turned into a subsidy war sponsored by local governments. This is because the relationship between the government and the market hasn't been clarified.

The outcry from the business world reflects a new demand for national policies in a new development phase. In the past, substantial achievements were made after government-formulated industrial policies were successful in giving full play to China's low-cost advantage. But now, innovation should be the new major driver of economic growth. Innovation requires the government to better function and allow the market to play a decisive role in allocating resources. Since the field of innovation is currently faced with technological and market-related uncertainties, too much government intervention will most likely lead to failure.

Therefore, the mindset of the government should be changed. A fair market should be created and the government should undertake responsibility for maintaining fair competition in the market so as to unleash the potential of our country's social capital. The Enterprise Research Institute under the Development Research Center of the State Council recently carried out a survey of 1,500 companies. Of the total, 96.7 percent of them thought optimizing the structure of the market should be key to China's future economic reform.

But what does optimizing the structure of the market actually mean? Getting down to brass tacks, it includes bettering the production elements of the market, realizing a fair system of market entrance, carrying out unbiased market supervision and offering equitable policy support.

The appeals of businessmen are in line with the new governance mindset of the Central Government. This year's government work report said bolstering reform should be China's new growth driver. The new leadership attaches top priority to the transformation of government functions by streamlining administration and delegating power to lower government levels. To date, phenomenal progress has been made.

By pushing forward reform on the investment approval system and letting enterprises independently make investment decisions, the market will be enabled to play a decisive role in allocating resources and the dividend of reform will become a continuous driver of growth.

This is an edited excerpt of an article by Ma Jun, Deputy Director of the Enterprise Research Institute under the Development Research Center of the State Council, published in People's Daily


$7.7 bln

The increased holdings of U.S. Treasury securities by China in May

632 mln

China's online population by the end of June

61.8 bln yuan

New loans that China's microcredit companies issued in the first half

133.96 bln yuan

Value of consumer goods imported into Shanghai in the first half, up 26.7 percent year on year


Growth in trade between China and members of the Association of Southeast Asian Nations in the first half


Growth of Apple's iPhone sales in China in the fiscal quarter ending June 30


"The property sector is the biggest uncertainty the Chinese economy will face this year and the next. A historic turning point lies ahead of us. It's not a periodic low point but a long-term turning point. The government should accelerate construction of affordable housing and guard against potential risks in the property sector. Meanwhile, it should lift purchase curbs and adopt differentiated macro-control policies according to actual conditions of cities."

Liu Shijin, Vice President of the Development Research Center of the State Council

Email us at: yushujun@bjreview.com

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