Chinese Liberalisation 2.0 Shifts Back to the Free Market

Chinese Liberalisation 2.0 Shifts Back to the Free Market

The People’s Republic of China appears set to begin a new economic policy that will place less emphasis on state planning and development of industry and more emphasis on the free market and private businesses, according to Prime Minister Li Keqiang.

It is too soon to tell if these policies will usher in economic stability or create economic instability, but this development signals a major shift in the world’s second largest economy that will shape China’s business environment over the next decade and beyond.

After suffering anemic economic growth and mass famine during the Mao Zedong years, Deng Xiaoping later instituted far-ranging market reforms such as privatisation, the lifting of price controls and the lifting of protectionist trade policies. These reforms have played an indisputable role in making China the world’s second largest economy — and which is estimated to surpass the U.S. economy in 2016.

But the Chinese economy has recently fallen on hard times. While China’s current problems do not compare to the Mao era, the Chinese economy has nevertheless begun to slow — many predicting the slowest growth rate in 23 years. With Chinese factory output slowing for the first time in seven months, observers are beginning to speculate that China, while certainly not approaching a recession, may be experiencing an economic slowdown.

In response to these issues, the Chinese government — in a clear sign that senior leadership is taking slowdown fears very seriously — is planning what are arguably its most ambitious economic reforms since Deng. China is shifting from a business tax to a value added tax (VAT) for its services sector, which is expected to deliver a nearly $20 billion tax cut to service companies. The government is planning to loosen controls on deposit and lending interest rates, with the expectation of further reform to major state industries.

The Chinese government is also in the process of drafting a major plan for urbanization, which will make it easier for farmers who live in the countryside to move to the cities and become official urban residents, with access to public education and healthcare. The ultimate goal of these reforms is to place more responsibility for economic growth in the hands of the private sector, with the expectation that private business concerns can better provide for stable, continuous economic growth. These reforms can be understood as a key part of Chinese leader Xi Jinping’s ‘Chinese Dream’ program, which also seeks to curb corruption among state officials.

So what do these reforms ultimately hold for China’s future? It is easy to imagine that these attempts to link economic growth more closely to the market-driven private sector rather than the whims of China’s Central Government will indeed spur economic growth. However, it is also entirely possible that China’s economic reforms will only accelerate China’s current economic slowdown—at least in the short term—by reducing the state’s ability to stimulate the economy.

As China’s government has only recently released priorities for these broad economic reforms and has not yet disclosed details concerning implementation, making a definitive judgment is difficult. However, given that these reforms appear to comprise the most significant economic shift China has undergone since its first liberalisation that began with Deng Xiaoping’s rise to power in 1978, anyone seeking to conduct business in China should certainly stay apprised of these developments.

Categories: Asia Pacific, Economics

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