Choice of reform options in line with trends of economic transformation in the 13th Five-year Plan period

  Time:2015-11-02   Hits:0

Choice of reform options in line with trends of economic transformation in the 13th Five-year Plan period

Chi Fulin

October 31, 2015

 

China will be at a historical turning point of its economic transition and comprehensively deepening reforms in the 13th Five-year Plan period (2016-2020), and a period that will determine the victory in building China into an all-round well-off society: The hope that China successfully eases short-term growth pressure and lays down a foundation for sustainable growth is in 2020; the key time for China to fundamentally change its economic development models will lie in 2020; the key joint for China to realize its goal of building an all-round well-off society and march towards a high-income country will be in 2020; and the end of the window period for China to comprehensively deepen reforms will be in 2020. The just closed 5th plenary session of the 18th CPC Central Committee has proposed a strategic plan for reform and development in the 13th Five-year Plan period. Against such a background, it is important to produce a good plan for the 13th Five-year Plan period, make a good choice of routes fro economic transformation and growth, unleash the great domestic demand by way of transformation and reforms, maintain a medium-high economic growth rate, and enable industries to move toward medium and high end to substantially improve the balance, inclusiveness and sustainability of development.  

I. The 13th Five-year Plan period (2016-2020): new trends, new structure and new drivers for economic transformation

The 5th plenary session of the 18th CPC Central Committee pointed out that China is still in a period of important strategic opportunities, nevertheless emphasized that we must correctly understand the changes in the connotation of period of important strategic opportunities. China has entered into the late period of industrialization. The trend, structure and drivers have all changed vastly, with a prominent feature of high integration of growth model transformation and reforms.

1. New trends of economic transformation. At present, despite the increasing pressure of economic slowdown, tendency changes in China’s economic transformation shows that China’s economy is stable, about to get better and to have important historic opportunities. First, following the trend of "Internet Plus", "Made in China" is gradually transforming from production-oriented manufacturing to service-oriented manufacturing, and new competitive strengths in manufacturing sector is expected to gradually take their shape. Second, driven by the reform of household registration system, scale urbanization is giving its way to population urbanization in a speedy manner. It estimated that by 2020, the population urbanization rate is expected to increase from the current less than 40% to about 52%, so that the gap between the population urbanization rate and the scale urbanization rate would be narrowed from the current 17% down to 8%. Third, consumption structure is in rapid switch from material-goods-based to service-based. It is estimated that the proportion of urban residents’ service consumption will be increased from about 40% for the moment to about 50% in 2020, and the figure is likely to exceed 60% in developed regions, which would demonstrate that consumption is playing an increasing role in driving economic growth.

2. New structure of economic transformation. The new trends of economic transformation in the 13th Five-year Plan period are to unleash huge potential of domestic consumption, bringing the upgrade of economic structure to a new level: First, an industrial structure with the service sector as the mainstay will be basically built up. It is estimated that the share of the service sector in GDP will be further increased from 51.4% in the first three quarters this year to more than 55% in 2020. Correspondingly, the share of service sector supporting production will climb from about 15% to about 30%, making the service sector development as the lead for industrial structure upgrade. Second, a new consumer-driven growth pattern will basically takes its shape. An estimated 8% to 10% annual growth rate in consumption will take place in the 13th Five-year Plan period, the total consumption in 2020 will reach 50 trillion yuan or so, and its contribution to growth will stabilize at the range of 60% to 65%. Third, a new opening-up pattern with service trade as priority will basically be in place. It is estimated that the share of service trade in total foreign trade will be lifted from 12.3% in 2014 to around 20% in 2020, and China will gradually develop new competitive advantages in the process of promoting bilateral and multilateral, as well as regional and global free trade.

3. New drivers for economic transformation. Unlike other countries, China is in a critical period with simultaneous promotion of economic transition and structural adjustment, facing both opportunities and challenges. The 13th Five-year Plan period is a historical opportunity and also the “last window period” for economic structural adjustment. If these are handled properly, China will be in a favorable position, not only in easing the short-term pressure of economic slowdown, but also in laying important foundation for 6% to 7% growth in the middle and long term. On the contrary, if not, China will be trapped in a difficult situation, facing increasing economic and social risks, and even crises. The key lies in the choice of reforms, lies in to what extend the reforms will be in line with the trends of economic transformation, with breakthroughs made and economy continuously driven. This requires a firm belief in reform, and at the same time, we shall understand reform characteristics in new situations, shall be more self-motivated and take responsibilities more seriously; this will require us not to be affected by short-term factors and interest relations, but to overcome the refrains by various interests in various reforms; this will also require the mobilization and involvement of all stakeholders in reform initiatives, “pro-reformers” shall be empowered and put in important positions, reform incentive mechanisms shall be built, and reform explorations at the local level shall be encouraged, for the purpose of building up a favorable environment of comprehensive deepening reform from the top to the bottom.

 

 

II. The 13th Five-year Plan: to form a new pattern of letting the market play a decisive role in resources allocation by prioritizing the opening up of the service sector

To develop modern service industry with the priority of opening up service sector is not only the key to transforming development models, adjusting structures and being in line with the general trend of economic transformation, but also a major task for next round of market-oriented reforms. So to speed up the development of the service sector as proposed by the 5th plenary session of the 18th CPC Central Committee, opening up the service sector should be a strategic priority in market-oriented reforms.

1. When entering the late stage of industrialization, the focus of resources allocation is shifting from the industrial sector to the service sector. When there are new trends and new economic structure for economic transformation, growth power switch is inevitably needed. International experience shows that it is a basic law of industrial structure evolution that low value-added traditional manufacturing industry gradually being replaced by high value-added modern service industry, and this is also an objective trend in this specific historical stage when a country is moving from the middle-and-late stage of industrialization to the late stage. In the last 37 years of reform and opening up, as a result of understanding the development of industrialization and the general trends of fast growing demand of global trade in goods, seizing the opportunity and actively promoting the opening of industrial sector, China is able to become the biggest manufacturing country in the world. Promoting market-oriented reforms with service sector as the priority in a speedy manner is the key to get favorable position in China’s transformation and reform for growth in the 13th Five-year Plan period and speed up its step to move towards a country with service sector as the main driver.

2. Opening up the service sector is a heavy part of market-oriented reforms. As a result of industrial sector as the core of market opening-up for many years, service sector has become a “short plank” in market-oriented reforms, demonstrated by “three lows and one high”: Firstly, low degree of market-oriented reform in the service sector. For example, the industrial sector has opened up at least 80% of its market to the social capital, while half of the service sector is still in monopoly. Secondly, low degree of openness in the service sector. Take the negative lists for investment in several pilot free trade zones as an example, 83 out of 122 measures are in the category of service trade, showing there are still many restrictions on service trade. Thirdly, low level of service in the service sector. For example, the essence of real estate industry would be service in the future. The 13th Five-year Plan will be faced with such issue as how the current real estate industry will become service-oriented, the core added value would be health services. Fourthly, high service prices. For instance, in 2014, the average speed for internet broadband connection in China was ranked 75th in the world, however, the average internet access price for one MB was 3-5 times that of the developed countries.

General speaking, for the market to play a decisive role in resources allocation in the 13th Five-year plan period, the difficulty is mainly in the service sector. This requires to break administrative monopoly and market monopoly in the service sector, comprehensively liberalize market pricing in the competitive service secotors so as to build up an open market system with fair competition, which in turn requires better facilitation of market entry in service sector to make social capital become the major player in the development of modern service industries.

 

3. Opening-up of service market influences the overall transformation and growth. In order to enable consumption make larger contributions to economic growth, service supply capacity has to be strengthened by further opening-up of service market; in order to build up an industrial structure with service industry as the mainstay, the efficiency of investment has to be improved by further opening-up the service market; in order to form a new pattern of open economy with service trade as priority, bilateral and multilateral FTAs have to be promoted in a speedy manner through orderly two-way opening-up of the service market. It is suggested that relevant national government authorities shall formulate an action plan for the opening–up of service market in the 13th Five-year Plan period as soon as possible.

 

III. The 13th Five-Year Plan: solving structural contradictions in economic transformation with structural reforms

Economic transformation is faced with prominent structural contradictions, which not only have negative impacts on short-term economic growth, but also hinder structural adjustment and economic upgrading. Getting over difficult problems with development and cultivating development advantages require not only speeding up the opening-up of the service market, but also advancing structural reforms with greater determination and courage.

1. Economic transformation is confronted with structural problems between policies and institutional mechanisms Developing the modern service industry needs more investment. According to relevant statistics, in the first three quarters of 2015, fixed assets investment in the service sectors only represented about 24.2% of the total, among which, education, health care, culture, elderly care and other service sectors with growing demand by the whole society only account for very low proportion of fixed asset investment.

The underlying problem is that the existing macroeconomic policies and institutional structure are to some extent in the nature of encouraging industrial development while restraining the development of the service sectors. Firstly, the policy orientation of “investment being the key to development” without any conditions has led to the hardly reversible situation of structural imbalance between investment and consumption. Slow reform in investment system have caused great difficulties for private capital’s investing in the service sector. Secondly, as the “replacement of business revenue tax with value-added tax” has not fully completed, and the reform of consumption tax has been slow, it is hard for local governments to change the traditional practice of giving higher value to investment while underestimating the importance of consumption. Thirdly, unreasonable financial structure and the backwardness of universally-beneficial finance make it hard to solve the financing difficulties faced by the small and medium-sized enterprises. Fourthly, the unreasonable educational structure has led to the shortage of skillful professionals.

2. The hard-nut in structural reforms has to be tackled. By integrating macro policy adjustment with institutional reforms, we can embark on a new path to solve structural contradictions with structural reforms. Firstly, it’s essential to make real breakthrough in investment institutional reform, making sure that investment is made based on effective demand. Stable growth is supported by growth, but investment should be made on the base of market demand and returns, rather than just for the growth of GDP. Thereby, we have to let consumption play a guiding role in investment transformation and increase the share of investment in the service sectors with real demand. Secondly, we have to speed up reforms of the fiscal and taxation system with consumption tax as the priority. Consumption tax should be made as the major tax category belonging to local governments and the direct tax share should be increased. For small and medium-sized enterprises in the service sectors, more targeted tax reduction should be given, and tax burden for the manufacturing industry and the service industry should be equal. Thirdly, reform of the financial institution should be deepened and the development of the small and medium-sized financial agencies invested mainly by private capital should be accelerated. With the aim to let finance support the real economy, it’s essential to support the innovative and standard development of private banks and community banks that provide services for the micro, small and medium-sized enterprises. The share of direct financing should be expanded through development of the multi-layer capital market. Fourthly, structural adjustment for education is also needed. The development of medium and high level vocational education in line with the current economic transformation should be promoted in a speedy manner so as to form institutional advantages for educating internationally competitive talents.

3. Structural reform is a profound revolution. Structural reform means comprehensive adjustment and systemic restructuring of the whole policies and institutions. It involves not only policy adjustment and institutional changes, but also sectoral interests, interests of the enterprises, departmental interests and local interests. Therefore, we should improve top design for reforms, strengthen organizational collaboration of reforms, intensified the efforts for tackling the tough problems in reforms and break down the hindrance of entrenched interests in the way of structural reforms.

 

IV. The 13th Five-Year Plan: creating better climate for economic transformation and reforms by further streamlining administration and delegating power to the lower levels

 

The government plays a key role in structural reforms and further streamlining governance and delegating power is the priority in building the big environment for transformation and reform during the 13th Five-Year Plan period.

1. Invigorating the market and relaxing restrictions on the enterprise are core objectives of streamlining administration and delegating power to the lower levels. Economic transformation and upgrading depends on a vigorous market, a level playing field and, and the breaking down of policy and institutional shackles on innovation and entrepreneurship. Currently, in the bigger context of accelerating economic restructuring and increasing downward pressure, we have to intensify effort of delegating power, invigorate the market and guard against the risk of putting market in the cage of power. To adapting to the general trend of economic transformation, there is still great room for streamlining governance and delegating power. My view is that we should: draw on the experience of international business system and comprehensively implement enterprise autonomous registration system; appropriately cancel the record system for general investment projects, which means except for government investment, investment made by enterprises should be decided by the enterprises themselves according to laws and regulations; reduce the use of industrial policies as interferences in business operation except for some special industries like agriculture.

2. The key to streamline administration and delegate power to the lower levels is to standardize power operation. Firstly, together with the comprehensive implementation of the negative list, the government should issue the power list and responsibility list for different levels of governments to reduce government’s interference in enterprise’s discretionary right. Secondly, regulatory transformation is the top priority. Strengthening regulation needs to improve market regulation, but it should not be taken as the excuse to increase the burden on enterprises. So we have to speed up transformation from administrative-based regulation to law-based regulation. Thirdly, deepening of streamlining governance and delegating powers involves reasonable distribution of powers between different departments and between different levels of governments. Therefore, I strongly recommend that structural adjustment of administrative powers should be put on the reform agenda as important task.

3. The key to streamline administration and delegate power to the lower levels is people oriented public service idea. The fundamental purpose of economic transformation and reform is to mote people’s development. Be it to release consumption potential of the 1.3 billion people or to put in place a service-led economic structure, people’s development is the ultimate pursuit. At a time when public needs are rapidly increasing, we must stick to and implement an innovative, coordinated, green, open and sharing development concept. We must say goodbye to the government-dominated economic growth model, make governments at levels become major players in providing public services and creators of good market environment. This is the anticipation of all walks of life. It is also the historical responsibility of the government for transformation and reforms during the 13th Five-Year Plan period.

 

 

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