China must keep opening up to boost reform

Hu Shuli says the government is right to renew calls for liberalisation in trade, services and governance to build a fair and open market economy

PUBLISHED : Thursday, 11 April, 2013, 12:00am
UPDATED : Thursday, 11 April, 2013, 3:03am

From the start, China's reform and opening up have been two halves of a whole. Yet, in recent years, signs of "closed-door reform" have emerged and in some cases have been put into practice. This is why Premier Li Keqiang's renewed call to push for reform by opening up is notable.

During a trip to Jiangsu and Shanghai late last month, Li said China's reform cannot be separated from its efforts to open up; in fact, opening up provides the push for reform. There's still room in today's China to speed up reform by opening up, he said, and we must "continue to open up so as to break through old ideas and outdated systems".

Li's view was shared by Vice-Premier Zhang Gaoli, who told an audience at the China Development Forum last month that if China is to press on with reform, it must insist on opening up, which is needed now more than ever before.

China's development since 1978 makes this point clear. From the establishment of the special economic zones then to China's entry into the World Trade Organisation in 2001, liberalisation has played a major role in the country's progress towards becoming a free-market economy and a law-based society. Without opening up, there would have been no Chinese economic miracle to speak of.

Deng Xiaoping said China must open up not only towards the outside world, but also internally. How is the country faring today?

The pace of opening up to the outside world has clearly slowed since China became a WTO member, especially after the global financial crisis. The forces of resistance include trade protectionists who want to restrict foreign business, as well as those who argue the complacent view that a fast-growing China needs no one else. These narrow, short-sighted views have become the biggest obstacle to opening up.

If China understood 30 years ago that it had no choice but to open up, today it must realise the door has to be opened wider.

The world has changed drastically in three decades. The growth spurt brought on by the first flush of globalisation has ended, and the global economy is now going through a correction period, with risks aplenty. Moreover, the impact of the financial crisis lingers, and the global economic order is in turmoil.

At home, China's old model of fast growth at all costs no longer works, hobbled by limited resources and environmental damage, a production system that lacks innovation and cannot compete internationally, and the problems that have emerged as China seeks to transform its economic model - including stalling reforms in key programmes and pilot projects.

The more complex environment has made opening up more difficult, but also more necessary. Premier Li has warned of the difficulty of reforms targeted at China's fundamental problems, given entrenched vested interests. If China stops opening up, its reform efforts would remain stuck. The government's call to push for reform through opening up is a good decision.

How should China continue to liberalise? In two areas, for a start: the services industry, and the capacity for global economic governance. They can be the litmus tests for the effective implementation of the next phase of the opening-up policy.

Today, China is the world's biggest exporter and its second-biggest importer, and its value-added service industry is worth close to US$4 trillion. Yet trade in services is only US$470 billion. The lack of progress in opening up the services industry has impeded China's plan to raise domestic demand. Expanding the financial securities industry and domestic trade would help accelerate economic restructuring.

And as China becomes stronger, it should assume more responsibilities and obligations on the world stage, and actively participate in the making of international rules. These efforts will help reduce volatility in the global economy, and create a healthier, more stable external environment for China's own development, not least by easing the path of mainland firms seeking international expansion.

To open up, China must push on with market reform.

Foreign companies have in recent years cast doubt on China's investment environment. Of course, this is due in part to changes in previous policies that favoured foreign companies over local ones. But we should ask why China has not been able to provide a fair market environment for multinationals.

This problem goes beyond China's promise to meet WTO obligations. It concerns questions over the development of small and medium-sized enterprises; the efforts to reorganise government and redefine its scope; the role and reach of state-owned enterprises; the investment and financing system for foreign enterprises; the internationalisation of the renminbi; the liberalisation of interest rates and reforms in key areas. In short, this concerns all aspects of the market economy.

If the government succeeds in tackling these many problems through the creation of a fair and transparent market, credit will have to be given to the policy of opening up.

When China undertook reforms over 30 years ago, there was consensus in society that, whatever the obstacles, China must open itself up. Today amid calls to deepen reform, the central government is calling for reform through liberalisation. The road ahead is clear. Efforts must be directed at where reform is stalled most.

This article is provided by Caixin Media, and the Chinese version of it was first published in Century Weekly magazine.