China’s reform and opening must continue, 40 years after its ‘second revolution’

This year marks the 40th anniversary of China’s economic reform and opening up. As Confucius said: “At 40, I had no doubts.” In the 19th century, German philosopher Arthur Schopenhauer noted: “The first 40 years of life give us the text: the next 30 supply the commentary.” No matter how it is stated, the 40th anniversary means a lot in life, and for a nation. 

Looking back over the last four decades, there is no doubt that reform and opening was the only way to create prosperity for the Chinese people, and this is certainly the consensus for most of the nation.

A few weeks ago, President Xi Jinping called for a boost to the reform drive at the Boao Forum for Asia’s annual conference: “Today, the Chinese people can say with great pride that reform and opening, China’s ‘second revolution’, has not only profoundly changed the country but also greatly influenced the whole world.” Xi’s use of the phrase “China’s second revolution” to describe the reform and opening means its importance can be compared to the founding of the People’s Republic. 

China’s new leaders have gradually taken their places within the party and government, and with the successful amendment of the constitution, Xi and his team are fully empowered and equipped to execute bold reforms in the coming years. Once the foundation becomes more solid, the conditions are ready for the implementation of extraordinary ambitions. 

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Taking a broad view of the announced and upcoming measures, it is certain that China’s reform and opening drive in 2018 will reach historic highs, unleashing economic vitality in many sectors and fields, which will become a major force for development in the next 10 to 20 years. These measures will have a dramatic impact on China’s economy and the whole of society. 

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The best way to understand this impact is through examples.

For instance, the market share of wholly private and foreign-owned banks is very small, severely limiting competition. In fact, by the end of 2017, total assets of foreign-owned banks in China was only about 1.28 per cent of the banking sector. State-owned banks dominate the industry and often prefer lending to other state-owned enterprises to avoid risk. As a result, the current banking system is not capable of efficiently allocating financial resources, such as capital, ultimately holding up economic development and increasing financial risks. 

The recently announced measures by Yi Gang, governor of the People’s Bank of China, will further open up banking, insurance and other financial service sectors to foreign companies, helping the financial service sector become more competitive and efficient. 

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There are many other industries and sectors facing similar problems, such as China’s civil aviation industry. The dominance of state-owned enterprises and restrictive government regulation restrain the expansion of private companies and market competition. 

For instance, in the United States, general aviation (which is civil aviation operations other than scheduled air services) is a huge market. According to the General Aviation Manufacturers Association, in 2017, the industry contributed more than US$219 billion to the US economy and generated 1.1 million jobs.

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In China, based on an industry expert’s estimation, the number of aircraft, airports and general aviation pilots are only a very small percentage of the American totals, with government regulation and control cited as the main barriers to the sector’s development. 

China’s general aviation sector is ready for take-off. Though the industry has gradually picked up in the last few years, further deregulation would unlock the market, creating massive economic value and opening the door for enormous business opportunities. 

Furthermore, according to the US Federal Aviation Administration and China’s Civil Aviation Administration, total revenue from China’s civil aviation was 639.3 billion yuan (about US$100 billion) in 2017, or 16 per cent of the US market. Although the calculation methodologies for the two countries may differ, it is obvious that these figures do not coincide with their respective economic scales, since China’s gross domestic product is about 60 per cent of the US total. (Of course, some may argue that China’s railway system, particularly its high-speed railway, is much more advanced than those in many countries, including the US.) 

The market potential for deregulation and increased marketisation of the civil aviation industry is vast, and could potentially add a few million jobs and enlarge business revenues to a few trillion. 

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Lastly, continued reform and opening in China will never be easy. In many cases, there is resistance to the enactment of many urgently needed measures. This is why it has been so hard to implement the policy of “let the market play a decisive role in resource allocation”, introduced five years ago. 

Without strong leadership to implement reforms from the top, many obstacles will not be overcome in China. Fortunately, the central leadership is more powerful now. The numerous measures for further reform and opening can be fully executed and the results should elevate the country’s economic development to much higher levels in the next few years. When we look back, the year 2018 will be another milestone in the history of modern China. 

Confucius also said: “At 70 I could follow my heart’s desire without overstepping the boundaries of what is right.” Will China reach that level in 30 years? We look forward to embracing it. 

G. Bin Zhao is a senior economist at PricewaterhouseCoopers China and he also leads the firm’s China Strategic Research. The opinions expressed here are the author’s own