China’s marketisation has taken a hit, and pro-market economists blame Beijing interference

Rising government intervention seen putting the brakes on China’s unfinished market-oriented reform, ‘despite remarkable progress in the past 23 years’
Beijing has been cracking down on Big Tech, property developers, entertainment and tutoring, while also intervening in the commodities market and power industry

China property

Frank Tangin Beijing

Published: 5:30am, 10 Nov 2021

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China’s marketisation – the increased exposure of industries to market forces rather than state intervention – has fallen, prompting domestic pro-market economists to criticise Beijing’s continued interference in the country’s economic activities.

A newly released marketisation index by the National Economic Research Institute (NERI) – providing a province-level marketisation breakdown that gauges the extent of pro-market reforms and measures the quality of market institutions, on a scale of zero to 10 – fell to 5.81 in 2019 from 5.99 in 2016, with 2019 being the latest estimate.

Nine of China’s 31 provincial jurisdictions – Tianjin, Jilin, Heilongjiang, Inner Mongolia, Gansu, Ningxia, Tibet, Hainan and Guangxi – reported a fall in their marketisation level in the 2016-19 period.

A fall in the index – which also measures government-market relations, non-state economic developments, product markets, factor markets and the legal environment – represents a smaller market role in China’s economy.

The last drop was seen in 2010, when state-owned enterprises expanded quickly after Beijing injected 4 trillion yuan worth of stimulus to combat the 2008 global financial crisis.

“We must realise that China’s market-oriented reform hasn’t yet been completed, despite remarkable progress in the past 23 years,” Wang Xiaolu, deputy director of the Beijing-based NERI, said at a symposium on Tuesday. “It needs to be pushed forward … the direction must not be changed.”

Wang attributed the decline in the market role to rising government intervention, after the NERI sub-index of government-market relations dropped 0.43 points from 2016-19, to 6.76.

The product market sub-index also fell 3.03 points to 4.15 in 2019, owing to rising local protectionism and price interventions, while the sub-index of non-state economy development rose by 1.12 points to 7.83 in 2019.

The eastern province of Jiangsu led the country with a score of 8.51 in 2019 – an improvement from 7.07 three years prior – followed by southern export hub Guangdong and economic centre Shanghai, the NERI study showed.

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China’s northeast rust-belt region, whose economic growth was lower than the national average in the first three quarters, saw its parameter dip 0.15 points to 5.33 in 2019.

Overall, however, the NERI study indicated that China’s marketisation has increased over the past two decades – the period of the study – with only small declines in 1999, 2010 and now 2019.

While the research did not take into account post-coronavirus policy adjustments, the fall in the index has triggered concerns about the future of China’s private economy and its entrepreneurs, particularly as central authorities push towards a dual-circulation policy of self-reliance, along with their “common prosperity” agenda.

The falling index has also come amid Beijing’s crackdown on privately run big tech companies, property developers, entertainment and tutoring businesses, along with widespread power rationing and intervention in the commodities market.

The Atlantic Council and Rhodium Group warned last month that Beijing’s back-pedalling from a more open economy started in 2016 and was particularly notable in the past year.

“China in 2020 remains remote from the characteristics typical of open-market economies,” according to their joint report titled China Pathfinder. “The Xi-era pledge to ‘make the market decisive’ remains unfulfilled.”

Chinese leaders have long insisted on a socialist market economy, and protecting the private economy. This is expected to be reiterated at the Communist Party’s sixth plenary session this week.

Zhang Weiying, a Peking University professor and a staunch defender of the market economy, said a higher degree of marketisation would be good for a variety of government strategies.

“The regions with high marketisation indices usually report good growth rates. Their innovation capabilities are often the highest, while their income gaps are the smallest,” he said.

Peng Sen, president of China Society of Economic Reform, said the market approach remains key to the country’s economic growth and structural adjustments.

“It should not be changed,” he added.