China Research

It seems, for example, credible that the role of the service sector has been strengthened more recently. This is a cornerstone in the new economic policy. The exact degree of this improvement is not known but the tertiary sector’s share of total production may now in reality be slightly more than 50 percent of GDP compared to roughly 40 percent for manufacturing (applying calculations by the National Bureau of Statistics).

Some further marketization of the financial sector and improvements in financial supervision can also be observed since 2014. The yuan has become a more international currency. Institutional shortcomings like corruption seem to be counteracted more strongly these days than in the past. The residential registration system (hukou) is about to be modernized, although probably not fast and broadly enough. Urbanization as a main driver of economic growth is going on, and let’s not forget the planned new Belt and Road Project with investment magnitudes that could become very high if everything goes to plan.  Focus on innovation, (mass-) entrepreneurship, e-commerce and other IT developments, pollution and the “new normal” with lower potential – but qualitatively better – GDP growth has been intensified by the Chinese decision makers and has also led to concrete measures.

An interesting detail is the introduction of a bonus and penalty system for pollution in an increasing number of cities in order to meet the compulsory government reduction targets of the current five-year plan. Further plans for pricing reforms should also be mentioned.

Thus, Chinese political decision makers are certainly not passive. Improvements have taken place recently and will happen in the future. However, insufficient reform steps and compromises will also be noted. Modern country and corporate analysis has to consider the promising parts of the reform policy but also the major difficulties that China will be confronted with in the forthcoming years.

Hubert Fromlet
Senior Professor of International Economics, Linnaeus University
Editorial board

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China wants to receive the market-economy status (MES) from the EU by December 11 at the latest, exactly 15 years after its WTO entry. This request is no surprise since China would see such a promotion as juridically justified and as a prestigious move toward further international recognition.

There are opponents to such a step which would give China cheaper penalties for price dumping on international markets. Experts like Rolf Langhammer (see our blog from March 2) believe, however, that economic reasons for granting China the MES are strong enough.

Here we come exactly to the point. In my view, purely economic reasons are needed for China’s potential MES. Political strategy and tactic on the part of Europe vis-à-vis the powerhouse of China should not be a guideline at all. Today, the Chinese economy is still characterized by a lot of government involvement, maybe too much for receiving MES. On the other side, Chinese leaders move structurally in the right market direction – but how fast?

Nobody can tell. But according to the decisions by the important Third Plenum of the CPC in 2013, China is intended to develop as a country that should give the market economy “a decisive role”. China argues at the same time that Europe is developing away from a genuine market economy which is partly true. These diverging trends make an economically based MES-decision even more difficult – despite China’s simultaneously still imperfect status as a market economy.

Hubert Fromlet
Senior Professor of International Economics, Linnaeus University
Editorial board

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