China’s socialist market economy: market governance and SOE reforms so far in the focus

The formal essence of China’s socialist market economy reform is to “increase efficiency” and “fairness of the market” to stimulate the vitality of market players towards the so-called “high-quality development” model. As such, the 14th Five-Year-Plan (FYP) emphasizes continued and broad reforms, and new steps have been taken particularly in market regulation of key industries, SOE and financial system reforms.

Assessment

  • The 14th FYP continues to promote a market-based allocation of production factors. This includes relaxing select restrictions on household registration (hukou), removing labor movement barriers between urban and rural areas, offering more freedom in transferring rural land, and enhancing the financing function of the multi-level capital market. Progress so far is visible particularly with regards to hukou liberalization in parts of the country’s second-tier cities. In other areas, there is still a lot of work.

  • The new FYP also elevates the importance of anti-monopoly work, and for the first time proposes to prevent the “disorderly expansion of capital”. As a result, the government has taken stronger regulatory action since last year in big tech, real estate and education sectors, including anti-trust fines and cybersecurity reviews. The plan is also a push towards fairer competition, strengthening the foundational status of competition policies including the “fair competition review system”.

  • The SOE reforms, initiated under the 13th FYP, will continue under the 14th FYP and focus on higher efficiency as well as on the strategic goal of building a “modern enterprise system with Chinese characteristics”, utilizing SOEs to achieve national strategic goals such as strategic security, industry leadership, or public services. The three-year action plan for SOE reform (2020-2022) has attained an official 70% completion rate and accelerated the progress of introducing mixed ownership.

  • Major first steps have also been taken to reform the financial system, including an accelerated implementation of the registration-based IPO system, improvements in corporate governance of financial institutions, and a strengthened supervision of shareholder equity and transactions. More work lies ahead.

Implications

  • Market governance is a key aspect in the implementation of China’s distinct socialist market economic reform. After a yearlong regulatory upheaval, and as stability becomes the governing theme for the country this year, policy focus is now shifting to more transparent and coordinated regulation and development. Given their prevalence and relevance for system stability, especially data-related business models or certain fields of the financial sector may expect regulatory refinements in the months and years ahead.

  • Reforms in state-owned sectors and the financial system, if implemented as announced, might open up new market opportunities. SOE reforms were initiated to corporatize and consolidate state-owned legacy enterprises and thereby raise their productivity, and now place more emphasis on increasing foreign investment ownership. Policy motives towards financial opening-up, broadening investment channels and capital market reforms therefore predict a larger potential customer base for targeted investment products.

State Council: 中华人民共和国国民经济和社会发展第十四个五年规划和2035年远景目标纲要