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China needs to rebalance the relationship between government and market

To tackle the challenges China now faces, its policy focus in 2019 and onward should be on providing a fair and transparent business environment for the private sector.

By NewsChina Updated Jan.1

2018 has been another turbulent year. In addition to domestic economic issues, such as the continued economic downturn and financial instability, the escalating trade dispute with the US, the biggest market for China’s exports, has started to take its toll on the Chinese economy. As these challenges will become further intertwined, posing ever greater risk to the country’s economic prosperity, China’s leadership needs to rethink its role in the economy.  

First, the government should shift its policy focus from promoting investment and expanding the economy to nurturing a fair and healthy business environment. In the past months, there has been much discussion about the role between the State and private sectors, with some even  
expressing the radical view that the State should “take over” the entire private sector. This caused great concern among entrepreneurs regarding the direction of the  Chinese economy. Thedebate was finally laid to rest when Chinese President Xi Jinping affirmed in a meeting on November 1 that the government will support the private sector to become bigger and stronger. Following Xi’s speech, both central and local governments have released new policy packages to offer support to the private sector, where many companies have encountered difficulties in the past months.  

While these moves will help private investors regain some confidence, the debate itself shows that even after four decades of economic reform, the protection of private ownership has not been fundamentally enshrined in China’s political mindset, and can prove to be fragile at times. The Chinese government needs to realize that China’s economic success in the past decades has been established on the premise of a liberalized and vital private sector. To tackle the challenges China now faces, its policy focus in 2019 and onward should be on providing a fair and transparent business environment for the private sector to ensure long-term confidence over their investments and to increase the efficiency of the overall economy.  

Second, the Chinese government should reform its taxation policies more drastically. In the past couple of years, the government has conducted several rounds of tax cuts. But in reality, there has been no major decline in the overall tax burden, as government revenue is still growing at a much faster rate than that of the overall economy. On the contrary, many local governments have taken advantages of the recent taxation reform to abuse their taxation powers. In some cases, local authorities even started to demand businesses pay their future taxes in advance – this could be the last straw for many struggling businesses. The situation has become so serious that China’s Ministry of Justice issued a decree on November 11 to warn local authorities against employing excessive coercive measures and said it could launch criminal investigations over cases of business disputes involving private businesses.  

Finally, the Chinese government should change how it spends government revenue. In most advanced economies, government revenue is spent primarily on public services such as education, social security and medical services. On the contrary, a major component of government expenditure in China is spent on financing infrastructure investment. While this approach has helped boost economic growth, it has created a number of problems such as low efficiency, high government debts at all levels and excess production capacity across different industries.  

Compared to most advanced countries, where administrative costs usually account for around 10 percent of government revenue, these costs average out at around 20 percent in China. The country needs to increase accountability for its administrative expenditure.  

Tackling the challenges posed by domestic and international factors means that China should endeavor to reshape the relationship between the government and the market. While the government should put its primary focus on providing high-quality public services, it should allow the market to be the decisive force in the distribution of economic resources. This will be key to achieving long-term prosperity for China.