Abstract: A unified market is characterized by a series of institutional arrangements that enable free and equal exchange of goods and services, factors of production, and financial resources within national or regional borders. “Unified” does not necessarily indicate concentrated management or planned economy; instead, a unified market is a developed, mature and high-level form of market economy that features freedom, openness and fairness. Building a national unified market is essentially a process of promoting modern economic governance. To enable this goal, China needs to properly handle the government-market relationship and the central-local relationship. Amid mounting downward pressure on its economy, the top priority for China now is to support businesses and employment in order to stabilize income and consumption.
I. A NATIONAL UNIFIED MARKET: CONNOTATIONS AND IMPLICATIONS
Q: What are the connotations and defining characteristics of a national unified market?
A: China’s market economy consists of a market for goods and services, a market for production factors, and a market for finance. A “unified market” thus features the combination of various institutional arrangements that enable free and equal exchange in these three markets within national or regional borders.
A unified market builds on decent resource endowment, proper division of labor, a relatively developed economy, and shared interests among participants. It is a developed, mature and high-level form of market economy, instead of a fragmented or decoupled one.
A national unified market has three defining characteristics.
1. Freedom. It’s a market where participants of all kinds operate and decide independently while assuming sole responsibility for their profit or loss, where consumers enjoy the freedom to choose, and where products and factors flow without restrictions.
2. Openness. The flow of goods and factors should be open, without being subject to barriers, within national or regional borders. In addition, a national unified market is not isolated; it is connected with and part of the global market. It should have an open embrace.
3. Fairness. A proper unified national market should have coherent rules; it should be open and transparent. That’s why it has to be underpinned by an open and transparent legal system so that the rule of law can fully play its role in protecting fair competition.
The European Union and the United States both have a unified market. After three decades of development, the EU today boasts a regional unified market that spans across sovereign states using a unified currency, the euro. The U.S. also spent several decades to forge a national unified market. It is a federal country where each of its states can make its own laws; the states even once implemented tariffs on each other, which later got abolished. Today, the U.S. has a national unified market with aligned rules across states on the circulation of goods, services, factors and financial resources.
Having made clear of the definition, connotation and characteristics of a unified market, it’s obvious that establishing such a market would boost resource allocation efficiency and eliminate barriers, and give full play to market participants so that they can make independent decisions and compete in a level playing field.
Q: What does a national unified market mean for the new development paradigm of dual circulation?
A: Building a national unified market has important implications for dual circulation.
First, it is an important enabler to forging the new development paradigm, especially to promoting the domestic circulation. A unified system with consistent rules could eliminate local protection and market fragmentation and break bottlenecks stemming circulation, in order to boost free flow of goods and production factors across the country. This could help revitalize market participants, promote economic development, and build a high-standard socialist market economy system, all of which could add momentum to dual circulation.
Second, building a national unified market can help relieve the mounting downward pressure on the Chinese economy. Under increasing strain from contracted demand, supply-side shock and weakened expectation, China now needs to adopt stronger macroeconomic policies to counter the blow. In a long-term view, policymakers need to step up reform of systems and institutions to spur economic growth. Building a national unified market could improve the efficiency of resource allocation, and this move is a comprehensive and systemic institutional reform in itself.
Third, it is necessary for improving China’s global competitiveness. China has a huge population, a huge market and huge potentials that are hardly comparable for most of the economies in the world in terms of total circulation of goods, factors and financial resources. But China with its super-large domestic market is also an integral part of the global market. To make this super-large market a globally-competitive one, China needs to improve its inner coherence.
II. CHINA NEEDS TO BALANCE TWO RELATIONSHIPS TO BUILD A NATIONAL UNIFIED MARKET, THE MAJOR ROADBLOCK BEING HOW TO MOTIVATE LOCAL GOVERNMENTS
Q: Who should be responsible for unifying the national market? In what way? What are the major weaknesses to address?
A: A sound unified market should be efficient and rule-based, fair, and open. These are the orientation of any effort to build such a market, which essentially is a process of reforming for modern economic governance.
While striving to build a national unified market, China needs to cope with two sets of relationship properly: that between the government and the market, and that between central and local governments.
A unified market is a combination of a series of institutional arrangement where national rules and laws are designed by the central government. Therefore, it’s the central government that is responsible for unifying the national market, despite that it has to work closely with local governments during the process. It unifies the market mainly by making, revising, abolishing and interpreting/communicating laws and regulations. In this sense, building a national unified market is a practice of the rule of law in the economic sphere. Open and transparent laws and regulations are the basic guarantees of the market.
If China is a few steps away from realizing such a market, these steps would be addressing some of the key weaknesses. China has achieved a lot over the past decades in advancing the socialist market economy, but flaws remain, especially in four aspects:
1. Markets for production factors are far from perfect, including the market for land, labor, capital, technology and data.
2. Market participants need a sound environment and a level playing field, with more transparency and less discrimination with local market access and more aligned regulatory rules.
3. Macroeconomic governance needs improvement, especially in terms of the continuity and stability of policies, and that is an important direction of effort to build a national unified market.
4. The business environment could be better. According to World Bank’s report, Doing Business 2020, China ranks No. 31 among the 190 economies in the world. That’s better compared with previous years, but there is still a long way to go to provide a more law- and market-based and international business environment, especially when compared with developed countries on the top of the list.
Q: What are the major choke points and bottlenecks to building a unified national market in China?
A: The biggest one would be how to motivate local governments. Local governments want local economic development and higher taxation income, which is reasonable. But excessive intervention in the economy or even protectionist moves for that purpose, such as unfair market access or barriers, would weaken competition and reduce the efficiency of resource allocation. It may be good for the local economy in the short run, but bad for market unification, resource allocation and competitiveness in a long-term view. Hence, local protection and market barriers have hindered the functioning of the market mechanism and increased the institutional cost of cross-regional and cross-sectoral resource allocation.
Take the negative list system for example. The central Chinese government implements a national unified list, rather than having local governments release their respective negative lists for market access. In this way, all business entities that comply with laws and regulations could gain access to markets for fair competition.
To break local protection and market barriers, local governments need to change their positioning and functions, and serve better as the “referee”. While remaining dedicated to promoting local economic development, they need to do it in a better way with a greater focus on improving business environment, enhancing fair competition review and maintaining a proper market order, and press ahead with public facility building. They need to do what they are supposed to do; they should not misplace themselves, or act beyond their authorities.
Q: You mentioned that to build a national unified market, China needs to properly handle the central-local relationship. Many local governments are subject to a mismatch between administrative power and economic power. How to motivate them to play a bigger role driving local economic development?
A: Properly handling the central-local relationship is important to eliminating local protection, with a special focus on the balance between the administrative power and economic power of local governments. We see a lack of such balance in many places across the country which have distorted the behaviors of some of the local governments. In the next step, we should properly divide the administrative and economic power of local and central governments, and adjust the structure and strength of fiscal transfer payments to local governments in a pragmatic way. For example, the central government could channel more resources to places with more population inflow to support local public facility and infrastructure construction. In addition, it should help local governments explore new sources of income to reduce their dependence on “l(fā)and finance.”
Q: There is the view that building a national unified market is a return to the planned economy. What do you have to say about that? How to properly handle the relationship between the government and the market in the new era?
A: This is of course a misunderstanding. “Unified” is not “concentrated”; it does not necessarily mean the concentration of power or planned management. As said above, “unified” means to implement consistent and coherent market systems and institutions across the country, in order to improve cross-departmental coordination and avoid mutually-interfering and divided policies. A “unified” market has aligned rules and interconnected infrastructures; it is essentially an advanced form of the market economy. Only developed economies have such unified markets where goods, factors, people and funds flow unimpededly.
A unified market is exactly the opposite of planned economy and administrative intervention. It allows market participants to do business independently, and respect their choice, including the choice of consumers, rather than meddling in their activities or management. The government in a unified market is primarily the lawmaker; it functions to enhance fair competition review, step up antitrust endeavors and crack down on unfair practices. The drive to build a national unified market is a step forward toward a better socialist market economy.
Building a national unified market could help sort out the relationship between the government and the market and reduce undue administrative interventions. The unification, a progressive and dynamic process that could take a long period of time, is not artificially engineered, but a natural result of the pursuit of a law-based market.
III. ACCELERATE HOUSEHOLD REGISTRATION SYSTEM REFORM AND PROMOTE FREE LABOR MOVEMENT
Q: To create a unified factor market, the most concerned issue is a unified land and labor market. How much do you think a unified land and labor market will drive economic growth in the next round? How to solve the problem of poor labor mobility? Is it possible to fully abandon the household registration system in super-large cities in the future?
A: Cancelling urban household registration system should be the direction of reform efforts. Promoting the smooth flow of labor and talents across regions, achieving full employment, and improving the quality of employment and people's living standards are of important significance to China’s high-quality development.
Under the urban-rural dual economic structure, China’s labor mobility basically shows two characteristics: one is the flow from the countryside to the city, and the other is the dramatic increase in the flow between cities. Population flow has played a very important role in boosting employment, stimulating economic development, and increasing the supply of urban services.
With the current household registration system, the current urbanization rate is at a very low level of 46.7% when the calculation is based on household registration. However, if the calculation is based on the resident population, the urbanization rate will reach 64.72%. This means that there are still a large number of rural migrants living in cities and towns, but they have not acquired the identity of urban residents. Therefore, it is necessary to accelerate the reform of the household registration system, of which the difficulty and focus lies in pushing through the reform in large cities.
At present, except for some megacities, the restrictions on settling in cities are required to be gradually lifted, and a new household registration system based on the place of habitual residence should be implemented to promote the settling of rural population in cities. At present, cities with a permanent population of less than 3 million have basically lifted the restrictions on settling down, while cities with a population exceeding 3 million still have certain thresholds. It is still difficult for migrant labor to become real urban citizens, behind which is the difficulty to realize equalization of public services.
At present, migrant labors are faced with housing problems, inadequate income increase, and education difficulties, among other hardships. In addition, in terms of social security, such as pensions, medical care, and work-related injuries, there is also a large gap between the non-local population and urban citizens. Therefore, in promoting the flow of labor and talents across regions, it is very important to realize the equalization of public services, which depends on the financial and material resources as well as carrying capacities of different regions and can only be solved gradually with economic development.
There should be bidirectional labor flow between urban and rural areas. In addition to the difficulties for migrant workers to settle down in cities, urban citizens also find it difficult to find a job or start businesses in rural areas. Peasants have the membership rights of collective economic organizations, urban citizens cannot become members of rural collective economic organizations even if they make investments there. Therefore, how to facilitate urban population to work or start businesses in the country and enjoy related rights and interests also needs a series of institutional reforms.
Q: At present, many reforms are "hard to crack". How do you think the incremental reform and the existing reform can go further? What efforts can be done to promote the construction of a unified national market?
A: Next, we must actively and steadily push through reforms, and pay close attention to the pace and intensity of reforms. Because these hard "bones" all involve underlying institutional reform, it is necessary to build up experience through pilot projects, and then popularize them in more areas. This will require a long and gradual process.
In general, China must insist that development is the first priority, continue to improve the level of economic development, and implement reform. But we should not rush into any reforms, otherwise it may be counterproductive. Many reforms still need to be piloted and pushed forward step by step.
It is pointed out in the “Opinions of the Central Committee of the Communist Party of China and the State Council on Accelerating the Construction of a National Unified Market” that under the premise of developing the national unified market, priority should be given to the construction of regional integrated markets. The gap between North China and South China, East China and West China is rather large, so it is necessary to encourage the development of regional integrated markets, because there are similarities in economy, culture, resource endowment, land and labor transfer in neighboring cities and provinces. In addition, they have closer connections, which facilitate the free flow and equal exchanges of various elements. Therefore, the development of regional markets is also an important part of promoting the construction of a unified national market.
IV. STABILIZING EMPLOYMENT IS THE TOP PRIORITY
Q: At the current stage, how to stabilize growth?
A: The most urgent task is to protect market entities and employment, and then stabilize income and consumption. Only when consumption remains stable, can the economy enter a virtuous circle.
With the impact of the pandemic, household consumption expenditure dropped and savings increased passively. In the first quarter of this year, the increase in residents' deposits was as high as 7.82 trillion yuan, which was significantly higher than the 5.49 trillion yuan in the same period of previous years. However, residents' income did not increase, which means that the extra 2 trillion yuan in savings was a passive increase. This should have been part of consumer spending. On the other hand, with the resurgence of the pandemic, many businesses were unable to start operation, especially the service sector, resulting in a reduction in supply, which further affected employment, income and consumption, resulting in negative feedback. Statistics from the National Bureau of Statistics show that in April this year, the surveyed unemployment rate in 31 large cities reached 6.7%, the surveyed national urban unemployment rate was 6.1%, and the surveyed national urban unemployment rate of the 16-24-year-old population reached 18.2%. Employment instability is mainly reflected in the service sector which has been hit hardest by the pandemic. In addition, the borrowing capacity of residents is also decreasing. In the first quarter, loans to the household sector increased by 1.26 trillion yuan, a year-on-year decrease of 1.3 trillion yuan.
Therefore, now the top priority is to secure employment. Only by securing employment can we stabilize income and consumption. A virtuous economic cycle cannot be achieved without stable consumption growth. By the end of 2021, the employed population in China is 746 million, of which small and micro enterprises and individual industrial and commercial businesses provide more than half of the posts. After the outbreak of the pandemic, banks deferred principal and interest repayment by 11.8 trillion yuan to support medium，small, and micro enterprises, and provided inclusive loans to small and micro firms of a total of 9.1 trillion yuan from 2020 to October 2021. These efforts have strongly supported them to tide over the difficulties. However, the survival and development of small and micro enterprises and individual industrial and commercial businesses did not rely on loans in the past. Thus, increasing lending won’t resolve the most prominent problem facing such businesses. What is really helpful is to help them recover their business.
Q: How do you see China’s economic growth prospects this year?
A: Now we have two factors that are beyond expectations. One is the impact of the pandemic and control measures. There are still many unknowns about the future trend of the pandemic, including the variants of the virus. The second is the great uncertainty in the international situation. Now we are not sure about the impact of these two factors on the economy.
We should stick to the GDP growth target set at the beginning of the year. With growing support of macro policy and effective pandemic control measures, it is still possible to achieve the growth target.
We should not give up on this target just yet. The Politburo meeting of the CPC Central Committee on April 29 called for urgent planning of incremental policy tools, indicating that the existing policy tools may not be enough. Policy tools need to be adjusted in a timely manner according to changes in economic development.
It should also be noted that although the above two factors exceeded expectations, both of them were exogenous shocks and did not affect the internal driving force of China’s overall economic development. Economic operation remains resilient, and the long-term positive trend of the economy has not changed. We have full confidence in this.
This is an interview conducted by CF40 Research Department with the author, published in Chinese on CF40’s WeChat blog on June 7. It is translated by CF40 and the English version has not been subject to the review of the author himself. The views expressed herewith are the author’s own and do not represent those of CF40 or other organizations.
