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For China, after more than 30 years of market-oriented reforms and a decade of WTO membership, the fight for status as a market economy has still been a tough brawl.
Over the past three decades, China has impressed the world with significant progress in market-oriented reforms. So far, 97 WTO members have granted China market economy status.
But its major trade partners, such as the European Union (EU), the United States, Japan and India, are still hesitant to follow suit.
It’s really a matter of time before China wins the status. Based on WTO rules, China’s full market economy status will automatically be recognized by 2016. Early recognition would provide relief for the country’s exporters reeling from growing trade disputes.
“Western countries have been using the market economy status to practice trade protectionism against China,” said Song Hong, a researcher from the Institute of World Economics and Politics under the Chinese Academy of Social Sciences (CASS).
China has been the world’s biggest target of anti-dumping measures for the past 16 years. In 2010, China underwent 23 antidumping probes, making up 33 percent of the world’s total, according to data from the Ministry of Commerce.
Dumping is determined in one of two ways: Either a commodity is sold abroad at a price lower than the price at home or lower than its production costs.
Since China has not been considered a market economy by Western countries, the costs in Chinese markets are regarded as unreliable and are therefore not used for calculating dumping margins.
Instead, Western countries select the prices of a substitute country—often with much higher production costs than China, making Chinese companies vulnerable to antidumping and anti-subsidy investigations.
“The low prices that Chinese exporters charge reflect true market conditions in lowcost China, and do not result from subsidies and other distortions typical of a command economy,” said Song.
The so-called technical criteria of Western countries have been an obstacle for China, said China’s Vice Foreign Minister Fu Ying.
Strictly speaking, several other countries that the EU has recognized as market economies, even some EU members, have failed to fully meet these criteria, said Fu.
The EU should treat China fairly on the market economy status issue, she said.
“The United States uses China’s market economy status as a bargaining chip to press China to compromise on issues such as the yuan exchange rate against the U.S. dollar and U.S. Treasury securities,” said He Weiwen, an executive director of the China Society for WTO Studies.
The United States in 2002 recognized Russia as a market economy, though it still has not obtained WTO membership, he said.
According to the 2011 Index of Economic Freedom compiled by the Heritage Foundation, China ranked well ahead of Russia.
“The confusing market economy status standards of Western countries have caused disruptions to China’s foreign trade,” said Mei Xinyu, an associate research fellow with the Chinese Academy of International Trade and Economic Cooperation.
“Whether the EU grants China market economy status is more an issue of political attitude than of substantial significance for either side,” Mei said.
Zhang Yansheng, a researcher of the Academy of Macroeconomic Research under the National Development and Reform Commission, said no country today could be defined as a pure market economy.
“But if the EU and the United States can recognize China as a market economy ahead of the 2016 deadline, it would help propel their closer cooperation in trade and investment with China,” Zhang said.
China’s strides
A market economy is characterized by free markets where supply and demand determine the allocation of resources and the prices of goods and services. By contrast, in a nonmarket economy, the government decides what to produce, the quantity and the prices.
Both the United States and the EU pointed to government intervention and legacy of a command economy as a major reason for not recognizing China’s market economy status.
The U.S. Department of Commerce said the Chinese Government remains deeply entrenched in resource allocation at all levels. The government’s continued role in the allocation of financial resources indicates that it exerts significant leverage over the allocation of resources in the economy as a whole.
The European Commission also said in a report in 2008 that the criteria China has yet to meet include less progress in reducing the state’s role in price-setting in sectors like energy.
Chen Deming, Minister of Commerce, said China and the West have different understandings on macroeconomic controls over their market economies because they are at different stages of development and have different conditions.
But a persistent decline in state control and a decrease in the use of mandatory planning mechanisms have really happened in the Chinese economy.
In 2008, China’s government revenues accounted for 21.8 percent of the GDP, compared with 26.9 percent of the world’s average, according to A Report on the Development of China’s Market Economy 2010 published by the School of Economics and Resource Management at Beijing Normal University.
The once-dominant state-owned sector is shrinking in relative terms and the growing private sector is becoming increasingly productive and profitable. Private companies have played a dominant role in telecom equipment, home appliances, mining and other sectors.
“Private businesses now make up more than half of the Chinese economy, and provide at least 70 percent of jobs,” said Huang Mengfu, Chairman of the All-China Federation of Industry and Commerce.
Business vitality has also been stimulated by transforming inefficient state-owned enterprises (SOEs) into share-holding companies. Data of the report showed 988 of the 1,293 large SOEs, or 77 percent, had been restructured into corporate enterprises with multiple shareholders by 2008.
Corporate governance was further improved through four major mechanisms: board of directors, executive compensation, ownership structure and financial transparency. In 2008, among the 988 restructured large SOEs, 91.52 percent had established shareholders’ meetings, 95.34 percent set up a board of directors and 80.87 percent had the board of supervisors.
These reforms were accompanied by an unprecedented opening to the outside world in search of export markets and necessary foreign investments, technology and management know-how.
As part of China’s WTO commitment, the country allowed foreign investors into a series of formerly state-controlled areas, such as finance, banking, insurance, securities and health care.
The society has become more fluid and dynamic than ever before, featuring greater social and geographical mobility and horizontal integration. Workers are gaining growing rights with respect to compensation and choice of employment. Newspapers are usually filled with reports that manufacturers in east coastal regions are finding it difficult to hire enough employees as workers demand higher salaries.
Zhuang Jian, chief China economist with the Asian Development Bank, said China has largely become a market economy with pricing of most products in the hands of the market.
“Since joining the WTO, the country has also drastically reduced import tariffs, liberalized foreign trade, while taking solid steps to tighten corporate laws, improve its investment environment and protect intellectual property rights (IPRs),” he said.
Xu Hongcai, an economist with the China Center for International Economic Exchanges, said Western countries should take account of China’s accomplishments in
market openness and should not give unreasonable criticism.
The discrimination would only deal a heavy blow to their trade with China, he added.
The way ahead
Despite the progress China has made in market-oriented reforms, it certainly has room for improvement.
“China’s market reforms are still far from over,” said Fan Gang, Director of the National Economic Research Institute. “To build a modern market economy, China still needs to further open up its financial industry, repair the social safety net, and establish the rule of law.”
“Learning lessons from the 2008 financial crisis, China should also strengthen market supervision and macroeconomic controls to avoid market imbalance,” he added.
“The country should make stiff efforts to deepen reform in a series of statemonopolized sectors like energy and telecommunications and foster fair competition,” said Zhuang.
Efforts are in fact already underway. For example, the government in early 2009 decided to adjust retail fuel prices when world crude oil prices changed by more than 4 percent over 22 straight working days. This was a remarkable break from a more or less rigid pricing scheme to which the government makes irregular and infrequent changes.
Meanwhile, highly concentrated shareholdings remain a hindrance to the improvement of corporate governance. The CASS conducted a survey of the top 100 listed Chinese companies in 2010, and found most of them delivered improved performance in information disclosure, risk control and asset management. But 71 percent of them had their five largest shareholders holding more than half of their assets, slightly lower than that of 77 percent in 2009.
“Such a shareholding structure makes it difficult to safeguard interests of smaller investors, and may easily deter mergers and acquisitions (M&As),” said Zhang Zhengjun, a researcher at the Development Research Center of the State Council.
“One solution is to propel shareholding diversification of SOEs, such as introducing strategic investors.” added Zhang.
Feng Bing, Executive Deputy Director of the China Enterprise Confederation, pointed out that a pressing task for China is to strengthen IPR protection, a cornerstone of the regulatory framework in a market economy and a powerful catalyst to generate innovation.
In the past decades, the country has attained significant results by launching a string of campaigns to crack down on counterfeit and pirate products. Firms are also attaching greater importance to their IPR value.
According to a recent report of the World Intellectual Property Organization, China ranked the second in terms of international trademark applications through the Madrid System for the International Registration of Marks, and the fourth place in international patent applications.
“The protection system is improving, though flaws still exist,” he said. “There still appears to be gap in IPR legislation and its enforcement.”
“The price IPR violators have to pay is still low in China, making it a poor deterrent,”he said. “Moreover, the public awareness of IPR protections also needs to be lifted.”
Over the past three decades, China has impressed the world with significant progress in market-oriented reforms. So far, 97 WTO members have granted China market economy status.
But its major trade partners, such as the European Union (EU), the United States, Japan and India, are still hesitant to follow suit.
It’s really a matter of time before China wins the status. Based on WTO rules, China’s full market economy status will automatically be recognized by 2016. Early recognition would provide relief for the country’s exporters reeling from growing trade disputes.
“Western countries have been using the market economy status to practice trade protectionism against China,” said Song Hong, a researcher from the Institute of World Economics and Politics under the Chinese Academy of Social Sciences (CASS).
China has been the world’s biggest target of anti-dumping measures for the past 16 years. In 2010, China underwent 23 antidumping probes, making up 33 percent of the world’s total, according to data from the Ministry of Commerce.
Dumping is determined in one of two ways: Either a commodity is sold abroad at a price lower than the price at home or lower than its production costs.
Since China has not been considered a market economy by Western countries, the costs in Chinese markets are regarded as unreliable and are therefore not used for calculating dumping margins.
Instead, Western countries select the prices of a substitute country—often with much higher production costs than China, making Chinese companies vulnerable to antidumping and anti-subsidy investigations.
“The low prices that Chinese exporters charge reflect true market conditions in lowcost China, and do not result from subsidies and other distortions typical of a command economy,” said Song.
The so-called technical criteria of Western countries have been an obstacle for China, said China’s Vice Foreign Minister Fu Ying.
Strictly speaking, several other countries that the EU has recognized as market economies, even some EU members, have failed to fully meet these criteria, said Fu.
The EU should treat China fairly on the market economy status issue, she said.
“The United States uses China’s market economy status as a bargaining chip to press China to compromise on issues such as the yuan exchange rate against the U.S. dollar and U.S. Treasury securities,” said He Weiwen, an executive director of the China Society for WTO Studies.
The United States in 2002 recognized Russia as a market economy, though it still has not obtained WTO membership, he said.
According to the 2011 Index of Economic Freedom compiled by the Heritage Foundation, China ranked well ahead of Russia.
“The confusing market economy status standards of Western countries have caused disruptions to China’s foreign trade,” said Mei Xinyu, an associate research fellow with the Chinese Academy of International Trade and Economic Cooperation.
“Whether the EU grants China market economy status is more an issue of political attitude than of substantial significance for either side,” Mei said.
Zhang Yansheng, a researcher of the Academy of Macroeconomic Research under the National Development and Reform Commission, said no country today could be defined as a pure market economy.
“But if the EU and the United States can recognize China as a market economy ahead of the 2016 deadline, it would help propel their closer cooperation in trade and investment with China,” Zhang said.
China’s strides
A market economy is characterized by free markets where supply and demand determine the allocation of resources and the prices of goods and services. By contrast, in a nonmarket economy, the government decides what to produce, the quantity and the prices.
Both the United States and the EU pointed to government intervention and legacy of a command economy as a major reason for not recognizing China’s market economy status.
The U.S. Department of Commerce said the Chinese Government remains deeply entrenched in resource allocation at all levels. The government’s continued role in the allocation of financial resources indicates that it exerts significant leverage over the allocation of resources in the economy as a whole.
The European Commission also said in a report in 2008 that the criteria China has yet to meet include less progress in reducing the state’s role in price-setting in sectors like energy.
Chen Deming, Minister of Commerce, said China and the West have different understandings on macroeconomic controls over their market economies because they are at different stages of development and have different conditions.
But a persistent decline in state control and a decrease in the use of mandatory planning mechanisms have really happened in the Chinese economy.
In 2008, China’s government revenues accounted for 21.8 percent of the GDP, compared with 26.9 percent of the world’s average, according to A Report on the Development of China’s Market Economy 2010 published by the School of Economics and Resource Management at Beijing Normal University.
The once-dominant state-owned sector is shrinking in relative terms and the growing private sector is becoming increasingly productive and profitable. Private companies have played a dominant role in telecom equipment, home appliances, mining and other sectors.
“Private businesses now make up more than half of the Chinese economy, and provide at least 70 percent of jobs,” said Huang Mengfu, Chairman of the All-China Federation of Industry and Commerce.
Business vitality has also been stimulated by transforming inefficient state-owned enterprises (SOEs) into share-holding companies. Data of the report showed 988 of the 1,293 large SOEs, or 77 percent, had been restructured into corporate enterprises with multiple shareholders by 2008.
Corporate governance was further improved through four major mechanisms: board of directors, executive compensation, ownership structure and financial transparency. In 2008, among the 988 restructured large SOEs, 91.52 percent had established shareholders’ meetings, 95.34 percent set up a board of directors and 80.87 percent had the board of supervisors.
These reforms were accompanied by an unprecedented opening to the outside world in search of export markets and necessary foreign investments, technology and management know-how.
As part of China’s WTO commitment, the country allowed foreign investors into a series of formerly state-controlled areas, such as finance, banking, insurance, securities and health care.
The society has become more fluid and dynamic than ever before, featuring greater social and geographical mobility and horizontal integration. Workers are gaining growing rights with respect to compensation and choice of employment. Newspapers are usually filled with reports that manufacturers in east coastal regions are finding it difficult to hire enough employees as workers demand higher salaries.
Zhuang Jian, chief China economist with the Asian Development Bank, said China has largely become a market economy with pricing of most products in the hands of the market.
“Since joining the WTO, the country has also drastically reduced import tariffs, liberalized foreign trade, while taking solid steps to tighten corporate laws, improve its investment environment and protect intellectual property rights (IPRs),” he said.
Xu Hongcai, an economist with the China Center for International Economic Exchanges, said Western countries should take account of China’s accomplishments in
market openness and should not give unreasonable criticism.
The discrimination would only deal a heavy blow to their trade with China, he added.
The way ahead
Despite the progress China has made in market-oriented reforms, it certainly has room for improvement.
“China’s market reforms are still far from over,” said Fan Gang, Director of the National Economic Research Institute. “To build a modern market economy, China still needs to further open up its financial industry, repair the social safety net, and establish the rule of law.”
“Learning lessons from the 2008 financial crisis, China should also strengthen market supervision and macroeconomic controls to avoid market imbalance,” he added.
“The country should make stiff efforts to deepen reform in a series of statemonopolized sectors like energy and telecommunications and foster fair competition,” said Zhuang.
Efforts are in fact already underway. For example, the government in early 2009 decided to adjust retail fuel prices when world crude oil prices changed by more than 4 percent over 22 straight working days. This was a remarkable break from a more or less rigid pricing scheme to which the government makes irregular and infrequent changes.
Meanwhile, highly concentrated shareholdings remain a hindrance to the improvement of corporate governance. The CASS conducted a survey of the top 100 listed Chinese companies in 2010, and found most of them delivered improved performance in information disclosure, risk control and asset management. But 71 percent of them had their five largest shareholders holding more than half of their assets, slightly lower than that of 77 percent in 2009.
“Such a shareholding structure makes it difficult to safeguard interests of smaller investors, and may easily deter mergers and acquisitions (M&As),” said Zhang Zhengjun, a researcher at the Development Research Center of the State Council.
“One solution is to propel shareholding diversification of SOEs, such as introducing strategic investors.” added Zhang.
Feng Bing, Executive Deputy Director of the China Enterprise Confederation, pointed out that a pressing task for China is to strengthen IPR protection, a cornerstone of the regulatory framework in a market economy and a powerful catalyst to generate innovation.
In the past decades, the country has attained significant results by launching a string of campaigns to crack down on counterfeit and pirate products. Firms are also attaching greater importance to their IPR value.
According to a recent report of the World Intellectual Property Organization, China ranked the second in terms of international trademark applications through the Madrid System for the International Registration of Marks, and the fourth place in international patent applications.
“The protection system is improving, though flaws still exist,” he said. “There still appears to be gap in IPR legislation and its enforcement.”
“The price IPR violators have to pay is still low in China, making it a poor deterrent,”he said. “Moreover, the public awareness of IPR protections also needs to be lifted.”