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10 China Myths for the New Decade- Myth #7: economy reform

Posted by Author on February 5, 2010

Derek Scissors, Ph.D., Research Fellow in Asia Economic Policy in the Asian Studies Center at The Heritage Foundation, via http://www.heritage.org, January 28, 2010 –

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Myth #7: China continues to reform its economy, with perhaps an understandable pause due to the financial crisis.

Truth: China’s market reform slowed sharply in 2002 and effectively stopped in 2005.

The 1980s saw path-breaking market reform in the PRC. The 1990s saw a mix of reform and, after the Asian financial crisis, greater state intervention. The 2000s saw early implementation of World Trade Organization concessions pushed aside by a dominant state. In prices, privatization, and even foreign investment, China was heading away from the market long before Lehman Brothers collapsed.[14]

Privatization of the corporate sector was first stalled, and then explicitly reversed by the Chinese government. All national corporations in sectors that make up the core of the economy are required by law to be state-controlled.[15] Their executives are routinely shuttled back and forth by the Communist Party to government positions.

The state exercises control over most of the rest of the economy through the financial system. It owns all large financial institutions, which lend according to state priorities, topped by favoritism for large state enterprises.

The People’s Bank sets very narrow ranges for the price of both domestic money (the interest rate) and foreign money (the exchange rate). Liberalization of the price of goods has been stalled by constant state intervention in the areas of food, health care, and energy.

The end result is that competition has been warped into a largely political battle among sibling state firms. For oil and petrochemicals, gas, coal, power, telecom, and tobacco industries combined, there are a total of 17 firms operating nationally, all state-owned. Consolidation is being pushed by the state from aviation to retail, reducing competition and further concentrating assets in the hands of the state.[16]

Inward foreign investment has seen increasing restriction. For example, the anti-monopoly law explicitly excludes the state giants and appears to apply only to foreign companies, while being touted as “reform.” Against that, domestic investment on non-market terms is pushed by the state ever higher.(to be cont’d)

Original from The Heritage Foundation

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