Free Markets Vital to China’s Economic Success

China’s choppy economic environment can benefit a lot from Free Markets. Finbarr Toesland investigates

china's economy

China is beginning to show the first signs that its rapid economic growth is slowing down and its long-term growth prospects are more modest than originally thought. When one thinks about China it hardly comes to mind as a capitalist utopia, where the free market philosophy is a central tenant of the government. However, since the introduction of ‘Socialism with Chinese Characteristics’ in 1978 the role that market mechanisms play has increased greatly, resulting in diminished government planning and economic control.

A lot has changed in China from the first market liberalisation, from the official endorsement of the goal of reforms to create a socialist market economy in 1992 to the elimination of price controls that were used to protect domestic industries in 2001. Most industries are still owned by the state and monopolies are found in the banking and petroleum sector, which can stifle innovation and create unfair competition.

The limited utilisation of free market reforms are partly responsible for the unprecedented growth achieved between 1978 and 2010 of 9.5% per year and for China becoming the world’s second largest economy, bested only by the United States. Chinese society has not been the same since these reforms, seeing colossal changes in the level of poverty, increased incomes and income inequality.

With GDP growth tapering off to a level that soon will be in line with OECD countries, according to Andy Rothman, China macro strategist at brokerage CLSA. “We need to get used to the fact that the boom is over. The days when you could just roll out of bed and make money, or the days when you could expect that the growth rate for most things was going to be faster next year — that’s done. We should expect that for the foreseeable future, every year on average, most major economic data points are going to be growing more slowly.”

Most industries are still owned by the state and monopolies are found in the banking and petroleum sector, which can stifle innovation and create unfair competition.

In response to the declining long-term growth projections, early this month China said they would offer entrepreneurs a stake in the state controlled economy, in order to bolster the countries productivity. For China to progress within the international economy; the dominance of state controlled industries need to be addressed. There is going to be little innovation and fair competition in sectors where government businesses receive major subsidies and force out private companies.

As profits from private sector companies are rising faster, at 16% so far this year, than state-owned business, at only 5%, it should be a main priority to open up the marketplace to entrepreneurs. Whilst it may be difficult in the short term to enact a wide range of reforms in China, if they want to remain competitive internationally they have no other option but to embrace the free market.

By Finbarr Toesland

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