Another important document relating to the market-based reform of production factors has been released. The General Office of the State Council recently issued the Overall Plan to Pilot Comprehensive Reforms of Market-based Allocation of Factors of Production, which sets a roadmap and timetable for the pilot work, aiming to explore a model that can be replicated and promoted across the country.
To achieve breakthroughs in this reform, governments at all levels need to respect the will of main market players and have the courage to liberate their minds. In particular, they need to handle the relationship between the government and the market properly. The main task of the government should be to formulate rules, deliver good services and remove institutional obstacles.
Over the past 40 years of reform and opening-up, China’s commodity and service markets have made great headway, and 97% of all commodities and services have basically achieved market-set pricing. However, the market-based reform of production factors has long lagged behind. The markets of land, labor, capital, technology and data are underdeveloped, and the scope of the market in determining factor allocation is limited. In addition, there are systemic and mechanistic obstacles to the flow of production factors, price signals are distorted and malfunctioning, and the vitality of main market players is insufficient. As a result, the production factor market has become a major impediment to building a unified domestic market featuring high efficiency, standardization and fair competition. If the market-based allocation of production factors cannot be fulfilled, the prices of commodities and services are bound to be distorted, rendering the optimal allocation of resources unreachable.
In April 2020, the Communist Party of China Central Committee and the State Council issued the “Opinions of the CPC Central Committee and the State Council on Improving the Systems and Mechanisms for Market-based Allocation of Factors of,” signifying that the pace of market-based reform of production factors in China had accelerated, with many local governments trying to make marginal progress. However, from a national perspective, there are still problems in numerous fields, such as poor flow of factors, low efficiency and imperfections in the system. Therefore, the reform needs to be deepened. The Plan focuses on the key areas, key links of production factor market construction and the problems that main market players strongly respond to; it puts forward a series of key reform tasks and factor market guarantees on multiple fronts including land, labor force, capital, technology and data elements. If effectively implemented, the Plan will undoubtedly help to bring the role of the market in allocating production factors to a higher level.
It should be noted that factor marketization is essentially a problem of market development, and the market should evolve itself. However, in emerging and transitional China, the development of the domestic factor market lags due to the profound influence of the long-term planned economy, making it difficult to change the situation solely depending on the power of the market. In this case, it is better for the doer to undo what he has done, and therefore, the government needs to play an active role in promoting the market-based reform of production factors. Its role is mainly to formulate rules and form mechanisms, or more specifically, to remove institutional barriers and deliver good services. These should be included in the construction of a law-based and service-oriented government. The government should give the domestic market-based reform of factors of production a hand to help it get it going. Ultimately, the market still needs to develop and mature independently to achieve optimal allocation of resources through price signals and the competition mechanism.
To this end, the government should respect the wills of main market players and actively solve problems that they point out. The Opinions require “improving the mechanism that factor prices are mainly determined by the market,” “guiding main market players to reasonably exercise their autonomy in pricing factors in accordance with the law and promoting the transformation of the government pricing mechanism from setting specific price levels to formulating pricing rules.” In the next step of implementing the Plan and concretely promoting the market-based reform of factors of production, relevant pilot areas must respect the will of main market players. Since reform and opening-up began, the implementation of the household contract responsibility system and the development of township enterprises and private enterprises were all made possible by respecting the will of main market players, seizing the momentum and recognizing grassroots initiatives. Therefore, in the reform of market-based allocation of factors, the will of relevant bodies in the market of factors should be respected. Take the capital market as an example. Listed companies should not only have the right to choose where to list, but also be able to switch among different boards within an exchange, or even between different exchanges. To achieve this, the registration system and related reforms should be further developed.
Respecting the will of main market players is not in contradiction with giving better play to the role of the government, in fact, they are mutually reinforcing. Recently, 21 departments, including the National Development and Reform Commission, issued the public service plan for the 14th Five-Year Plan (2021-25) period. The service plan lists subsidized rental housing, community elderly care services, kindergartens, county-level senior high school education, infant care and occupational health services as key reform areas during the 14th Five-Year Plan period. Public services and the optimal allocation of the production factor market might seem unrelated, but in fact, it is quite the opposite, and the reason behind this is relatively simple. Only when governments at all levels perform better in the construction of subsidized rental housing and joint-ownership housing can the labor force dominated by young people living and working in peace and contentment in big cities with expensive housing. This promotes the rational allocation of the labor force. The same goes for health care, education and other public services.
Accelerating market-based reform of factors of production requires boldly liberating minds and sidestepping self-imposed limits. From China’s reform experience, we have learned that we can take bold decisions as long as we firmly believe in them. For many “forbidden areas,” it is only after relevant breakthroughs are made that we will find that our worries were groundless. The point of piloting comprehensive reforms is to explore the reform path of market-based allocation of factors of production, and we should remove all obstacles, helping the reform reach its ultimate goal. According to the Plan, qualified regions will be supported to carry out reforms and make bold explorations, and community-level initiatives will be respected. The Plan has also established a withdrawal mechanism for pilot areas with insufficient motivation, ineffective implementation and ineffective results. Governments at all levels should seriously consider how much room there is for breakthroughs in important areas such as the land management system, the household registration system and the social mobility of talent.
After all, the keys are the government-market relationship, the market’s decisive function in resource allocation and the role of the government. Though a platitude, it encapsulates the essence of China’s economic reform. According to the Plan, by 2025, most pilot projects will be completed and landmark achievements will be made in the market-based allocation of factors of production. Despite the limited time, we can expect to see tangible, verifiable and even quantifiable results from this reform.
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