How China Did not Transform into a Market Economy

Abstract

China’s remarkable economic performance since the process of economic reforms began in 1978–79 is described by some as involving a transformation into a market economy. This characterization, while appealing, is inaccurate. What China did was to modernize its non-market economy by re-creating markets, abandoning central planning, and introducing some degree of privatization and opening to foreign trade and investment. Because China’s revitalized non-market economy is export-dependent, policies have been engineered to provide Chinese producers with artificial cost advantages consisting of heavily distorted factor, raw material and energy pricing. The Chinese Government also regulates industry conduct {regulation of industry conduct} to prevent “excessive competition” amongst Chinese producers. Finally, to assure that China’s industrial structure is sufficiently concentrated on high-value goods, the Chinese Government nurtures sectors, products and even production processes that it views as strategic or involving “cutting edge” technologies through development programs which result in further cost assistance, the regulation of market entry and scale of production, and even the provision of subsidies. So China has become an economic success story, but a market economy it is not.

The opinions expressed in this Chapter are mine alone and do not represent in any way official views of King & Spalding LLP or its clients. I thank James Nedumpara and Weihuan Zhou, editors of this book, for comments. Bonnie Byers, J. Michael Taylor and Chris Cloutier also commented on a draft version of this Chapter. All errors remain my own, however. I thank Larry Stockel as well for ably producing electronic versions of all diagrams used.

Annex I

Figure 3, below, is a variation of Fig. 2. As in Figs. 2 and 3 represents one of the industries in a CPE where imports are deemed necessary. The distance between the demand and the supply schedules, $\text{Q}^{\text{D}}_{0} - \text{Q}^{\text{S}}_{0}$, indicates the quantity of imports involved (M₀).¹³⁷ Three different levels of import prices, inclusive of import duties, are denoted on the vertical axis.¹³⁸ $\text{P}^{\text{W}} \left( {1 + t^{\text{m}}_{1} } \right)$ indicates the starting level of import prices and import duties.¹³⁹ If in successive trade negotiations the duty rate is reduced to $\text{P}^{\text{W}} \left( {1 + t^{\text{m}}_{2} } \right)$ and then to $\text{P}^{\text{W}} \left( {1 + t^{\text{m}}_{3} } \right)$, import volume remains the same (M⁰), because the fall in import (and domestic) prices resulting from the reduction in the level of tariff protection does not expand domestic demand nor does it make domestic production contract (since local demand and supply are unresponsive to price). In such circumstances, to get import volume to increase, an import undertaking has to be agreed upon. In Fig. 3, the additional import volume involved in the undertaking is denoted by MU. In order to enable import growth in this proportion, the planning authorities have to boost demand to $\text{Q}^{\text{D}}_{1}$ (which involves shifting the demand schedule to $\mathop {\mathbf{D}}\limits^{{\mathbf{ \approx }}}$). Accordingly, considering the undertaking, import volume increases to M₁.

Fig. 3

Import undertakings by A CPE