Chinese experts urge Beijing to overcome obstacles to unified national market

Experts see unified national market as China’s shield against global shocks

As economies around the world reel from the effects of the US-Israeli war against Iran, analysis suggests a “unified national market” would help China better absorb external shocks. Huang Qiusheng, a senior researcher at the Hunan Provincial Center for Contemporary Chinese Marxism Studies, says improving domestic flows of economic production would “protect against the uncertainties of the global economic cycle” (see chart). Huang Kainan, a special researcher at the Shandong Provincial Research Center on Xi Jinping Thought, says a more integrated market with more efficient distribution of labor, capital and land “would effectively respond to external risks and challenges.”

China’s recently released 15th Five-Year Plan calls on all levels of government to improve regulatory frameworks to “resolutely eliminate bottlenecks and obstacles hindering the development of a unified national market” and “eliminate local protectionism and market segmentation.” The new initiative for a unified national market comes four years after the State Council issued a landmark guideline making it a top priority. Since then, Beijing has, for example, issued guidelines requiring all levels of government to align with national market rules and accelerated efforts to unify technical standards and quality requirements.

A single market can transform new productive forces into economic power

An integrated market is expected to strengthen what Xi calls China’s “new quality productive forces”: technological modernization, research and development innovation, and advanced manufacturing. Xia Cailiang, a senior economist at the School of Economics at Beijing Technology and Commerce University, and Huang Xiankai, a former Chinese Communist Party secretary and professor at the same university, argue that market integration – supported by reforms to China’s restrictive household registration (“hukou”) system or a tax system that allows regions to offer incentives – could help China’s economy shift from one based primarily on “big to might,” which is essential to advance innovation.

Beijing must break down market barriers to unlock domestic demand

Other researchers note that the reforms could strengthen China’s domestic economy by generating more domestic demand and reducing dependence on foreign markets. Expert says closer links between domestic production and consumption would strengthen “national economic cycle”. Guo Liyan, deputy director and researcher at the Institute of Economics of the Chinese Academy of Macroeconomic Research, describes the domestic market as a strategic resource and says expanding domestic demand is the central task. Li Yuju, deputy director of Xi Jinping’s Economic Thought Research Center, similarly touts China’s “large” market and growth potential as a major advantage – while acknowledging the diversity of entrenched obstacles to a unified national market.

Local fragmentation is holding back the Chinese economy

These include quality standards, pricing practices and so-called factor access restrictions that make it difficult for non-local companies to access capital, land, labor, energy, data and technology as easily as their local competitors. Li also denounces the reluctance of local authorities to recognize qualifications acquired elsewhere (including licenses, certifications and professional qualifications required to practice) as well as local favoritism in public procurement. The underlying idea is that the internal market – a key economic asset – remains surprisingly underdeveloped, largely because of strong local governments.

Since the beginning of reform and opening-up in the late 1970s, China’s administrative structure has provided strong incentives for localities to promote economic growth within their borders. This has helped spur rapid economic growth and local experimentation, but has also fractured the domestic market by fostering bureaucratic barriers that favor local businesses and make it harder for non-local businesses to compete. As a result, businesses often found it easier to expand overseas than to compete in a neighboring city or province. As Xi seeks to move Chinese industry up the economic value chain and some foreign markets become increasingly difficult to access, China increasingly needs a more efficient, integrated domestic market.

This makes the removal of protectionism and local monopolies essential. Wang Hongmiao, a researcher at the Institute of Economics of the Chinese Academy of Social Sciences, says such a move would “accelerate comprehensive market-oriented reform”, which is not only crucial for improving economic efficiency, but also for “promoting greater social fairness”. Huang Zhen, professor at the Institute of Financial Law of the Central University of Finance and Economics, notes that growing knowledge of the law is already leading more and more companies to resort to legal channels to protect their rights and interests, especially to ensure market access.

New KPIs must force managers to build a unified national market

Beyond legal and regulatory reforms, experts also call for reform of the incentive structure that makes local party and state cadres the drivers of market fragmentation. Xia Cailiang and Huang Xiankai argue that the party should stop promoting local officials on the basis of short-term economic growth, and instead prioritize their successes in a more sustainable, innovative, financially sound and nationally integrated economy. According to them, indicators such as “market environment fairness”, “technological innovation” and “ecological and environmental protection” should be given more weight, with the aim of directing local governments from pure competition to more coordination between regions.

This implies a major change in Chinese administrative culture as it has developed over the past half-century. Li, of the Xi Jinping Research Center for Economic Thought in Beijing, emphasizes the need to correct “cadres’ misguided approaches to evaluating official results” by encouraging them to prioritize national economic efficiency over purely local economic gains. Incentive structure reform is seen as playing a major role in improving central-local economic coordination. If Beijing fails to prevent local cadres from being rewarded for boosting local growth and protecting local interests, China will continue to struggle to build a single market.