The ‘golden age’ for business in China may yet be followed by the dawning of a new era that could be equally rewarding for China and for foreign investors.

However, that positive transition will occur only if the new leadership remains steadfast and is courageous in urgently implementing the decisive reforms outlined during the Third Plenum, without this the commitment of foreign business to China may start to wane and, at worst, the economy could be headed for crisis.

Within two years of taking power, China’s new leadership has already determined its economic blueprint, aptly named the ‘Decision’. At its core, the Decision is a framework for China to make the necessary shift to a new development model that can foster sustainable drivers of growth.

The new drivers of growth in this new model are rightly based around services, value-added, innovation and efficiency. These are things that business produces; therefore industry has to be the solution. And they are complex; so advanced, adroit and creative businesses must be fostered to provide them.

Such businesses can only be fostered through a real market economy – by market forces determining what is good, rewarding what is good, providing resources to those that are good, and therefore forcing companies to produce what the market deems as good and necessary.

The Decision shows that China’s leadership increasingly understands this. By identifying the need for the market’s role to be decisive, it provides a framework of the reforms required to drive growth, correct current economic imbalances and meet important societal needs. And by accepting that the government needs to fundamentally reorientate its role in the business environment, it can safeguard the platform that business needs to develop the required products and solutions.

Given China’s significance to the global economy, this task is potentially the issue of foremost economic consequence in the world today. It was surely not easy to get this far. But the next steps are what count. Time is of the essence and implementation is key.

European companies want and need China to sustain its success story. The European Chamber’s Executive Position Paper synthesises recommendations from European industry invested in China. It aims to show that, through steadfastly sticking to the principles of giving a decisive role to the market and limiting its interference in the business environment, the government can bring about China’s necessary rebalancing (section one), and improve the quality of life of its citizens by helping to solve many of the problems that China is facing today (section two). The final section provides a global perspective on China’s reforms.

1. The Role of the Market
   1. Rebalancing the Economy: As the underlying supporting factors of the state-led investment model are diminishing, industrial policies that direct cheap capital and resources into the industrial economy and into infrastructure development are leading to waste and unsustainable levels of corporate and local debt. Only the market can direct the flow of resources to productive areas of the economy.
   2. Financial Reform: The use of market price signals, such as liberalised interest rates, and removing government influence over lending policies, would increase capital efficiency by incentivising banks to ensure that capital only flows to less risky and higher-return projects. It could also drive domestic consumption by giving greater returns to depositors and providing financing to more economic actors.
   3. Fiscal Reform: While risky, increasing fiscal resources for local governments and realigning their incentives would inhibit them from distorting the market through local protectionism and by promoting wasteful investments in order to secure needed fiscal resources.
   4. State-owned Enterprise (SOE) Reform: The Decision indicates that the government wants to continue to protect and maintain a dominant position for SOEs. Such a half step towards fostering market forces would not work. To produce SOEs that are world-class and globally competitive, SOE reform must stop the preferential treatment given to SOEs and open them up to full and fair competition. This is because SOEs will only truly improve efficiencies and invest in productivity-enhancing innovations if they are forced to by competition.
   5. Market Access: Foreign companies bring direct benefits to the economy through technologies and efficiencies. While this is important, granting full and fair market access to foreign companies is more important for its ability to foster global levels of competition in the marketplace. As China needs to move up the value chain, low costs and scale will no longer be enough. The instinct to protect domestic companies by raising investment restrictions and barriers for foreign companies to operate and sell their goods and services does not work as it inhibits forces that would push domestic companies to innovate and optimise their efficiency.
   6. Institutional Restructuring and the Freedom to Choose: Independent societal institutions help form the structure in which the market economy can play out freely. The freedom for industry to choose from supporting private institutions is vital to maximise corporate efficiency and ensure that the value generated in each link of a value chain is higher than the cost incurred.

2. Quality of Life
   1. Innovation: China’s indigenous innovation framework, which is strongly centralised and which aims to use China’s large marketplace to falsely promote domestic technologies, has worked contrary to intentions. Innovation must instead be led by industry and therefore requires an environment that rewards genuine innovation and fosters both competition and cooperation.
   2. The Environment: Changing the gross-domestic product (GDP) growth-related incentives of local governments to more environmental-based targets is critical. This can be done by increasing the weight of environmental and life-cycle criteria in public procurement processes, ensuring supervision agencies function independently, and ensuring that companies are held accountable for environmental violations and given appropriate levels of fines. Greater corporate transparency and access to local-level statistics would also spur environmental performances. Furthermore, greater market access would ensure that globally-leading environmental solutions and technologies are available to be deployed in China.
   3. Urbanisation: Removing market entry barriers and obstacles that impede equal treatment would contribute to China’s sustainable urbanisation process by ensuring the availability of the most innovative and efficient global technologies and solutions.
   4. Healthcare: A healthcare system focused on value-based outcomes would help meet China’s ambitious healthcare reform plans. To contribute to this, streamlining pre-market approval requirements would decrease the time to market of potentially life-saving medical devices and drugs, and the lifting of administrative price controls to allow product pricing to reflect real, market-based values would improve China’s healthcare innovation environment and reduce long-term costs by improving clinical use.
   5. Food Safety: Increasing emphasis on risk mitigation throughout the entire food supply chain would improve food safety, and fostering greater communication and coordination amongst the ministries with competencies for food safety would improve the consistency of interpretations of food safety regulations and standards. Increasing local-level resources and increasing punishments for corporate violators and local government officials that ignore violations would increase enforcement and further deter violations.
   6. Internet Management: Decreased Internet restrictions would increase Internet speed and improve access to materials that would assist corporate operations and research and development (R&D) as well as help to attract more world-class researchers to China.
   7. Rule of Law: Greater transparency and consultation would improve law-making and enforcement processes, and greater accountability, judicial independence and predictability would safeguard the rules protecting the market economy and help companies plan their activities. A continued crackdown on anti-compliant practices would also help to foster a fair market environment in China, so long as the targeting and the investigations themselves are carried out fairly, transparently and in accordance with rule of law.

3. China and the World

Further harmonisation of China’s regulatory and standards system will be critical in further integrating its firms into and moving them up the value chain in complex global supply chains. China’s leadership in further advancing the World Trade Organisation (WTO) and in engaging meaningfully in bilateral investment agreements could also spur global liberalisation and progress China’s internal reforms. Doing so would also improve China’s image and that of its companies, in turn increasing the internationalisation chances of its domestic firms.

To download the full paper, the Executive Position Paper or any of the individual working group’s papers free of charge, please go to http://www.europeanchamber.com.cn/en/publications-position-paper