China Institutional Reforms: 2015-2020

In the area of fiscal reforms, the Chinese government has put great emphasis on promoting public-private-partnership (PPP). PPP was introduced thirty years ago but institutional roadblocks remain. An inadequate legal environment, frequent changes to regulations and incongruent central and local government statutes hinder PPP development.

Institutional constraints are dampening the effectiveness of reforms on many fronts, ranging from urbanization, to SOE reforms and fiscal reforms. The Chinese government has initiated reforms in all these areas over the past two years. Success, however, will require sweeping changes to the existing institutional framework.

Urbanization is one area where delays in institutional reforms have been blocking progress. The movement of people is being held back by rural-urban hukou distinctions. As such, the hukou system must be relaxed further to incentivize rural people to make their move. Rural-urban migration could be further facilitated if rural citizens were able to sell their land use rights and use the proceeds for relocation. For this to happen, rural property rights need to be better defined, and a more credible legal framework established to aid the land use transfer process.

In the area of SOE reforms, China has been pushing mixed ownership reform for two years. Stakes in state-owned companies were put up for sale. A landmark  deal is Sinopec’s sale of 29.99% of its sales unit to 25 domestic and overseas companies in March. In June, the Bank of Communications won State Council approval to introduce private capital, while retaining its state-controlled status.

Company ownership and control are often separated. Because the state retains effective control over key decisions, it dampens private enterprises’ appetite to invest. It is questionable whether efficiency improvements can be raised if private investors do not have a say on major decisions. Improvements depend on the state’s willingness to relinquish control and upon private investors’ determination to introduce change. Reforms succeed best when public and private sectors see eye-to-eye on the ultimate objective.

In the area of fiscal reforms, the Chinese government has put great emphasis on promoting public-private-partnership (PPP). PPP was introduced thirty years ago but institutional roadblocks remain. An inadequate legal environment, frequent changes to regulations and incongruent central and local government statutes hinder PPP development. Against his backdrop, private investors are often unconvinced that their interests would be safeguarded. Overhauling the legal environment is an enormous task but this is the only way to clear the reform path.

Another lingering institutional challenge is the blurry distinction between the state and the market. While the initiative is supposed to infuse market elements into public finance, there is a tendency for the government to interfere with project operations. Private companies should be given leeway to operate projects with minimum government intervention. Meanwhile, the government’s key role should be to nurture a favorable institutional and administrative environment – one that safeguards investors’ interests and that clearlydelineates the role of the government and the market.