Economic Reform Scorecard 

Some Positive Movement, But Major Reform Elusive

The US-China Business Council’s (USCBC) released its Economic Reform Scorecard, which tracks developments on tangible progress that the Chinese central government agencies have made toward implementing economic reform and the impact these reforms may have on US companies just before the opening of China’s National People’s Congress. The NPC will deliberate economic reform policies and pass a new Five Year Plan for China’s economy.

USCBC’s latest assessment of China’s economic reform efforts still finds limited progress, with no improvement from our September 2015 scorecard. This latest assessment is based on a review of both new policies and a re-examination of previous policies to gauge their ongoing impact.

Between August and December 2015, Chinese government agencies released a number of reform-related policies that address foreign company concerns, but in limited fashion. Simultaneously, there have been a series of actions and policies that have raised concern about whether market forces are allowed to play an important role in the economy, as well as the continued emphasis on national security policy over economic policy that impacts market reforms and access. These mixed signals from the Chinese government foster uncertainty among foreign business about China’s reform efforts, while working against China’s own goals for economic growth and stability.

Among the reform-related policies tracked during this period, a notable few made strides toward greater market openings and addressed company concerns. For example, the State Council committed to initiate a nationwide negative list for investment management, with clear goals and concrete timelines for implementation. The system, which will be implemented by 2018, is a positive move toward clarifying China’s investment regime and potentially opening up additional sectors for investment. Simplifications to administrative licensing procedures, such as streamlining the process of applying for a production license and efforts to combine multiple licenses into one, are additional examples of commendable reform policies that should create a more welcoming investment environment for companies.

The Chinese government also made modest strides on financial sector reform, such as lifting geographical limits for online insurance sales, removing requirements on banks’ loan-to-deposit ratio, and improving the funding process for public-private partnership (PPP) projects. Other new policies released during this tracking period aimed to standardize development of industries such as electric vehicles and cloud computing, and to harmonize China’s standards with international standards at large. Although the implementation of these policies and additional supporting measures will determine their true impact, they represent a positive step in China’s overall reform effort.

However, there have been a number of developments that have ultimately offset the positive momentum of reforms. Developments in the information and communications technology (ICT) sector particularly raise concerns about the use of national security for protectionist purposes. Specifically, several policies released during this tracking period called for use of “secure and controllable” or “secure and reliable” technology in the medical device, insurance, and ICT industries—policies that can discourage foreign companies from participating in the market.

Still more recent developments call into question whether China’s reform efforts will create a level playing field for both foreign and domestic firms. For example, a “key technology roadmap” released to complement the Made in China 2025 plan includes localization targets for domestic production in industries, including new energy vehicles, integrated circuits, and other areas of advanced manufacturing. The release of local plans, such as the Beijing Implementation Plan for Made in China 2025, encourages innovation and efficiency in China’s manufacturing sector with specific development targets for Beijing. It remains unclear whether the preferential policies laid out in the nationwide plan will be extended to foreign companies, or how government-backed support systems will impact fair competition with local Chinese producers.

Continued financial market instability and the responses by Chinese regulators have sparked debate as to the extent of government intervention in the economy and willingness to genuinely allow the market to play a decisive role. For example, regulators discontinued a stock market circuit breaker days after it was implemented due to dramatic stock market fluctuations, leading many to question the predictability and stability of China’s policymaking, a key ingredient for a desirable investment environment.

Despite the number of reform policies released by Chinese government agencies since 2013 (more than 450, by USCBC’s latest count), many are still not broad enough in scope or specific enough in implementation detail to address foreign company issues. Instead, many of these policies address minor operational issues or are limited to particular sectors. Others do not clearly apply to foreign companies.

Although the impact of reform remains limited, senior government officials have stated that China’s overall economic reform plans will be continuously implemented through 2020, with the guidance of the 13th Five-Year Plan. The Shanghai FTZ was launched in 2013 with a three-year timeframe before its reforms would be implemented nationwide, though some of these policies have already been extended to other designated districts in Shanghai, as well as to the free trade zone areas in Tianjin, Fujian, and Guangzhou. Under this timeline, 2016 should be the year for the pilot policies begin to be implemented nationwide.

USCBC encourages Chinese officials to take further steps to issue economic reforms that will benefit the Chinese economy by creating more openings for both foreign and domestic companies. Key steps include establishing concrete policies that liberalize investment, boosting the role of the market in the economy, creating a level playing field for foreign and domestic firms, and promoting further legal reform.

Read the full report, complete with a breakdown on each policy.