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UPDATED: May 4, 2015 NO. 19 MAY 7, 2015
Perspectives on China's Reforms
By Edison B. Silva Filho and Ricardo G. Bacelette

The concept of the "Four Compre-hensives"--an ideological framework that should guide the next steps of reforming Chinese economy and institutions--goes beyond political discourse. These new guiding mottos summarize a commitment to deepening the ongoing process of transformation carried on in the country.

Economic transformation

The Chinese economy and its institutions are undergoing large-scale reforms aimed at creating a new development model, which shall be increasingly based on domestic consumption and innovation, instead of its past reliance on exports and huge investment in infrastructure. One of the most significant impacts of these changes will be the expansion of the already booming middle class in China, whose consumption will demand higher diversification and quality standards not only from the private sector, but from public services as well.

Major Chinese companies must also shift their focus to internal consumers, while reducing their dependence on foreign markets. Some of these companies have already engaged in this change, embracing new technologies of production and moving to higher value-added segments of global value chains. This will require significant increases in wages and other production costs over the next years. The increasing costs could be partially compensated by government policies oriented toward elevating labor productivity, such as expanding both technical training and higher education, and also investing in research and development projects in cooperation with the private sector.

The recent change toward more restrictive credit policies should contribute to reduced inflation in the medium term, while improving the purchasing power of households and thus contributing to reducing social inequality. The sharp fall in gas and iron ore prices observed in the second half of 2014, though unexpected, will certainly facilitate achieving these objectives.

However, there are still important short-term risks in this adjustment process. Since the non-regulated credit system (shadow banks) still plays an important role in financing both the private sector and local governments, it is likely that there should be disruption of some financial channels that might trigger massive losses for the most exposed agents. Therefore, a transition toward a new economic model will rely also on the capability of the government in successfully managing these challenges.

Nonetheless, the emphasis placed by President Xi Jinping on moderation suggests that reducing inequalities and expanding the benefits of development to the poorest share of the population shall be the Chinese Government's priority over the next years, even at the expense of the country's fast economic growth.

Reform and innovation

China is committed to developing a dynamic business environment that shall favor not only local enterprise and innovation, but also foreign investment in the Chinese market. In this sense, one of the most important projects is the pilot free trade zone in Shanghai, launched in 2013.

The pilot free trade zone acts as a petri dish for the ongoing process of financial liberalization in China, by allowing a free market interest rate and easing regulations on cross-border capital, which could later produce spillover effects that will benefit the rest of the economy. Similarly, reforms have been introduced to facilitate credit from offshore and an international trading platform has been created to allow transactions of gold denominated in the Chinese currency yuan, or renminbi. The growing interest of foreign companies to establish themselves in the zone is a sign that Shanghai's initiative might already be considered successful, and therefore could be used as a guide for further projects of economic reform in the country.

Today Chinese manufacturers are able to produce some of the world's most sophisticated goods, and hold a growing number of patents and proprietary rights that will allow them to increase their share in the global value chains in the near future. Government incentives also ensure that a great part of these companies' revenues is dedicated to R&D activities and modernization of their production lines.

More recently, the Chinese Government has pointed out a number of technology-intensive sectors of strategic importance, which are seen as key to the success of the international integration of China. The most relevant is renewable energy, and specific policies have been designed to promote exports and endogenous innovation in this sector. China has already become a world leader in the production of solar panels and is also investing heavily in other green technologies that will have a profound effect on the daily lives of those who live in the cities of the future. These technologies include intelligent energy management systems, hybrid vehicles and low-carbon mass transportation. As a result, technological innovation will also play a decisive role in the economic transition envisioned for China.

Other social and economic challenges that the Chinese society face are the growing income gap and an aging society, both of which are heavily influenced by the aforementioned issues. In the last decade or so, China's Gini Coefficient--an income concentration measure--has risen by 20 percent, in spite of the remarkable drop in poverty, from 19 percent in 2002 to 8 percent in 2007, according to the World Bank. Then again, the development of higher-skill industries and services, with more value-added is fundamental to allow wages to increase, which in turn allows societies to achieve better living standards.

Clean governance

Moreover, as history shows us, social and political changes tend to follow economic transformations. In this regard, Chinese authorities are also working on measures to increase government transparency and social stability of the world's largest population. Keeping this in mind, Xi's anti-corruption campaign can only be effective in light of controlling and accountability mechanisms. One example would be the one implemented by the Brazilian Government, the so called Transparency Portal, a website that allows any citizen to view federal government outlays, expenditure and contracts, which could closely cooperate with the Central Commission for Discipline Inspection of the Communist Party of China (CPC), the Party's top anti-graft agency. As it happens in many developed--or even developing--countries, citizen participation and supervision is the keystone when it comes to fighting officials' misconducts.

Other social dialogue initiatives are also welcomed, such as the use of Weibo and other social media to create channels of communication between the government and civil society, apart from traditional channels, such as community-level bureaus and assemblies of the CPC, in order to ensure appropriate public policies and service quality. As it stands, the users of such public services and goods are likely to be the most effective inspectors.

Although it may be too early to predict the success of the new political philosophy enshrined in the "Four Comprehensives" initiative, there is an undeniable merit in the Chinese strategy of reducing inequalities and shifting toward a more transparent, rules-based business environment, in order to achieve a balanced and sustainable growth path. These changes might not only rebalance the distribution of wealth and political power in Chinese society, but also strengthen the country's capabilities to prosper in a new global reality.

Therefore, these initiatives constitute more than just a reflection of an inevitable adjustment: they represent a new development proposal that undoubtedly will be diligently observed, and perhaps even imitated, by other emerging economies.

The authors are researchers at the Department of International Studies under the Institute for Applied Economic Research of Brazil

Copyedited by Kieran Pringle

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