Market reforms enter new era

With the introduction of reform and opening-up in 1978 and its deepening since 1993, the People's Republic of China has been successfully accelerating its economic development. Over the last 35 years, China has imported know-how and reaped productivity gains by shifting underemployed workers in agriculture to export-oriented manufacturing, to become the second-largest economy in the world while substantially reducing poverty. More recently, after the global financial crisis, growth has depended more on domestic consumption and investment. There has also been impressive progress in many social areas, such as education, healthcare, pensions, and gender equality, to name a few.

However, for any economy, the period of high growth through industrialization does not last forever. Eventually, the pool of underemployed rural labor will be drained, and the advantage of technological catching up diminished. Changes are needed to restructure the economy and diversify the sources of growth. Countries that fail to adjust their growth pattern face the risk of stagnation, a phenomenon known as "the middle income trap".

This challenge is especially relevant to China today. Chinese policymakers are therefore planning the implementation of far-reaching reforms to restructure the economy and build a "moderately prosperous society by 2020". In this context, the reform plan released after the Third Plenary Session of the 18th Central Committee of the Communist Party of China in November is comprehensive and full of profound ideas. I particularly support the plan to provide the market a "decisive role" in the allocation of resources. If we look closely at the scope and implications of this seemingly rather simple policy statement, we can see that the successful implementation of the forthcoming reforms will indeed bring China a new era of socioeconomic development.

Given that the private sector is always a driver of innovation and change, I welcome the emphasis on promoting greater private involvement in the economy. Private initiatives in China have so far been often overshadowed by the presence of the large public sector. This results in fewer financial resources, smaller market shares, and narrow growth opportunities for the private sector, inhibiting the economy's ability to generate employment and improve efficiency. China's new vision will unleash the dynamism of the private sector and its potential as an engine of growth, facilitating the country's transition to higher income status.

Advanced economies with strong private sectors rely on well-functioning financial services and capital markets. As the economy matures, the financial sector instead of the State should play an essential role in allocating resources. A liberalized and robust financial sector will discover growth areas, allocate needed resources, and monitor the effectiveness of resource deployment. Despite significant progress in financial sector liberalization, there is an urgent need to deepen the reforms, particularly by liberalizing the deposit interest rate, gradually opening the capital accounts and promoting internationalization of the Chinese currency. These are exactly the areas that the Chinese authorities are focusing on.