By Zhang Junkuo

Research Report No 047, 2006

The importance of competition on raising economic efficiency and improving social welfare has been adequately proved by the practice in China. The most thought-provoking phenomenon in the process of the country’s reform and opening-up is that wherever the state monopoly is broken and competition is introduced, vitality will be injected; the product and service quality will be improved; wherever the state monopoly is maintained, the product and service quality are not likely to be improved while the costs and prices are usually at a high level. Moreover, economic practice has also proved that the improvement of economic efficiency is not only determined by the opening of access and introduction of competition, but also by the quality of competition. Sufficient, orderly and fair market competition is conducive to optimizing resource allocation and improving social welfare. Insufficient, disorderly and unfair competition will damage effectiveness of market mechanism, and even deteriorate the resource allocation and impair social welfare. Therefore, maintaining a sound competition order is of the same significance with that of introducing competition mechanism. Then, how to guarantee a sufficient, orderly and fair market competition? This is the question that the competition policy should tackle. In this sense, competition policy is the basic and most important economic policy under a market economy.

I. The Special Features of Competition Policy against the Backdrop of System Changes

Theoretically, the competition policy could be divided by broad and narrow senses. The competition policy in a narrow sense refers to the anti-monopoly laws, regulations, policy mechanisms and government structure. The competition policy in broad sense refers to a series of laws, regulations, policy and system arrangements adopted to maintain an efficient market environment. That is to say, in addition to the competition policy in a narrow sense, such policy also involves the policies of privatization, deregulation, subsidy, international trade and foreign investment policies, etc.

The fundamental goal of the competition policy is to enhance social welfare and improve economic efficiency through maintaining and promoting competition. However, the main factors restricting the market competition may vary with different economic systems, different stages of economic development and different traditional and cultural backgrounds. So the main goals of the competition policy would also differ. For instance, for developed Western countries where the market systems are more mature, legal systems are more complete and government conducts are more standardized, the problems in administrative monopoly and unfair competition conducts are relatively not serious. But due to its high degree of marketization and economic development and the large size of enterprises, the problem in business monopoly is usually prominent, and the focus of the competition policy is placed on regulating such monopoly conducts. But things are different to an economy that is transforming from a planned system to a market system. At the early stage of the reform, the essential problem is obviously not to check unfair competition or business monopoly, as the economy is basically built on the planned economy, which is monopolized by the state, and the market competition mechanism barely exists. Therefore unfair competition and business monopoly have not become key issues. The main problems and tasks that the competition policy faces at that stage are, first, how to break the planned system and state monopoly and introduce competition. With the introduction of competition mechanism and development of the market economy, the problems such as non-standardized market entities, unfair competition conducts and administrative interference in the competition will emerge. The competition policy should make timely and duly response. As to the problems of business monopoly, including misuse of dominant position in the market, monopoly agreements and market concentration， they would obviously become a prominent problem that needs to be stressed by the competition policy only after the market economy has developed to a certain level.

According to the aforesaid analysis, for an economy in the course of systemic transformation, the concept of the competition policy in a broad sense is more appropriate. For such an economy, the problems that face promoting and safeguarding competition are not just ones of breaking business monopoly. Sometimes (for instance, in the early period of systemic transformation), the main issue is not to tackle business monopoly, but to introduce competition mechanism and deal with unfair competition conducts. The missions of the competition policy are not just to formulate and implement anti-monopoly laws, but to transfer government functions, establish market rules and reform corporate systems, which touch upon an even broader process of systemic changes.

II. The Development of Competition Policy and Basic Experience in the Course of China’s Reform

Before the implementation of reform and opening-up policy in 1978, China practiced a highly centralized planned economic system. The system of the people’s commune was adopted in the countryside. What and how much to grow were all decided upon by the state plan; while the products were purchased by the government. Farmers worked for the collective, which had a unified planning and accounting system. In non-agricultural sectors, private investment was prohibited. Almost all the enterprises were state-owned or quasi-state-owned collectively-owned firms. For instance, in 1978, more than 77% of the industrial output value was contributed by the state-owned enterprises while collective firms turned out more than 22%. The enterprises of other forms of ownership hardly produced anything. From the point view of competition, the centralized planned economy is actually state monopoly. There were no markets or competition in a real sense, let alone a competition policy.

From 1978, China started to implement the market-oriented policy of reform and opening-up, the core content was to change the planned system, break state monopoly and introduce market competition. In this sense, many of the reform policies, such as deregulating and giving up the control of mandatory plans, reforming state-owned enterprises, developing private enterprises and loosening the price control, all fell into the category of the competition policy in a broad sense. After more than two decades of reform, China scored great achievements in introducing competition mechanism. According to the latest statistics, the prices of 95.3 percent of the commodities and services in the country have been determined by the supply and demand of the market. In the general manufacturing sector, market competition has been in fairly complete shape. In most part of this sector, the country is facing excessive competition, not inadequate competition.

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