Huang Qifan: A Unified National Market is Foundational for the New Development Pattern

DATE: 2022-04-26

At the Fourth Annual Conference of Government and Economics, held virtually on April 26, 2022, Huang Qifan gave a lecture on the requirements and benefits of building a unified national market in China. What follows is a transcript of his lecture that has been translated from Chinese into English and lightly edited for clarity. Huang Qifan is the Former Mayor of Chongqing Municipality and a Distinguished Professor at Fudan University.

        Good morning everyone!

    The theme of my speech is that the construction of a unified national market is foundational for the establishment of the new development pattern. Recently, the CPC Central Committee and State Council issued guidelines for accelerating the construction of a unified national market, and I would like to talk a little bit about my understanding and insights from this document.

    First, China’s super large-scale singular market is an outstanding advantage. In terms of scale, China's population of 1.41 billion people accounts for nearly 20% of the total global population. In this sense, if there is a product that China cannot produce itself and must import, it can immediately create market demand proportional to 20% of the world’s population. If China can self-sufficiently supply a certain type of product, the supply capacity will be equivalent to 20% of the global population in addition to the products exported overseas.  Assuming a global export share of 10%, this is equivalent to China supplying 30% of the global population. In comparison, the most developed countries in Western Europe—such as Germany, France, and the United Kingdom—have populations of approximately 60-80 million people, accounting for only about 1% of the total global population. With 126 million people in Japan and 330 million in the United States, the total population of high-income countries in the world is 1.215 billion, while China alone has a population of 1.4 billion, resulting in a greater impact on the global supply and demand pattern than the entire population of high-income countries.

    In terms of market structure, China is a singular large market. By singular market, I mean a market with a unified legal system, a unified tax system, unified business rules, and a unified language and culture. Thus, China is a typical singular market under the legal system of the People's Republic of China. The Han Chinese population dominates the ethnic structure of the Chinese population, accounting for 91.1% of the total population. The ethnic groups are harmonious, stable, and balanced, and Chinese is the official language spoken throughout the country. Furthermore, the business rules and market environment are largely consistent.

    China is very different from India, which is also a large country with more than 1.4 billion people, but can actually be described as a fragmented bulk market. India is a federal country with 28 states, 6 union territories, and a national capital. Each state has a great deal of autonomy, with its own legal system and business rules outside the constitution. As a result, there are many barriers to the flow of factor goods between states. India has more than 100 ethnic groups with distinct habits, of which the largest group, Hindustani, accounts for only 46% of the total population. India has a wide variety of religions, including Hinduism, Islam, Catholicism, Buddhism, etc. The relationship between the various religions is complex, and India is also multilingual, with as many as 22 official languages, and 121 languages spoken by more than 10,000 people. In addition, India has also inherited a hierarchical caste system that divides people into five classes, with no unified market between different classes of people, so it can be said that India is composed of more than 20 large and small bulk markets.

    The fact is that China has a super large-scale singular market, coupled with a full range of manufacturing systems, which creates unique and powerful competitiveness for Chinese industry. This will have a huge impact on the global supply and demand pattern, which in turn will bring about a series of dramatic changes in the global division of labor in raw material prices, industrial support, etc. This will eventually be reflected in the price of products—what China buys will be expensive, and what China sells will be cheap.

    A country's industrial competitive advantages can be roughly broken into the following: a technological advantage due to leading technology, a comparative advantage of labor due to an adequate supply of low-cost labor, and a high-quality resource endowment leading to a resource comparative advantage due to low-cost factors such as oil, electricity, coal, gas, or transport. The biggest competitiveness of China's industrial manufacturing industry lies in the advantage of scale. The traditional concept that the core competitiveness of China's manufacturing industry stems from low labor cost has some truth, but in fact, labor cost often accounts for about 10% of the total costs of the manufacturing industry. A higher or lower labor cost can only affect a few percentage points of the total cost, but once the scale effect is formed, it can significantly dilute the costs of manufacturing. The first is the cost of research and development, the second is the cost of fixed investment, the third is the cost of logistics, the fourth is the cost of market development, and the fifth is the cost of raw material procurement. Once the scale effect is formed, the labor cost will also be diluted, so in this sense, the scale can affect 30-40% of the overall manufacturing costs. Once sufficient scale is achieved, the price can be lowered by about 30-40%. When China is able to produce a type of product, this will immediately be able to significantly depress the selling price of similar products, which is where the power of China's super-sized singular market lies.

    Some US experts and politicians find it hard to understand why Chinese products are so cheap, so they always conduct so-called anti-dumping investigations against Chinese companies, but in fact, they do not understand the characteristics of the Chinese market. Conversely, those multinational companies that have invested in China, including American companies, have tasted the sweetness of the Chinese market and have been optimistic about it. Even under the impact of the pandemic, they have increased their investment in China. In this sense, those who advocate decoupling from China are short-sighted, and their proposals will not hold water.

    Second, I would like to say that China's super large-scale singular market, which is still in the process of continuous development and formation, still has four specific problems that require continuous deepening of reforms to solve. First, the negative effects of inter-regional competition. In the economics community, the competition between regions for economic growth and scale is considered to be one of the intrinsic drivers of China's sustained high economic growth, which is indeed an objective phenomenon. In this regard, Professor Qian Yingyi of Tsinghua University's School of Economics and Management has profoundly observed and written that this regional competition is like the market economy in that it has an invisible baton driving local governments to speed up infrastructure construction, improve the business environment, introduce preferential policies and attract investment, etc. This is the positive effect brought about by regional competition, the good side. But regional competition also has a negative effect. To boost local GDP and tax revenue, localities compete fiercely for projects. Coupled with the fact that industry, in general, is a low-level sector, this results in a large range of low-level construction duplication and overcapacity. Following the same logic, local governments always tend to protect local enterprises, even to the extent of protecting backward production capacity, which hinders the market’s “survival of the fittest” function, leading to waves of overcapacity. In recent years, supply-side structural reforms have reduced this phenomenon, but it still exists to a certain extent.

    Second, the urban-rural duality has led to more market segmentation, which manifests in many aspects of the factor market. The flow of labor between urban and rural areas and between regions is still subject to the shackles of the household registration system. Furthermore, the concepts of “same land, same rights, and same price mechanisms” for rural and urban construction land is still being explored. In terms of commodity services, they are subject to differences in regulatory capacity. Some goods circulating in local villages versus urban areas may look very similar, but they are subject to vastly different quality standards, and some may even be counterfeit brands and fake goods. In terms of transportation and logistics market facilities and public services, the gap between urban and rural markets is relatively significant, which restricts the free flow of commodity factors and in turn exacerbates the imbalance in development.

    Third, the administrative allocation of resources in some areas is still pronounced. China's market economy was transformed from a planned economy, and although the socialist market economy system has been increasingly improved after 40 years of reform and opening up, there are still some areas with strong planning and administrative overtones that restrict the decisive role of the market in allocating resources. For example, in the energy sector, oil and gas imports and exports are still highly regulated. China is a major energy importer and consumer, but lacks a voice in global energy pricing partially due to our highly regulated policy. In the power sector, for example, coal feed-in tariffs were not gradually liberalized until last year when there was a massive power shortage. There are also a number of areas where there are different degrees of glass door and spring door phenomena. In some areas, policies determining market access are completely different across localities. An enterprise may be able to register in one place but not another, and so on.

    Fourth, there is still disorderly expansion of capital in some areas, even leading to market monopolies. For example, in recent years, the real estate industry’s domination and high prices kidnapped the Chinese economy. A large amount of capital was wrapped up in bank loans in the real estate industry in a disorderly manner, which not only disrupted urban planning, but also took the Chinese economy hostage. Macro-control was cornered into a passive response for fear of collateral damage that could accompany more decisive action. For example, the financial industry has been moving away from the real economy in favor of the virtual economy, leading to deformed development. The average income level of the financial industry is several times that of the manufacturing industry, while the profits of listed companies in the financial industry account for half of the profits of all listed companies. There is a large amount of capital competing for license resources, and banks’ off-balance sheet business has expanded sharply. A large number of funds are idling outside the real economy, with some capital being used for rat trading under the banner of financial innovation, cheating the people, and P2P lending has become prevalent over the past few years. Another example is the barbaric growth of the Internet industry, which has led to a series of problems such as restricting competition, a winner-takes-all phenomenon, price discrimination, data privacy leaks, damage to consumer rights, and accumulation of risks and hidden dangers, with regulatory lags and even regulatory gaps. All the above phenomena reflect the need for further regulation and reform of China’s super large-scale singular market. This is my second point.

    Third, the essence of constructing a unified market is to open the key blockages that restrict the economic cycle. To promote the transformation of China's market from large to strong, the CPC Central Committee and the State Council issued guidelines on accelerating the construction of a unified national market, including 30 opinions on topics such as general requirements, market-based rules, market facilities, the factors and resources market, the goods and services market, supervision and market order, organization and implementation of security. It is my understanding that the core intention is to further open the key blockages that restrict the economic cycle in order to promote the formation of a broadly consistent market environment across the country, and to promote the transformation of this super large-scale singular market from large to strong.

    In order to accomplish this, there are three main tasks. The first is to deepen supply-side structural reform. If factor market reform is meant to promote supply-side structural reform at the factor level, the unified large market is meant to promote supply-side structural reform from the level of market players’ business environment. The subject of our discussion today is the relationship between the government and the market, which seems to be clear in the classic economics textbooks. There is a common saying, “Give back to Caesar what is Caesar’s and to God what is God’s,” and it seems that there is a clear division of labor between the government and the market. Here, I would like to emphasize that China's market economy has been reformed from a highly centralized planned economy, and was gradually formed through a process of development and growth. Although the four pillars of the market economy have been erected after years of reform, there is still a considerable gap that must be bridged in order to reach a mature market economy, not to mention that China is engaged in a socialist market economy. My understanding is that government is needed to give birth to an effective market. As China is a mega-market economy in transition, and the government must play an active and dynamic role in providing the basic system, basic market facilities, and the marketization of factor resources. In combination with the effective supply of market systems, this can promote the formation of an efficient, standardized, fair, competitive, fully open and unified national market. Only in this way can we truly unleash the power and vitality of China’s large-scale singular market.

  The second task is to promote healthy regional competition and coordinated development of major initiatives. One of the intentions of the guidelines is to systematically correct the negative effects of regional competition. Currently, the technical conditions for the implementation of such corrections have already been met, and are in line with the current trend. From a technical point of view, in recent years a lot of work has been done around the protection of property rights, market access, fair competition, social credit system construction, and so on. Now what we have to do is to unify the standards, rules, and interfaces so that market players can enjoy the same system of supply wherever they are. Looking at the trend, with the development of China's market, competition between regions is increasingly changing from homogeneous competition around low-end industries to differentiated competition based on their respective comparative advantages for the deep division of labor. Especially in the context of the full integration of the digital economy with the real economy, the comparative advantages of each region are being profoundly adjusted. In the past, flowers from Kunming could only be consumed locally, requiring people to go to Kunming to enjoy the flowers. But now, thanks to the advancement of cold chain technology, the convenience of air transportation, and the addition of e-commerce platforms, flowers from Kunming can be delivered to homes in Shanghai, Beijing, and Shenzhen on the next day or even the same day. This is due to the proliferation of technology such as Shenzhen’s cold chain technology and innovative business model, plus Hangzhou’s promotion of e-commerce platforms. These factors brought about the expansion of market coverage, extending the scope of Kunming flower delivery from local to national. This is a typical story, which would be unimaginable without a unified large market. Such a story also allows less developed regions to gain a new comparative advantage. Put simply, to promote the construction of a unified large market is to make more stories like this possible.

    The third task is to smooth the path for domestic and international dual circulation, an inherent requirement of strengthening China’s gravitational field. The construction of a unified national market, on the one hand, stems from the need to accelerate the formation of mutual promotion of supply and demand, production and marketing, and smooth and efficient domestic circulation. On the other hand, it also stems from the need to better participate in international circulation through the efficient regulation of domestic circulation, fair competition, and full openness, thus influencing international circulation and promoting the stable and sustainable growth of the world economy.

    At present, ACEP has come into effect and will eventually achieve zero tariffs for over 90% of goods trade in the future. Market access for service trade has been substantially liberalized, non-tariff barriers have been significantly reduced, and China has also applied to join the CPTPP. As China participates in more and more FTAs with higher and higher standards, China's transaction costs in international circulation will tend to decline. On this basis, if the domestic market is still divided inefficiently, making the cost of free flow of factor resources between regions and industries still relatively high, the market will lose the meaning of opening up. In other words, if we do our homework in the domestic market, we will be better able to participate in international circulation and international competition, forming the foundation of a gravitational field to attract global factor resources.

    That's all for today, thank you!

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