It is time to break down walls.
The Chinese government’s new guidelines on building a “unified national market” signals its resolve to demolish the walls within its fragmented domestic market.
The concern is that the Chinese market is “big but not strong”. Local governments may set rules to protect their jurisdiction’s merchants and financial interests, creating walls that deter external traders. The jurisdiction gains, but the country loses. China also loses potential economic growth when foreign companies are put off by inconsistent regulations across regions.
Now, China wants to pursue growth through a unified national market that is highly efficient, standardised, open and fairly competitive. This will be done through “breaking down local protectionism and market segmentation, clearing key blockages that restrict the economic cycle, and promoting the smooth flow of factors of production on a wider scale”.
Speeding up the creation of a unified national market is good news. If the obstacles above are indeed removed, the market mechanism will play a better role in allocating resources, thereby achieving greater economic efficiency.
The new guidelines have drawn much attention. The public is wondering why China is introducing them at this point in time. Foreign entrepreneurs and investors, such as those in nearby ASEAN countries, would also want to know what implications there would be for their businesses.
The concept of a unified national market is not new. The Chinese government has long been considering it in theory... In practice, however, local protectionism remains a problem.
The difficulty of rooting out local protectionism in China
The concept of a unified national market is not new. The Chinese government has long been considering it in theory. In 2004, researchers from the Development Research Center of the State Council published a report on local protectionism and the importance of clamping down on it. In 2013, the government pointed out that “efforts are to be made to build a market system that is uniform but open, orderly and competitive”.
In practice, however, local protectionism remains a problem. Whenever a local government conducts a random national inspection on a product, the passing rates for local brands are often higher than that for foreign brands.
The problem appears to have been exacerbated by the Covid-19 pandemic. When an outbreak occurred in Shanghai, reports emerged that some local authorities erected roadblocks or placed healthy truck drivers under quarantine, disrupting logistics services across cities. The State Council had to stress that airports, harbours and highways must remain open amidst the restrictions.
China must tackle anti-competitive practices across regions.
Other factors resulting in local protectionism lurk in the background. Geopolitical issues, such as China-US tensions and the Russia-Ukraine war, have cast a pall on consumption. These external events cannot be easily controlled. With less domestic spending, investments and exports to drive economic demand, the Chinese government needs to look at improving economic supply.
To do so, China must tackle anti-competitive practices across regions. All factors of production, such as the labour, land, capital and energy needed to produce goods and services, must be equally accessible, fairly competed for and efficiently utilised.
Breaking down the walls of local protectionism also fits in nicely with China’s dual circulation strategy, which was proposed in 2020. On the one hand, a domestic market with less local protectionism will boost the economy’s internal circulation. On the other hand, foreign investment and improved productivity will facilitate the economy’s external circulation.
... a stronger Chinese market will exert positive externalities on ASEAN countries.
Positive spin-off effects for ASEAN
In the long run, a unified market can spur economic development across regions in China. It will improve productivity, lower production and transaction costs, promote market efficiency, and increase China’s global competitive advantages. What does this mean for ASEAN?
China is ASEAN’s biggest trading partner. ASEAN’s exports to and imports from China grew at an average annual rate of 10.4% and 12.5% respectively from 2010 to 2019. The improvement in China’s market environment, infrastructure and circulation of factors of production will increase the supply of its commodities and products. It will also ensure the quality of Chinese goods, providing more trading options for ASEAN. Hence, a stronger Chinese market will exert positive externalities on ASEAN countries.
In addition, China has become one of the leading investors in the ASEAN region in recent years, according to a report from The Hong Kong Trade Development Council. The main investment activities are in finance and insurance, real estate, manufacturing, wholesale and retail trade, as well as construction. In 2020, mainland China’s Foreign Direct Investment (FDI) in the region amounted to US$7.62 billion, making it ASEAN’s fourth largest FDI source after the US, Hong Kong and Japan.
Hence, it is clear that ASEAN is a very attractive region to Chinese investors. There is a positive correlation between the economic growth of China and that of ASEAN. A stronger Chinese market will produce larger enterprises. And some of them will be eager to enter a different but neighbouring market, such as ASEAN. Hence, achieving a unified national market will promote China’s long-term prosperity and play a role in its neighbours’ economic performance.
The guidelines are also good news for foreign investors in China. In 2021, ASEAN's actual investment in China amounted to US$10.58 billion, of which the top three investment source countries were Singapore, Thailand and Malaysia. An open, rule-based and competitive business environment will attract more foreign trade and investment.
The central government will have to make an effort to change local governments’ GDP-oriented mindsets and convince them to cooperate.
Instead of navigating multiple sets of standards across different regions, all companies (both local and foreign) will face the same rules. Hence, foreign companies are less likely to be discriminated against by regional governments and find it easier to streamline their supply and production chains. They can then smoothen their production process, reduce coordination and transaction costs, and organise their supply chains more efficiently.
Moreover, they are more likely to compete with local companies in a fairly competitive market. Hence, the new guidelines will make investors more confident. This is particularly important in the current situation as Shanghai’s lockdowns have sparked fear and frustration, shaking investor confidence in the Chinese market.
We should be aware that building a unified national market is a long-term goal for China. The Chinese market is not likely to turn market-oriented all at once. The guidelines are more like “a catalyst for further regulation and implementation guidelines”.
The central government will have to make an effort to change local governments’ GDP-oriented mindsets and convince them to cooperate. Although the central government is determined in pursuing a unified market, difficulties await. It will take years to realise this goal. But what businesses in ASEAN countries can do is to prepare for this change.
When the last few walls are gone, it will be time for businesses to soar.
Related: Shanghai's Covid shutdown is disrupting domestic and global supply chains | China's pro-Russia stance in the Ukraine war could negatively impact the Chinese economy | China gears up for grimmer economic outlook | The growing difficulty of balancing China’s local government budgets | Stability and growth: Two Sessions' government work report spells out what China wants | China’s 2022 economic growth will start low and end high