III How to Intensify Factor Market Reform without Repeating Mistakes of “Pass-crossing in Pricing” and Prevent Collapse of China Economy

Fortunately, there is consensus about factor market reforms in the government, though with few agreements on the total reforms. Under the promotion of hard-earned consensus about reforms, the factor market reforms were enforced. However, we shall pay attention to the following aspects to ensure the intensification of factor market reforms and avoid collapse of China’s economy and failure of reforms.

Factor Market Reforms: To Construct Complete Competitive Factor Market System Instead of Easin Pricing Regulation

An erroneous view was put forward that as long as the government relaxes price controls and allows free market pricing, the pricing of production factors can be market-oriented. A complete competitive market systemis composed of four aspects: first, fair production factor trading market; second, a production factor price formation mechanism based on demand and supply in the market rather than on government instruction; third, market diversification to ensure that the market price is competitive rather than monopolized; fourth, clear property rights of production factors. At present, China performs well in terms of the first aspect, “fair production factor trading market”, rather than of the remaining three aspects. If China only performed the second aspect, relaxing government’s control over pricing, instead of making further reforms, a sophisticated competitive factor market system still could not come into being.

First, the market-oriented reforms refer to the marketing of competitive markets. Only diversified market players can ensure the market price to be a competitive one rather than a monopoly one. The market structure can be divided into four kinds: monopoly market, oligopoly market, monopolistic competition market, and fully competitive market. The prices developed in the former two kinds of market structures are not competitive market prices, but those developed in the latter two kinds are. As for factor markets, if the market players are in small number or even single, even if the government relaxes price control to allow free market pricing, a competitive market-oriented price in the true sense shall not be obtained. It deserves our special attention.

In the case of interest rate markets, the liberalization deposit interest rates are entirely the interest rate marketization. In other words, the deposit interest rate liberalization is not the last step in interest rate marketization reforms.²⁴ The premise for interest rate marketization is the establishment and improvement of a series of basic systems, including market player diversification, deposit insurance system, financial institution withdrawal system, and market-based nomination system of senior management personnel. The reforms in these basic systems are more complex and difficult, influencing more stakeholders’ interests than simply opening up deposit rates. In particular, it is necessary to break the market access of banks and monopoly of state-owned banks in order to allow more private capital to establish private banks, especially large private banks, to promote market player diversification, and thus to promote the market-orientation of interest rates. Therefore, even if the interest rates are liberalized, interest rate marketization shall still go through a long way requiring far more than one to two years. Of course, only the opening up of deposit interest rate already had great impact on China’s economy because the income of interest rate spreads accounts for a high share of the profits of state-owned banks, and the survival and development of state-owned enterprises and local government investing and financing platform also demand low-cost funds under financial repression.

Second, the clear property rights of production factors are the premise of factor price marketization, and the premise of the free flow of production factors for market transactions. On the contrary, the unclear property rights will make it hard to reflect the interests of owners and the external costs in factor prices. The property rights play a crucial role in the marketization of land and mineral resources. Concerning the factor of land, if the land ownership is unclear and the land use rights of farmers are not put into comprehensive practice, even if the local government is required to compensate the farmers whose lands are expropriated, equivalent of releasing price regulation as opposed to the regulation on compensation on the basis of land original use, it will still be possible for the local government to confiscate the land as the land owner. In the meantime, the farmers still have enough capacity for price negotiation, which will make the land price not truly market-oriented. As for mineral resources, the existing laws only generalize that the ownership of all mineral resources pertains to the nation, without clearly defining the right to use and to yield. Firstly, it resulted in the separation of the right to use mineral resources from the right to yield them. Only a handful of state-owned enterprises monopolized the right to use of mineral resources via free allocation and occupied the right to yield them that was supposed to belong to the whole nation. Secondly, it made the mineral resource enterprises bear only the direct cost of extraction instead of the indirect costs of environment governance and ecology compensation. If we do not make property reforms, but simply open up price regulation, most likely a few state-owned enterprises will continue to access mineral resources for free or at extreme low cost. Even so, they might still ignore the external effects like environmental pollution and ecological destruction, which finally would lead to the failure of completely market-oriented pricing of mineral resources.