Impact of Factor Market Reforms: Not Enough to Lead to Collapse of China’s Economy under Positive Development of Private Economy

To prolong factor market reforms is simply based on two aspects of considerations. The first one is that price control helps to reduce production costs to encourage investment and exports to maintain rapid economic growth, and the second one is if market reforms will lead to China’s economic collapse. The first one has little significance now, as it has brought about serious economic distortion and unsustainable growth. The second one seems reasonable, especially when the current Chinese economy has ushered in sub-high growth with slow growth. China’s economy has a characteristic, that is, when the situation is good, the authority prefers to summarize the experience, upgrade it into a new pattern, and lose the impetus to reform; on the other hand, when the situation becomes worse, the authority will be fearful of the impact of reforms on China’s economy and will have no willingness to reform. Reforms are always much more declared than made. Under such logics, there will never be any chance for any reform to occur to the factor markets. Obviously, this is wrong. Therefore, it is necessary to clarify the second consideration that might delay reforms.

The reform bonus of the factor market reforms is to be found in the long run, and difficult to be seen in a short time or even likely to appear as negative dividend. The factor market reforms indeed impact China’s economy, especially obvious in the state-owned enterprises. Take the interest rate marketization as an example. After such reform, China’s actual loan interest rates will rise, so will the capital costs; and the investment activities of the whole society will be curbed. The author’s research results show that after interest rate marketization, China’s actual loan interest rate will increase from 3.66% to 4.59%, that is, by 25.4%. Under this influence, the production scale of the whole society will significantly shrink, with the total social capital stock falling by 10.3% and the total output declining by

Reform in Factor Markets 119 7.2%.²⁸ After interest rate marketization, state-owned enterprises will bear the brunt. As they can get preferential loans, the actual loan interest rate that state-owned enterprises undertook from 2001 to 2009 was only 1.6%, while the market lending rate was 4.68%. If state-owned enterprises apply for loan at the market interest rate, they need to additionally pay the interest for RMB2.75 trillion, accounting for 47% of the net profit in the same period. Meanwhile, after the market-oriented reform of interest rate, the actual loan interest rate will further increase and the production scale of state-owned sectors may be quickly declined.²⁹ If the market-oriented reforms in the factors of labor, land, and resources are simultaneously carried out, the investment costs of enterprises, especially state-owned enterprises, will further increase. It is expected that the total output will reduce in a greater scale. Therefore, the impact of factor market reforms on China’s economy is a force to be reckoned with.³⁰

The simultaneous advancement of the reforms of factor markets and state-owned enterprises can maximize the reduction of negative bonus of reforms. The premise for factor market reforms to impact China’s economy is that they are separately carried out while other conditions remain unchangeable. If they are not carried out separately but jointly with other aspects of reforms, it will actively develop the private economy and will not result in the collapse of China’s economy. China’s reforms include the reforms of economy system and the government³¹ and legal system. The economic system reforms mainly include factor market reforms and state-owned enterprises reforms. If the factor market reforms are implemented in line with restraining monopoly of state-owned enterprises and actively developing the private economy, the impact of factor market reforms on China’s economy will be limited. Take the interest rate marketization as an example. The loan interest rate after the reforms is higher than that before the reforms, which has an adverse impact on the state-owned enterprises that have obtained cheap loans. However, as for the private enterprises that can only obtain loans at high rate in the dual-track interest rate system, the acquired loan rate after the forms might be even lower than that before the reforms. Therefore, it means good news for such enterprises, especially for those excellent ones which can take higher factor prices.³² In this regard, the development of private economy can reduce the impact of the interest rate marketization. For a long time, the important industries of electric power, telecommunications, oil, and finance have been monopolized by state-owned enterprises, though theoretically, the “new 36 articles (of provisions from Several Opinions of the State Council on Encouraging and Guiding the Healthy Development of Private Investment in 2010” and the “old 36 articles (of provisions from Several Opinions of the State Council on Encouraging, Supporting and Guiding the Development of Non-Public Economy, including Individual Private Economy in 2005)” have greatly improved the opening of monopoly industries to private economy. However, in fact, the prevalent existence of the “glass door”, “spring door”, and otherhidden obstacles continue to hinder the access of small and medium-sized private enterprises.³³ To develop the private economy in a true sense, China is supposed to intensify the reform of state-owned enterprises, restrain the monopoly of state-owned enterprises, and create wide scope of development for private enterprises.