Economic ModelMarket-based statist economy

In their 2009 Economic Freedom of the World Annual Report, authors J. Gwartney et al. calculate a score of 0.0 for China for the factor "government enterprises and investment" as a percentage of total investment. The EFW scores range from 0 to 10, with higher values signifying greater economic freedom. When the economy is dominated by state-owned enterprises and government investment exceeds 50 percent of total investment, a rating of 0.0 is assigned. The Heritage Foundation's 2009 Index of Economic Freedom calls China an authoritarian state, in which the state remains dominant in the economy, even though it does permit individuals and enterprises a degree of latitude to respond to market forces. The state remains in tight control of the financial sector, with direct or indirect control over all banks. The 2009 Background Note by the U.S. State Department reports that China has been undergoing economic reform since 1979, when it took its first steps along the road to an "open door" policy. Since then, market-oriented reforms have significantly reduced the role of ideology in the economy. The goal has been to combine these reforms with central planning in a variety of ways. In agriculture, the old commune system has been dismantled, to be replaced by a household-based system. Nonagricultural activities have been encouraged, self-management has been introduced in state-owned enterprises, and foreign financing and imports have assumed greater importance in the economy. These changes have led to significant growth in per capita income and in productivity. In the late 1980s, however, the rate of inflation surged, leading the government to turn toward austerity measures for a time. In the 1990s, then-leader Deng Xiaoping asserted that his goal was the creation of a "socialist market economy," and instituted a 10-year plan aimed at political continuity combined with bolder economic reform. In 2003, constitutional amendments were proposed that included private property rights protections, along with a number of other reforms. These were approved in 2004.

The 2008 Bertelsmann Transformation Index (BTI) report on China asserts that although improvements are being achieved in both market competition and the development of market-oriented institutions, a number of governmental controls remain in evidence. Price controls are still in existence, usually in the form of subsidies that permit state-owned enterprises to operate under artificially favorable conditions vis-à-vis their competitors. Still, the government has instituted new legal requirements that the private sector receive equal treatment with state-owned enterprises, improving private companies' access to previously restricted or regulated sectors and to the capital market. Nonetheless, local governments tend toward protectionism, often favoring local government-owned enterprises. The informal sector of the economy is growing as it absorbs employees laid off from state-owned enterprises and an influx of workers from the rural areas, but the extent of this sector can only be estimated. The BTI adds that a draft Anti-Monopoly Law was approved in 2006, aimed at preventing large state-owned enterprises and foreign multinationals from forming monopolies. However, the BTI notes that the draft has since been modified in such a way that there are now concerns as to its applicability. In the words of the report, "it is feared that the anti-monopoly law will be used mainly to pare back the influence of foreign firms." As the draft legislation contains no provision for the creation of an anti-monopoly enforcement regime, the law seems likely to have limited ability to curb state monopolies or the formation of monopolies in general.

Sources

Bertelsmann-Stiftung, "2008 BTI: China Country Report," 2008. Available from Bertelsmann Stiftung website. Accessed on October 24, 2009. (BTI 2008)
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Gwartney, J., et al., "Economic Freedom of the World: 2009 Annual Report," 2009. Available from Frazer Institute website. Accessed on October 23, 2009. (Gwartney et al. 2009)
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Heritage Foundation, "2009 Index of Economic Freedom: China," 2009. Available from Heritage Foundation website. Accessed on October 23, 2009. (HF 2009)
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U.S. Department of State, "Background Note: China," January 2009. Available from U.S. Department of State website. Accessed on October 23, 2008. (U.S. DoS 2009)
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