The Main Point
Policy changes and reform plans announced relative to prices, currency, and capital markets suggest that China’s commitment to economic liberalization remains strong, although it will also remain gradual.
Below are some of the key developments relative to economic liberalization that occurred in May:
Eliminating price controls for drugs
- China will eliminate long-standing state price controls on most medicines, effective June 1
- Applies to drugs covered by medical insurance, blood products, immunizations, anti-AIDS and birth-control medicines; narcotics and some psychotropic pharmaceuticals
- The government statement said “The reform of drug prices needs to… fully utilize the resource allocation role of the market.”
Eliminating General Price Controls
- China announced that it will drop price controls on 80 per cent of the products it usually prices.
- Price controls will remain on seven categories of products and services, including natural gas, electricity, tap water, and anesthetics.
Infrastructure investment opened to private investment
China has opened to private investors some areas of infrastructure investment that had been off-limits, including energy, transport, water and environmental protection and urban utilities through franchises, Contracts would be based on build-operate-transfer models.
Balance of payments data to conform to IMF rules
China adopted the IMF’s standards for balance of payments data. Part of China’s effort to obtain reserve-currency status for the yuan. The changes include putting reserve assets under the financial rather than the current account.
Interest Rate Liberalization: Not always a smooth path
Although China is liberalizing interest rates, including giving banks more leeway to set their own deposit rates, in May it also instructed commercial banks to refrain from raising deposit interest rates for fear higher rates would curb borrowing. While China is moving toward liberalization, the old habit of twisting arms to control variables is difficult to break, particularly when the economy is slowing.
China issues blueprint for capital market reform
The State Council approved guidelines on capital market reform this year. The guidelines are an attempt to detail the action plans for reform this year after the top leadership set the policy tone at the Central Economic Work Conference in December.
Guidelines include mentions of the following objectives:
- have an orderly easing in controls over deposit rates,
- reform the initial public offering system,
- develop a multi-layer capital market,
- widen and deepen the capital market,
- boost the yuan’s global status and improve resource allocation,
- launch a pilot project “at a suitable time” on domestic individual investors’ overseas investments, and
- an experimental run of the Shenzhen-Hong Kong Stock Connect after a similar link between Shanghai and Hong Kong.
Import duties lowered
- China will lower import taxes on some consumer goods by an average of more than 50%. Products include skincare products, Western-style clothing and nappies starting.
- “Expanding domestic consumer demand is an important step in creating stable growth and promoting structural reform,” the Ministry of Finance said in a statement.
IMF says RMB no longer devalued
China’s yuan is no longer undervalued after “significant” appreciation over the past 12 months, the International Monetary Fund said yesterday in the agency’s first such finding in more than a decade.
Even so, the IMF called on Beijing to make the exchange rate more flexible while quickening reforms in the state sector.
- The RMB is now Asia’s leading currency for doing business with China, trumping the Japanese yen and the Hong Kong dollar as Beijing aggressively pushes it through international trade channels.
- The currency now accounts for 31% of payments exchanged with China, up from 7% just three years ago,
Sources for this Story:
China to Remove Drug Price Controls
Off-limits projects now open: China sets new rules to lure private investment in infrastructure
Beijing to end price controls for most products
China adopts IMF accounting practice in yuan reserve-currency push
Interest Rate Liberalization — With Chinese Characteristics
Beijing approves blueprint for capital market reform
China slashes tax on foreign goods to help boost slowing economy
China’s yuan no longer undervalued, says IMF
China to Ease Limits on Overseas Investments