China in Transition

How much does China’s future development hinge on genuine policy and institutional reforms?

In the following interview, Prof. Liu Mingkang, honorary professor of the CUHK Business School, shares with China Business Knowledge @ CUHK how China’s future development hinges on genuine policy and institutional reforms.

What is your analysis of the current situation in China?

When we considered the lessons learned from the global crisis, we discovered that the growth model that China and other Asian economies had been using – a model of mass production and mass exports, must change. China has not invested enough in research and development and this is something the country must address, or it will never cope with the changes afoot. So how can China change its growth model? We’re looking at the role of the free market and the Chinese government in all this, and asking: where did we go wrong in the past?

How can Western countries work better with China in the future?

China can improve the way it communicates at an international level. If it operates in a more transparent way the rest of the world can understand it better. But the flip side of that is that the international community – especially the West – must understand how everyone can benefit from a fast-growing and changing China. The more China grows the more resources and expertise it will require and the more the rest of the world stands to gain from China’

What are the major transition challenges facing China in the next five years?

China needs to look closely at existing structures and begin to reform entire industries, line by line. New policies are needed to encourage businesses to open up and attract new talent. But this is just the start – China needs to modernize its corporate governance and also corporate culture. As a nation it needs to become more inclusive with the rest of the world – a rather daunting task. China must begin to reform its growth model and focus more on the domestic market rather than abroad – a market of 1.3 billion people is a huge market to tap.

China faces another important challenge – it needs to strengthen the rule of law and enable legal reform; the country would benefit from a more empowered legal system. If China wants to restructure industry and encourage private ownership, it must have a solid legal structure in place before it even starts; and that means tough laws and the mechanisms with which to enforce them.

China must learn from what happened in Russia during its transition to a market economy – that’s why the rule of law is so important; it can create the right atmosphere and environment – and it’s a crucial mechanism for fair play. Institutional and other private investors must have a fair deal during the bidding process – so the rule of law is essential to underpin this process in the coming five to ten years. China is also facing big demographic changes; sooner or later it will become an aging society. Are pension funds sufficient? Will existing arrangements be enough to support the older population? With China’s huge resources I’m confident it can, provided that the country carries out a reform of the tax system. This would give room to maneuver on difficult issues such as restructuring industries and building up pension funds to bridge any gaps. China is rich in tax revenue. It’s a fast growing economy – even with the impact of the financial crisis this year, China has enjoyed between six and seven percent growth in GDP and I think the economy will continue to grow steadily.

What challenges does China face at an international level?

China needs to collaborate to encourage “green growth” – it could achieve more by working with other nations. China could improve technology and information sharing – and cooperate to set and raise environmental standards in order to profit from green growth. Globally environmental laws must be enforced and tightened so that they become part of standard business practice.

China needs to improve cross-border cooperation. The crossborder resolution scheme is very important, especially as protection against financial crises.

Conflict and tension in the Middle East and Korean peninsula are of great concern – there needs to be a firm worldwide legal platform in place to produce concrete measures to deal with these conflicts in an efficient and effective way.

Money laundering and the funding of terrorism remains a global challenge – it’s very important China tackles these.

Prof. Liu Mingkang is an honorary professor of the CUHK Business School and distinguished research fellow at the Institute of Global Economics and Finance at the CUHK. He served as the first chairman of the China Banking Regulatory Commission (CBRC) between 2003 and 2011.