On the Breakout of Chinese Economy

by Qiren Zhou (Author)
Monographs XII, 224 Pages


Reform has long been a consensus in China, but after decades of rapid growth, there still remain numerous intractable barriers and institutional constrains to solve, and new problems are continuously emerging, all these hinder the implementation of China’s deepening reform. How can China break out of those encirclements? This book is a collection of the author’s articles on China’s experience of social and economic reform which proposed that new momentum is needed for an overall deepening of reform. Based on his years of research on real-world economics in rural land reform, state-owned enterprises reform, urbanization and urban governance, technology innovation and industrial upgrading, the author introduces the concepts of state and market, firm and law, property rights and contracts, transaction cost and system cost, comparative advantage and competitive advantage etc. Whether the momentum of reform can penetrate multiple levels of complex networks, from the top to grassroots and local to central, is a decisive factor in China’s deepening reform. This penetrating power has the connotation of the comprehensive decision making, technological innovation, and optimism in the face of uncertainty. Reform seeks to break, while innovation seeks to create. The future is better than one thinks.

Table Of Contents

  • Cover
  • Title
  • Copyright
  • About the author
  • About the book
  • This eBook can be cited
  • Contents
  • Preface
  • 1 Reform’s Next Step
  • 2 Economy’s Dependence on Megatrend
  • 3 Urban–Rural Bottleneck
  • 4 The Logic of Innovation
  • 5 Distinguishing Online Ride Hailing
  • Postscript

←vi | vii→


Enhancing the Penetration Power of Reform1

Reform is a global trend, and now many countries are upholding the banner of reform. However, reforms undertaken by different countries are remarkably different. In particular, the reforms of large countries have their distinctive characteristics; because large countries have multiple levels and uneven development, it is not easy to reach consensus on the reform and it is also more difficult to implement the reform decisions. On the other hand, once a reform in a large country is implemented, its dividends are considerable. To study the reforms of large countries, the important part is to learn how the consensus is formed and how the reforms are then put in place. A critical question in this is the penetration power: After consensus is reached and reform decisions are made, can the reform penetrate through all the multiple levels of organization from the top to the bottom? This is a challenge. A large country is called “large” because it takes a long journey to go from the top to the bottom. For the reform experience and the endeavors from the bottom of a large country to enter the top-level design, the journey is even much, much longer. Is it possible to achieve penetration both ←vii | viii→ways? This is a question we will confront as we review 2014 and look ahead to China’s reform situation for 2015.

We all agree that the decision to comprehensively deepen the reform made at the Third Plenary Session of the Eighteenth CPC Central Committee and the decision to rule the country by law at the Fourth Plenary Session are correct. If there are any concerns or misgiving, it is about whether or not these decisions will be effectively implemented and achieve effective penetration. This penetration is bidirectional: Not only must decisions from the top penetrate down to the bottom, but also the actual situation at the bottom and the reform experience created at the bottom also percolate up toward the top. The penetration power has a decisive significance for a large country’s reform. As to how to enhance the penetration power of China’s reform, different people might have different views. I personally believe the following points will probably be helpful.

First, reform goals must be clear and simple. Only when the goals are clear and simple can the penetration power be strong. Taking the economy as an example, the goal of the reform is for the market to play a decisive role in resource allocation. This is a general outline which drives all aspects, including a better role from the government. In the fields of politics and society, the goal is democracy and the rule of law; in particular, public or government power should be put into the cage of institutional constraints to bring the country onto the track of rule of law and to motivate more members of the society to participate in social governance. The market, democracy, and the rule of law as goals are adequately simple and should not be burdened by adding more and more complications. What is passed on from China’s culture is also actually quite simple; this is because China is a very large country, and it is difficult for too-complicated things to have penetration power. From the top to the bottom, too-complicated things might change as they pass along the way and can thus be difficult to be truly implemented.

When the goals are correct, adequately simple, and adequately clear, the only thing left is persistence. Only when the simple and clear reform goals are upheld can the penetration power be strong. Not all changes can be called reforms; a reform must have a clear direction and clear connotations. It cannot be willy-nilly, heading east for a while, then going west. The reform of a large country must follow with perseverance an exceptionally simple and clear direction, and only by doing this can the penetration be powerful.

Second, the number of potential interpretations to reform decisions and goals should be reduced as much as possible. This is because the reform decision is a program of action, not a set of complicated theories or rhetoric. In particular, the various levels and departments do not need to “interpret” reform decision, ←viii | ix→because it is not difficult to understand. We can simply let people read the original text of the Decision2 of the Central Government and take actions immediately after the reading. In particular, no complicated interpretations are needed; otherwise one sentence becomes five sentences, five sentences become fifty sentences, patches are added onto patches, and finally no one understands what is being talked out and people do not know what to do, then nothing at all can be achieved. Some interpretations go in the opposite way of the intent and content of the Decision, so which one should prevail? It should be the Decision.

Let us take the land system reform, which I am familiar with, as an example. In this case, the structure of the reform scheme ratified by the Central Leadership Group for Deepening the Reform is very clear by itself: do not touch the “three bottom lines”; local governments are encouraged to do more exploration, practice, and creation; and its goal is a land market, a unified urban and rural land market. However, after various interpretations, it seems that the “bottom line” has been changed into a closed loop, which can only circulate within itself and cannot break any boundaries, and the local explorations and the goal of building the market are all disappearing. This makes it very difficult to accomplish the reform. The way out - is to minimize interpretations. In particular, departmental interests, vested interests, and outdated concepts should be prevented from taking advantage of the interpretation and turn the originally correct, clear, and understandable decision into a muddled and ambiguous puzzle. The information puzzle for a big country’s reform is obstructing the penetration like a haze.

Third, there should be more exchange of actual hands-on reform experience. The Decision is correct and concise, but its implementation will often encounter all sorts of actual situations. What should be done to put the implementation in place, and what new problems need to be resolved? This is a very important step to enhance the penetration power of the reform. According to my research and observations, this aspect is very likely the weakest one. While the Central Committee’s Decision has been talked about and emphasized multiple times, which actions have been taken at the grassroots level? Did these actions happen after the Third Plenary Session of the Eighteenth CPC Central Committee? What are the universally applicable experiences? What are the setbacks, and what are the deviations?

←ix | x→

In fact, at the bottom, there are many moves toward the direction of marketization and many actions toward the expansion of democracy and the rule of law. To give an example, in 1999 when the internet started to become popular, internet telephony appeared on the scene. The regulatory departments in place at the time were of the opinion that network communications conducted directly by the private sector was violating relevant communication laws and regulations; as a result, the innovator not only got his property confiscated but also lost personal freedom for a while. Fuzhou Intermediate People’s Court tried this case and decided that the judgment by the court of first instance had no legal basis and that the case should be returned for retrial. The implication from this case is clear: For things not expressly prohibited by law, some space can and should be left for innovation behaviors.

This is a good case. If it gets transmitted to the super structure, it will provide a substantial push to many things, such as preventing administrative monopoly, strengthening market competition, and following the same rules of the game in interest distribution. It is often said that China does not have many excellent judges or many excellent lawyers, and that the number of people with the concept of the modern rule of law is even smaller. However, we still have some, even if “not many.” Sometimes, a single counter-example has great penetration power. If we can seize such counter examples and instigate a discussion in the whole society, the penetration power of the reform can be enhanced.

Fourth, new systems should be formed in some critical locations. Currently, the general belief is that China’s product market is better developed than its factors market. What exactly is the factors market, though? Take the land market as an example: It isn’t necessary for every village to become a place for land transactions, because factors trading and their price discovery need to be relatively concentrated at certain locations. “Global oil prices” are often discussed in the news. What are global oil prices? Are they something decided by the whole globe? No; they are decided at a small location, namely the high-end oil market. To enhance the penetration power of China’s reform, we must seize key locations, namely high-end markets, because as long as the new system can stand on its own and successfully operate in these locations, the original system can be broken and the new system will have a huge radiation power.

Shanghai Free Trade Zone policy has spread to Tianjin and Shenzhen; this obviously has shown some penetration power, but it seems not strong enough. Why was Shanghai’s financial reform put at the port and warehouse area? Wouldn’t the radiation be stronger if it had been put in Lujiazui? Later on, a sentence was added to extend the free trade zone policy to Pudong New District. ←x | xi→It is hoped that relevant financial service policies will not only play a role in the warehouse areas of the trade port but also be proactively expanded Pudong’s core urban areas so as to generate more radiation throughout the Yangtze River basin, the southern part of China, the whole of China, and even the Asia–Pacific region. This is an important move to strengthen the penetration power of the reform.

Fifth, remove some difficult obstacles. Currently, administration according to law is being emphasized; this means that administration should follow existing laws and legal regulations. However, some of the content of existing laws and regulations conflicts with the reform decisions made by the Third Plenary Session of the Eighteenth CPC Central Committee. To move toward the market mechanism and build a country governed by the rule of law, it is imperative to touch some previously formulated laws and regulations; frictions will therefore be unavoidable, which is a significant difference in comparison with the reform of the early 1980s. Therefore, the current reform should go hand in hand with legal revisions. It would be best to have a list of legal revisions together with a timetable. If the existing laws and regulations do not get changed at all, the reform cannot be advanced.

←xi |

1 This essay is adapted from the keynote speech given by the author on December 19, 2014, at the 5th Caixin Summit themed “New Normal and New Reform.”—Editor’s Note.

2 The Decision by CPC Central Committee on Several Major Questions Related to Comprehensively Deepening the Reform.


XII, 224
ISBN (Hardcover)
Publication date
2022 (December)
New York, Bern, Berlin, Bruxelles, Oxford, Wien, 2023. XII, 224 pp.

Biographical notes

Qiren Zhou (Author)

Qiren Zhou (Ph.D., UCLA) is Chair Professor of Peking University and has served as Dean of the National School of Development at Peking University. An eminent economist in China, Dr. Zhou is a member of the Expert Committee of National Development Planning and has been an advocator and adviser for decades for China’s reform and opening-up.


Title: On the Breakout of Chinese Economy
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236 pages