China's Transition to the Market: Status and Challenges

China's transition to the market has been astoundingly successful, the more so as its reforms, though far-reaching, are incomplete in many important dimensions. Although China has irrevocably committed to establishing a market economy, the situation is yet to progress to the point where the markets are entrusted, with minimum encumbrance, to allocate goods, services and factors of production. The Government reserves the right to intervene in markets when developments are not to its liking, even where the better (meaning more market friendly) policy might be to liberalize further rather than to re-impose administrative controls. Our review suggests that market development has progressed most in the goods markets, with services next, and factor markets still lagging.. To improve the function of China 's markets, more of the right sort of competition is needed. We hypothesize that four broad types of government actions can heighten fair competition and improve the way in which Chinese markets work. In the approximate order in which they are likely to contribute to efficiency gains, they are: (1) phase out remaining barriers to the freedom of movement of goods, services and factors of production in the domestic markets, (2) roll back the barriers to foreign participation in the Chinese economy in accordance with, but not limited to, the undertakings for accession to the WTO, (3) compile and disseminate more information of all kinds to improve participants' knowledge of China's market environment, and (4) experiment in introducing more complementary markets (for example, forward markets, markets for derivatives) and market supporting services (rating agencies, specialists in grading products and valuing assets, marketing, and more).