Further reforms needed to build unified market, improve efficiency

In September, China released a new directive to promote new energy automobiles, stipulating that no less than 30 percent of cars purchased should come from non-local manufacturers.

No discriminatory measures should be taken to favor domestic brands and squeeze out non-local players, according to the directive.

The move is the government's latest effort to integrate the country's regionally fragmented domestic market, in which local authorities' obsession with regional prosperity has fueled a rise in protectionism, into a unified market with free flow of capital, labor, and goods.

Local protectionism has become more prominent since 2008, when the international financial crisis dealt a blow to overseas demand, prompting local authorities to encourage the purchase of local products to boost growth.

Although the protectionist measures may help lift local economies in the short term, the fragmented and distorted market has spawned problems such as higher operation costs and overcapacity in the wider economy, undermining the economies of scale of China's huge market, said Zhou Hongchun, researcher at the Development Research Center of the State Council, a state think tank.

China's ongoing attempt to eliminate outdated capacity has met resistance from GDP-oriented local governments accustomed to chasing economic growth by investing in high-cost, low-tech capacities -- restraining the economy's growth as a whole, which has already suffered from weak overseas demand.

With the central government reining in overcapacity in traditional manufacturing, emerging industries have become the new investment target for many local governments. Wang Xiangdong, general manager of Yingli Solar Co., Ltd., said that some local governments have encouraged enterprises to engage in solar panel production regardless of current capacity and profit conditions just because it can contribute to local revenues.

With 7.7-percent growth reported in the first three quarters of the year, a slowdown from the two-digit growth pace seen over the past 30 years, China's new leadership has become more accepting of slower growth to allow leeway for further reforms, which include the promotion of a unified market mechanism, analysts said.

During a visit to central China's Hubei Province in July, Chinese President Xi Jinping stressed that China will accelerate efforts to form a unified and open market mechanism to eliminate barriers and improve resource allocation efficiency.

Hope for a more open and fair market has been pinned on the upcoming Third Plenary Session of the 18th Communist Party of China Central Committee due in November, which will roll out a comprehensive reform package.

Further reforms are required to improve the country's economic and political system in order to facilitate a free flow of production factors, experts said.

Kuang Xianming, head of the economic research center at the Hainan-based China Institute for Reform and Development, said it's important that local governments, under the scrutiny of the central government, ease their administrative power and restore the role of the market in order to integrate the national market as a whole.

Meanwhile, the performance assessment of local governments by the central government needs to be altered accordingly, Kuang said. "The role of GDP in the assessment should be reduced and more focus should be put on the work that has been done to improve public services and social management," he said.

Moreover, existing systems, including the household registration, land allocation and fiscal systems, are also factors that have caused regional fragmentation of the domestic market, said Ding Yuanzhu, vice director of the department of policymaking consultation at the Chinese Academy of Governance, a state think tank.

Ding said that the country's labor force has not been able to move freely between rural and urban areas, between government institutions and enterprises, and between provinces, due to a rigid household registration system, incoherent personnel systems among industries, and uncoordinated medical and elderly care mechanisms across the country.

"To build a unified national market, the country needs first to integrate these systems," Ding said.

At a March news conference held just after the new leadership was established, Chinese Premier Li Keqiang vowed to reduce one-third of the more than 1,700 administrative approval items controlled by the central government during his administration. About 221 items have been exempted so far.

Local governments, which control about 17,000 administrative approval items, have also started to follow suit in cutting items.