China's market reforms to upgrade economy

China is stepping up market reforms to upgrade its economy and reduce distortions caused by the remnants of the government-controlled economy.

The move is in line with the call by the nation's new leadership for "new impetus for economic development through reform."

On October 25, the People's Bank of China (PBOC) launched a new benchmark lending rate, the "loan prime rate", in a bid to help push forward market-oriented interest rate reform.

Nine commercial banks will submit the lending rate they charge their best customers each day to set the prime rate, according to the central bank.

Analysts say that the benchmark will actually serve as the floor for bank loans, although the central bank still publishes a "policy" lending rate, which it said will be phased out after a "certain period of time" to be replaced by the new prime rate.

In China, interest rates have been decided by the PBOC's monetary policy committee, which in real operations, has generated two rates, the "policy" one published by the central bank and the one set based on the financial market.

The long existence of the double rates is not conducive to the establishment of a national unified financial market and therefore not healthy for the rational allocation of financial resources.

The rate reform is just part of a broad reform agenda that China's leaders are expected to outline at a key policy meeting this week. Meanwhile, more efforts have been made in eliminating the "dual price system" in production material industries, which has for years dragged the country's economic development.

In July, China liberalized its gas pricing regime by raising the price local distributors pay for gas for non-residential use by 15 percent, a move to establish a market-oriented natural gas pricing mechanism that fully reflects supply and demand conditions, according to the National Development and Reform Commission (NDRC).

The act was seen as another leap forward after the successful reform of the pricing mechanism of fuel and electricity.

China has been steadily carrying out its reform and opening-up policy since 1978. Though a slow process, the country had initially established its socialist market economy in the late 1990s.

"For more than 30 years, the marketization degree of China's commodity market has been relatively high. But in energy fields such as gas, coal and electricity, the degree is still low," said Chi Fulin, dean of the China Institute for reform and development.

The problem was obvious in the coal power industry.

Most power generated in China comes from coal-fired plants, which leaves power producers heavily exposed to coal prices. In order to keep electricity tariffs stable, for years the government has asked coal suppliers to sell to power firms at contract prices, which are far below market rates. The result is the distortion of the coal-electricity industry chain, and battles between China's coal suppliers and power suppliers.

To tackle the problems, reforms have been underway since last year.

On December 21, 2012, the NDRC said that the government would lift the price ceiling on coal-power industries from January 1, 2013, free up prices of coal supplied to power plants and let supply and demand decide the price. The move was seen by the industry as the abolition of the former contract coal price.

Following that, China further canceled the "dual price mechanism" of electricity and coal, fixed their price linkage mechanism and improved the pricing system for refined oil products, all of which signaled the speeding up of market reform in production fields.

China's market reform has clear goals, which are to set up a national unified open market, to create a market environment of fair competition, and to establish a market-driven pricing mechanism, according to experts.

"The reform of production material industries will certainly release tremendous vitality into the market," Chi said.

Expectations are growing high for the market reform ahead of the upcoming key policy meeting, at which an economic transformation agenda will be outlined, with the promise to steer the economy from its reliance on debt-fuelled investment to a more balanced model driven more by consumption, services and innovation.

Gao Shangquan, honorary chairman of the China Society of Economic Reform, said that the key to successful economic transformation through reforms lies in balancing the relationship between the government and the market.

"The government should help ensure a healthy market environment instead of interfering with the market in the micro-economic level," he said.

Zhang Jiashou, an economic professor at the Party School of Guangxi Zhuang Autonomous Region, also said that China is now at a turning point of economic transformation. "The core is to set up an economic system in which the market can play a bigger role in allocating resources."