The transition to a market economy in the People’s Republic of China is among the great economic success stories of modern times. Since the beginning of economic reforms in 1978, real GDP growth has averaged almost 10% annually, a performance that compares favourably to that of the prior growth champions – Japan and Korea. China has become the world’s third largest economy, its number two exporter, and its leading manufacturer. Living standards of all segments of the population have risen markedly over the past three decades and poverty has fallen from over 50% at the beginning of reforms to below 10%. 

The advance to a market economy in the People’s Republic of China is among the greatest economic success stories of modern times. China’s performance seems all the more impressive given the distinctive manner in which it was carried out. This chapter summarises the enormous progress that China has made in developing the modern legal and regulatory foundation for the market economy. The seven years since China’s accession to the World Trade Organisation in 2001 have been especially productive for economic reforms. New laws have gone a long way toward establishing systems for ownership, competition, and mechanisms for entry and exit comparable to those of most OECD economies. At the same time, the chapter outlines the important challenges that remain. These include further reduction in the scope of state ownership, reform of relations among central and local governments, firmer establishment of the rule of law, and strengthening of regulatory institutions and processes. 

Across the OECD area, the liberalisation of domestic markets and international trade, coupled with the introduction of regulatory management tools, has led to a profound reformulation of the state’s role in the economy. A similar trend has emerged in the People’s Republic of China since the late 1990s. Even if the process remains in its early stages, there is still evidence that the central government has begun to construct a fledgling regulatory system that gives policy makers new tools to impose and enforce economic regulation. This chapter describes how China has gradually developed capabilities for setting economic regulation and thereby guiding market dynamics through regulatory agencies, commissions and administrative procedures that nevertheless maintain an arm’s-length relationship between state and market. The aim of this chapter is to promote discussion on the development of regulatory governance in China and the relevance of regulatory approaches adopted by OECD countries. It raises a wide range of issues that deserve further thought in determining regulatory options for China.

Conditions supporting vigorous market competition in the People’s Republic of China were revived after the interruption of a generation-long experiment in central planning. Transition reforms began in the 1970s by acknowledging and encouraging initiative in local markets, which led to vigorous competition among township and village enterprises and regions. Opening to outside markets destabilised monopolies. As competition became established by the 1990s, the focus of reform turned to create the laws and institutions needed to support enterprise markets on a national scale. China adopted a general competition law in August 2007 that became effective a year later. China’s Antimonopoly Law follows familiar international practices about horizontal and vertical restrictive agreements, abuse of dominance and mergers. Like competition laws in many jurisdictions, the Antimonopoly Law pursues several policy goals. Many details, such as merger notification thresholds, remain to be determined by regulations and guidelines and by experience in applying it. China is now completing the restructuring of the heavy-industry heritage of its once-planned economy. The challenges of transition to a market economy are being succeeded by challenges of development, along with the familiar problems of regulatory reform, of providing infrastructure and public services in a market setting. Curbing government intrusion that tries to protect special interests by dampening competition and favouring particular competitors is complicated by the complexity of the relationships between national and local levels of government authority. 

The People’s Republic of China is a large and rapidly growing economy that has benefited substantially from international trade and investment. Economic reforms beginning in 1978 under Deng Xiaoping have gradually introduced a market sector within a centrally planned economy, and leveraged international trade and investment to support this process. China’s piecemeal process of economic reform over the past thirty years has yielded significant results in economic growth and integration into the global economy. China’s accession to the WTO on 11 December 2001 symbolised its ongoing integration into the world economy by providing more secure and predictable market access both for China and its trading partners. WTO accession entailed obligations to implement a spectrum of reforms to broaden the adoption of market-based economic and trade policies. WTO obligations have been important to China not only in terms of locking in existing reforms, but in supporting domestic policymakers when advancing behind-theborder reforms to enhance the quality of existing market liberalisations. WTO obligations have and continue to underpin systemic institutional and regulatory reforms across the administrative bodies governing the Chinese economy. Domestic political conditions for further “second generation” trade-related reforms – tackling border and domestic regulatory barriers are becoming more difficult. Industrial policy interventions and restrictions on foreign investment have marginally increased in recent years. This chapter traces the path of China’s regulatory reform in the trade area. It pays special attention to the way in which rules are implemented. This report uses as its basic yardstick the six “efficient-regulation principles” developed by the OECD. The chapter concludes with a series of policy options which Chinese authorities should consider as they move toward a fully open and efficient trading system. 

The organisation of infrastructure industries in OECD countries has undergone massive changes in the past thirty years. Taken as a whole, their experience constitutes a rich source of information on infrastructure service industries and their governance. Such information can be of great value for the People’s Republic of China, where infrastructure development will be one of the major development challenges in the years to come. The aim of this chapter is to provide an overview of the experience of OECD countries in the management of their infrastructure service industries, and draw some lessons of relevance for policy making in China. The first part of the note provides a sketch of the public utility model that prevailed in most infrastructure industries of OECD countries until the end of the 1970s, discusses why and how this model has been challenged and gradually modified in the past thirty years, and illustrates some of the opportunities and risks of the reform process through three examples. The second part proposes a more detailed analysis of the main issues that infrastructure industries pose to policy makers today and some possible responses. The third part summarises the policy lessons drawn from the recent experience of OECD countries and examines what this entails for the management of infrastructure services in China. 

The continued success of rapid economic growth in the People’s Republic of China – and the accompanying economic reforms – will depend in no small measure on the continued growth of the electricity sector. With the aim of improving the commercial and technical performance of the sector, the Chinese government has undertaken a series of reforms in the electricity sector. These include the now standard reform strategy of separating the assets and operations of generation from those of transmission and distribution. This chapter describes the challenges, both politically and economically, of implementing this strategy. The aim of this chapter is to examine the progress of reforms and to evaluate the outlook for continuing the reform of China’s power sector in light of developments in energy markets in recent years, both within China and around the world. The chapter concludes that given the current situation in China, the introduction of widespread competition in generation runs a number of risks and that competitive markets should only be introduced gradually. It further suggests that a period of several years could be used constructively to build up the institutional framework for later competition, and a range of instruments other than competitive markets could be employed to address urgent priorities relating to system security, security of supply, sector efficiency and the environment.

The People’s Republic of China faces many serious challenges in its water sector – including scarcity, pollution and flooding – that constrain economic growth and harm the health of the people. Despite massive investment in the sector, the overall situation of resource availability and water quality continues to worsen as economic development continues. This chapter outlines some to the core challenges of water management in China, which include the fragmentation of the institutional and legal framework and the inefficient co-operation, both vertically and horizontally, among the different departments of government and the different layers at state, provincial and local levels. To understand and analyse how the Chinese authorities can solve these challenges, this chapter will consider the institutional and regulatory issues at river basin level that affect the allocation of water to different users for abstractions for irrigation, rural and urban domestic use, and industry. The chapter also seeks to address some of these points from the perspective of improving the regulatory systems, drawing on experience from OECD countries.