Chinese Game – The End of ‘Monopoly’?

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Monopoly – Chinese Version

Monopoly is an American board game where players move around the board buying and/or trading properties, developing their properties with houses and hotels. They also collect rent from their opponents, the ultimate goal being to drive them into bankruptcy. The game is named after the economic concept of monopoly—the domination of a market by a single entity.

Less state and more market for the growth of Chinese economy? At least this is what Chinese can expect due to the planned reforms of Chinas central committee of the communist party. A reason why these reforms are necessary is e.g. the economic growth weakens within the second biggest national economy. With a growth rate of 7.7 % in 2012 and 7.6 % in 2013 China reaches their self-made goal of 7.5 % but is the weakest growth rate since more than 20 years. Does it mean that China will give at least some of their monopolies to open the market for external investors or will they still continue to play that game?

Public enterprises: The communist party still controls about 110 huge conglomerates such as Air China, China Telecom, Banks, Oil-enterprises or Chatters. Some of the top managers are even members of the central committee. In the daily business it means that many economy sectors are a No-Go for private or foreign investors. Private entrepreneurs have no chance to compete against the gigantic monopolies which have direct connection to the central committee. But couldn’t more competition lead to better businesses and aren’t private companies more inventive than state enterprises? Private enterprises should be encouraged to get involved in the reforms of state enterprises. Mutual participants and mergers of different ownership forms should arise such as state, cooperate and private. Those ownership forms should play an important role within the future economic system. State ownership should serve the strategic goals of the state. These include public service, the development of strategic industry areas, conservation, technological and scientific development and security of the state. However, this step would be at least a step towards more market economy. China’s financial sector is just controlled by large state banks (government). Private Banks are very limited in their work. Now Beijing wants to open the financial sector for up to five private banks. The banks are allowed to work firstly in an experimental phase under strong control regulatory authority. For foreign institutes it would be an advantage since they had a very hard market entry. This reform would lead to more international competition and more transparency. [1. http://www.manager-magazin.de/unternehmen/artikel/a-942251.html]

National currency and interest rates: The value of China’s Yuan is not setting up by supply and demand at the moment. Instead of supply and demand set up the value of the national currency, members of the communist party are doing it at their will. Additionally the trade of currency across borders is limited. But actually, without a free and exchangeable Yuan, China couldn’t establish as a world power economy. It is also not allowed to transfer foreign currency to and from China for free. Moreover the interest rates given by the banks are dictated by the government. Especially in local areas, party functionaries decide who gets credits and who doesn’t. Besides that the interest rates are partly so low that they cannot even balance out the inflation rate. There are people which saved money couldn’t afford an own property and even lost money. The mechanism for the rate determination of the national currency Yuan will be improved by supply and demand. The establishing of interest rates should be quickly orientated by the market. Furthermore China wants to implement deposit protection for attracting savings. Bank and capitall transactions across the border should be simplified to complete them with the national currency. [1. http://www.spiegel.de/politik/ausland/china-kp-sichert-ihre-macht-ab-statt-zu-reformieren-a-933214.html] [2. http://www.heute.de/China-plant-Reformen-Experten-bleiben-skeptisch-30669610.html] [3. http://www.spiegel.de/wirtschaft/soziales/china-deutsche-wirtschaft-lobt-reformversprechen-a-933911.html]

Taxes and Budget: The government plans also an implementation of a standardized and transparent budget system, due to reach an even budget on a long-term view. Regional administrations should be able to finance themselves at the capital market easier. Furthermore the complicated VAT system will be reformed and simplified. In addition to that excise duties should also include energy intensive and polluting and luxury goods.

Pricing is an important issue in the Chinese economy as well. The development of prices should leave up to the market. The communist party needs to stop triggering the pricing. Pricing by the government will be reduced to public facilities and services and they have to be transparent and should be controlled by the public. The inflation rate of 2013 is 2.6 % which is lower than the goal from the Chinese government which was 3.5 %.This means that reforms according pricing would be less risky. During the Congress of November 2013 the party promised to give the market a “crucial rule” due to the establishing of prices for oil, gas, electricity and water. But the prices were artificially depressed. This resulted into low prices for industry and consumers but increased waste and environmental consumption. [5. http://www.n-tv.de/wirtschaft/Inflation-kommt-Chinas-Fuehrung-entgegen-article12046001.html]

To implement all these reforms is going to be very difficult. You can just wait and see if the communist party will manage it and how fast they can handle this process. Even the leader of the party Xi Jinping and the Premier Li Keqiang are claiming about to many influences by powerful interest groups. “Without a reform of the political system – economic reforms cannot be successful.” State monopolies and party functionaries are too strong, since they have something to lose. Does it seem that the reforms make the political system of China more visible to deprive the power of those who are hiding or is it more a strengthening of the party and the continuing of ‘Monopoly’?

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