Chinese experts urge Beijing to push past obstacles to a unified national market

The upside of undoing the country’s patchwork of regional protectionism is seen as greater than ever, says Alexander Davey. The challenge will be to bring local cadres along.

Integrating China’s domestic market for goods and services will help Xi Jinping realize his key goals of insulating the economy against external risks, boosting industrial upgrading, and reducing the country’s reliance on exports, according to Chinese scholars. A MERICS Expert Debate Analysis shows why the task – widely recognized as a huge challenge – appears more urgent than at any time since economic liberalization began in the 1980s. Although Xi raised the issue after coming to power in 2012, it was not until 2022 that Beijing began legislating to undo the patchwork of regional rules and protectionism – and progress has been slow.

Experts cast the unified national market as China’s shield against global shocks

As economies around the world reel from the effects of the US-Israeli war against Iran, one line of analysis holds that a “unified national market” would help China to better absorb external shocks. Huang Qiusheng, a Distinguished Research Fellow at the Hunan Provincial Center for Contemporary Chinese Marxism Studies, argues that improving domestic flows of economic output would “hedge against the uncertainties of the global economic cycle” (see graphic). Huang Kainan, a Special Researcher at the Shandong Provincial Research Center for Xi Jinping Thought, says a more integrated market with more efficient allocation of labor, capital and land would “enable effective responses to external risks and challenges.”

China’s recently released 15th Five-Year Plan calls on all levels of government to improve regulatory frameworks to “resolutely remove bottlenecks and obstacles hindering the development of a unified national market” and “eliminate local protectionism and market segmentation.” The new push for a unified national market comes four years after the State Council issued a landmark guideline making it a top-level priority. Since then, Beijing has, for example, issued guidelines requiring all levels of government to align with national market rules and accelerated efforts to unify technical standards and quality requirements.

A single market can turn new productive forces into economic power

An integrated market is expected to bolster what Xi calls China’s “new quality productive forces” – technological upgrading, research and development innovation, and advanced manufacturing. Xia Cailiang, Senior Economist at the School of Economics at Beijing Technology and Business University, and Huang Xiankai, a former Chinese Communist Party secretary and professor at the same university, argue that market integration – supported by reforms to China’s restrictive household registration system (“hukou”) or to a tax system that allows regions to dole out incentives – could help China’s economy transition from relying mainly on “being large to being strong,” which is key to driving forward innovation.

Beijing must break market barriers to unlock domestic demand

Other scholars note that reforms could strengthen China’s domestic economy by generating more demand at home and reducing reliance on foreign markets. One expert says that tighter links between domestic production and consumption would strengthen the “domestic economic cycle.” Guo Liyan, Deputy Director and Research Fellow at the Institute of Economics of the China Academy of Macroeconomic Research, describes the domestic market as a strategic resource and argues that expanding domestic demand is the central task. Li Yuju, Deputy Director at the Xi Jinping Research Center for Economic Thought, similarly presents China’s “super-sized” market and growth potential as a major advantage – while also acknowledging the variety of entrenched obstacles to a unified national market.

Local fragmentation is holding China’s economy back

These include quality standards, pricing practices, and so-called factor access restrictions that make it difficult for non-local companies to access capital, land, labor, energy, data and technology as easily as local competitors. Li also calls out local authorities’ reluctance to recognize qualifications acquired elsewhere (including licenses, certifications, and professional qualifications required to operate) as well as local favoritism in government procurement. The underlying claim is that the domestic market – a core economic asset – remains surprisingly underdeveloped, due in no small part to strong local governments.

Since the start of reform and opening in the late 1970s, China’s administrative structure strongly incentivized localities to promote economic growth in their jurisdictions. This helped spur rapid economic growth and local experimentation, but also fractured the national market by fostering bureaucratic barriers that favor local companies and make it harder for non-local ones to compete. As a result, businesses often found it easier to expand overseas than to compete in a neighboring city or province. With Xi looking to move Chinese industry up the economic value chain and with some foreign markets becoming more difficult to access, China increasingly needs a more efficient integrated national market.

This makes the removal of local protectionism and monopolies essential. Wang Hongmiao, Researcher, Institute of Economics, Chinese Academy of Social Sciences, argues such a step would “accelerate comprehensive market-oriented reform,” which is not only crucial for improving economic efficiency, but also for “promoting greater social equity.” Huang Zhen, Professor, Institute of Financial Law, Central University of Finance and Economics, notes that increasing familiarity with the law is already leading more and more companies to use legal channels to protect their rights and interests, particularly in securing market access.  

New KPIs must force officials to build a unified national market

Beyond legal and regulatory reforms, experts are also calling for a reform of the incentive structure that makes local party-state cadres drivers of market fragmentation. Xia Cailiang and Huang Xiankai argue that the party should stop promoting local officials on the basis of short-term economic growth, and instead prioritize their successes in a more sustainable, innovative, fiscally sound and nationally integrated economy. In their view, indicators such as “fairness of the market environment,” “technological innovation,” and “ecological and environmental protection,” should be given greater weight, with the aim of steering local governments away from pure competition towards more coordination between regions.

This implies a major shift in China’s administrative culture as it has developed over the last half century. Li of Beijing’s Xi Jinping Research Center for Economic Thought stresses the need to correct cadres’ “misguided approaches to evaluating official performance records” by encouraging them to prioritize national economic efficiency over purely local economic gains. Reforming the incentive structure is seen as playing a leading role in improving center-local economic coordination. If Beijing fails to stop local cadres from being rewarded for boosting local growth and protecting local interests, China will continue to struggle to build a single market.