It is time to break down walls.

The Chinese government’s new guideline on building a unified national market signalled its resolve to demolish walls in its fragmented domestic market.

The concern is that the Chinese market is “big but not strong”. Local governments may set rules to protect their jurisdiction’s merchants and financial interests, creating walls that deter external traders. The jurisdiction gained, but the country lost. China also lost potential economic growth when foreign companies were put off by the inconsistent regulations across regions.

Now China wants to pursue growth through a unified national market that is highly efficient, standardised, open and fairly competitive. This will be done through “breaking down local protectionism and market segmentation, clearing key blockages that restrict the economic cycle, and promoting the smooth flow of factors of production on a wider scale”.

The acceleration in creating a unified national market is good news. If the obstacles above were removed, the market mechanism would play a better role in allocating resources, achieving greater economic efficiency.

The new guideline has drawn much attention. The public may wonder about China’s reasons for introducing the guideline now. Foreign entrepreneurs and investors, such as those in nearby ASEAN countries, would want to know the policy implications for their businesses.

Reasons for the guideline

The concept of a unified national market is not new. The Chinese government has long been considering it. In 2004, researchers from the Development Research Centre of the State Council published a report on local protectionism and the importance of clamping down on it. In 2013, the government pointed out that “efforts are to be made to build a market system that is uniform but open, orderly and competitive”.

However, local protectionism remained a problem in practice. When a local government conducts a random national inspection on a product, the passing rates for local brands are often higher than that for foreign brands.  The problem seemed to be exacerbated by the COVID-19 pandemic. When an outbreak occurred in Shanghai, reports emerged that some local authorities erected roadblocks or put healthy truck drivers into quarantine, disrupting logistics services across cities. The State Council had to stress that airports, harbours and highways must remain open amidst the restrictions. Other factors leading to local protectionism lurk in the background. Geopolitical tensions, such as those between China and the United States, or those between Russia and Ukraine, cast a gloom on consumption. These external events cannot be easily controlled. With less domestic spending, investments and exports to drive economic demand, the Chinese government needs to look at improving economic supply.

To do so, China must tackle anti-competitive practices across regions. All factors of production, such as the labour, land, capital, and energy needed to produce goods and services, must be equally accessible, fairly competed for and efficiently utilised.

Breaking down the walls of local protectionism also fits in nicely with China’s dual circulation strategy, which was proposed in 2020. On the one hand, a domestic market with less local protectionism would boost the economy’s internal circulation. On the other hand, foreign investment and improved productivity facilitate the economy’s external circulation.

Impact on ASEAN

In the long run, a unified market can benefit economic development across regions in China. It will improve productivity, lower production and transaction costs, promote market efficiency, and increase China’s global competitive advantages. What does this mean for ASEAN?

China is the biggest trading partner of ASEAN. ASEAN’s exports to China grew at 10.4 per cent annually from 2010 to 2019, and its imports from China grew 12.5 per cent annually during the same period. The improvement in China’s market environment, infrastructure, and circulation of factors of production will increase the supply of its commodities and products. It will also ensure the quality of Chinese goods, providing more trading options for ASEAN. Hence, a stronger Chinese market will exert positive externalities on ASEAN countries.

In addition, China has become one of the leading investors in the ASEAN region in recent years, according to a report from The Hong Kong Trade Development Council (HKTDC). The main investment activities are in finance and insurance, real estate, manufacturing, wholesale and retail trade, as well as construction. In 2020, mainland China’s Foreign Direct Investment (FDI) in the region amounted to US$7.62 billion, becoming ASEAN’s fourth-largest FDI source after the US, Hong Kong and Japan.

It is clear that ASEAN is a very attractive region to Chinese investors. China and ASEAN’s economic growth are positively correlated. A stronger Chinese market will produce larger enterprises. And some of them will be eager to enter a different but nearby market, such as ASEAN. Hence, the unified national market will promote China’s long-term prosperity and play a role in its neighbours’ economic performance.

The guideline is also good news for foreign investors in China. In 2021, ASEAN’s actual investment in China amounted to US$10.58 billion, of which the top three investment source countries are Singapore, Thailand and Malaysia. An open, rule-based and competitive business environment will attract more foreign trade and investment.  Instead of navigating multiple sets of standards across different regions, all companies (both local and foreign) will face the same rules. Hence, foreign companies are less likely to be discriminated against by regional governments and find it easier to streamline their supply and production chains. They can smoothen their production process, reduce coordination and transaction costs, and organise their supply chains more efficiently.  Moreover, they are more likely to compete with local companies in a fairly competitive market. Hence, the new guideline will make investors more confident. This is particularly important at the current stage as Shanghai’s lockdowns have sparked fear and frustration, shaking investor confidence in the Chinese market. We should be aware that building a unified national market is a long-term goal for China. The Chinese market is not likely to turn market-oriented all at once. The guideline is more like “a catalyst for further regulation and implementation guidelines”. The central government will have to make an effort to change local governments’ GDP-oriented mindsets and convince them to cooperate. Although the central government is determined in pursuing a unified market, difficulties await. It will take years to realise this goal. But what businesses in ASEAN countries can do is prepare for this change. When the last few walls are gone, it will be time for businesses to leap.

The article is an abridged version of the one first published in ThinkChina.