Tuesday, October 1, 2013

China's latest reform experiment

China has perfected the art of reform by stealth. By this I mean the strategy of initiating reforms in a small-scale and low-key manner - so as to figure out the challenges, prepare the political ground, provide adjustment cushions for businesses and citizens - before scaling them up in a big-bang.

The latest is an attempt to introduce the next generation of external market liberalization in the services sector by opening a 11 square mile Free Trade Zone (FTZ) in Shanghai. The FTZ's would have liberalize rules for financial market transactions and the services sector. Financial sector reforms in the FTZ would include liberalized norms for opening of banks, fewer restrictions on capital movements, and allowing market determined interest rates. Other reforms include easing of restrictions on foreign investments in 18 sectors, including general business, shipping, culture, and social sectors. Another important focus is on improving the ease of doing business in this area through management innovation and improvements in the regulatory environment and the legal system.

This follows the pattern of liberalization that has made China a global manufacturing powerhouse. Many of these measures would neatly fit into the basket of desired set of reforms for a country seeking to open up its financial and services sector. What is surprising is how the Chinese policy makers happen to hit the right policy buttons with such regularity. And the understated and cautious strategy to introduce those reforms is equally impressive.

Irrespective of how this will pan out, there is a compelling case that this pragmatic approach has the best likelihood of success in the implementation of such complex and generic sectoral reforms. Are policy makers on the other side of the Himalayas, who too face similar transitional compulsions, watching?

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