Guo Kai on China's need for a unified national market
The central bank official-turned-thinktank leader says fragmentation is a genuine concern for China, and the rule of law curtailing local government intervention is the only fundamental solution.
Back in 2022, when China publicized the Opinions on Accelerating the Construction of a Unified National Market, some called it another centralization push by Xi Jinping. Similar to a Western diplomat’s doubts that I have come across in Beijing, the U.S.-China Economic and Security Review Commission said in its 2022 Annual Report to Congress
Xi notes his intentions for consolidating and centralizing in his Fifth Plenum speech, arguing that his “new development dynamic must be built upon a unified national market, not on small and fragmented local markets.”
To many in the West, it seems counter-intuitive that China, a one-party, relatively homogenous, unitary state speaking one language, needs to emphasize building a unified national market. But more experienced China watchers, such as Charles Parton at the Council on Geostrategy, understood the need to address the enormous fragmentation in the economy and regulation within China
Building a unified national market will aim to get rid of the age-old problem of barriers and protectionism at provincial and lower levels, thereby promoting the free flow of goods, services, and the means of production.
Below is a quick read on the subject by Guo Kai, a PKU-and-Havard-trained former People’s Bank of China official now running a leading non-governmental think tank in Beijing focusing on the economy and finance.
The WeChat blog of the National School of Development (NSD) at Peking University published the following transcript on November 25, 2024.
郭凯：统一大市场的法治基石与人口流动规律
Guo Kai: The Legal Foundation of a Unified Market and the Patterns of Population Mobility
On the afternoon of September 22, 2024, 郭凯 Guo Kai, Executive President of the China Finance 40 Forum, a leading non-governmental think tank on China’s economy and finance, gave the following talk in the forum “The Path to a High-Level Market Economy,” part of the 30th anniversary celebration of the National School of Development (NSD) at Peking University.
As a highly centralized country, China has long achieved a unified system of “standardized carriage gauges and a common written language,” free from obstacles related to language, population, institutional differences, or central government authority. In theory, China should have a highly integrated national market. Why, then, is the construction of a unified national market still emphasized? The root causes merit deeper exploration.
The Legal Experience of the United States in Building a Unified Market
When it comes to unified national markets, only a few countries worldwide offer valuable reference points. The European Union is not among them, as it consists of multiple independent states with diverse languages and significantly different institutional systems. Despite its commitment to building a unified market, the EU remains constrained by these differences. In contrast, China has a unified currency and fiscal system, providing a solid foundation for developing a unified national market.
If we follow the EU’s definition of a unified market, its core lies in the free movement of four key elements: people, capital, goods, and data. Only when these elements can flow freely can a market be truly considered unified. By this standard, the United States may serve as a reference point. Geographically, the U.S. is vast, similar to China. Politically, however, the U.S. operates under a federal system, where power is largely decentralized to state governments, making it quite different from China’s highly centralized governance. Despite these differences, the U.S. has largely achieved a unified domestic market, offering valuable insights.
One significant obstacle the U.S. faced in building a unified market was the strong local protectionism driven by state governments. These governments possess extensive administrative and legislative powers, control their judicial systems, and are accountable primarily to their local populations. This setup can foster strong protectionist tendencies, artificially fragmenting the market and hindering its unification. In its early history, the U.S., as a federal system, suffered from rampant local protectionism, with states implementing various measures to restrict external businesses and limit the movement of economic factors. However, the U.S. eventually overcame this challenge, and today, there is no pressing need for further integration of its domestic market.
The U.S. successfully mitigated local protectionism not only through advancements in transportation and communication but, more importantly, through the refinement of its legal system. At the constitutional level, the U.S. clearly delineated the division of power between the federal and state governments, granting the federal government authority over interstate commerce. A series of landmark judicial decisions, particularly those by the Supreme Court, further clarified the relationship between central and local authorities, restricting state governments’ discretionary powers. This legal framework provided a robust institutional guarantee for the formation of a unified market.
For instance, a 1924 dispute over steamboat licensing on the Hudson River exemplified the federal government’s authority in regulating interstate commerce and highlighted the judiciary’s role in resolving such conflicts. In this case, a New York-based company challenged the validity of a federal license within the state’s waters, arguing that the Hudson River fell under state jurisdiction and should be governed by state-issued licenses. The case reached the Supreme Court, which ultimately ruled that the federal government had the authority to issue interstate trade licenses. This decision solidified the federal government’s dominance in regulating interstate commerce and clearly defined the licensing authority between federal and state governments.
A 1939 case involving the cashing of bank drafts further underscored the importance of federal law in interstate economic activities. A bank-issued draft was refused payment in Alabama because the state did not recognize the issuing bank’s interstate license. The case was also taken to the Supreme Court, which ruled that a banking license issued in one state should be recognized nationwide, ensuring smooth interstate financial transactions.
Another unavoidable issue under the federal system is conflicts in legal applicability. Laws enacted at the state and federal levels may sometimes contradict each other, necessitating clear principles for legal precedence. The resolution of legal conflicts, exemplified by Ohio’s disputes with federal regulations and cases such as Swift v. Tyson, gradually established principles to resolve such legal contradictions. These judicial precedents limited state governments’ discretionary powers in certain domains, ensuring the unity and authority of the legal system.
These cases not only demonstrate the complexity of the legal system under the U.S. federal framework but also highlight the critical role of the rule of law in maintaining market unity and fostering fair competition.
The foundation of the rule of law lies in the principle of equality before the law. This means that local governments, private enterprises, and state-owned enterprises, regardless of their size, all enjoy equal rights and obligations within the legal framework. Such a system provides a solid foundation for the healthy development of a market economy.
One of the key advantages of law in shaping a business environment is the principle that “everything not explicitly prohibited by law is permissible.” This principle essentially forms a natural negative list system. Within this framework, unless a law explicitly forbids an action, the government has no authority to intervene. This effectively limits local governments’ discretionary power, ensuring fair competition and creating a favorable business environment for external enterprises. The negative list approach is not only significant in international trade but also has important applications in domestic governance.
I once attended a conference on the negative list system, where a (Chinese) government official posed an intriguing question: Why does China place such strong emphasis on the negative list system, applying it not only in international trade but also in domestic governance, while other countries rarely mention it? Reflecting on my personal experiences and understanding of the U.S. legal system, I offered an initial analysis. In my view, the emphasis stems from China’s traditional administrative approach. China’s governance has historically relied on a positive list model, meaning actions require explicit government approval before they can be taken. In contrast, the U.S. Constitution takes the opposite approach, explicitly listing government powers, with all unenumerated rights reserved for individuals, businesses, and civil society. This fundamental difference explains why China needs to emphasize the negative list system—to clearly delineate government authority, promote free market competition, and reduce the market fragmentation caused by local protectionism.
As the optimal tool for shaping a business-friendly environment, the rule of law fundamentally provides clear and stable regulatory frameworks. Only within a legal framework can the principle of “everything not prohibited is allowed” be upheld, effectively curbing local governments’ discretionary power, reducing protectionism, and fostering a more unified, open, and orderly competitive market environment.
Population Mobility and the Development of a Unified Market
China has made significant progress in building a unified national market across multiple sectors. However, among key factors such as goods, people, capital, and data, the unification of the labor market remains insufficient. For example, while the dairy industry has achieved nationwide price unification and capital flows freely, population mobility still faces many obstacles.
Observing population and housing distribution in the U.S., the two exhibit a strong linear correlation: areas with high population density also have ample housing supply, reflecting a “housing follows people” pattern. Moreover, the U.S. population distribution adheres to Zipf’s Law, where the largest cities have significantly larger populations than secondary cities. This concentrated distribution fosters economies of scale, enhances innovation, and improves public service efficiency. This pattern is not unique to the U.S.; it has also been validated in Mexico, South Korea, Japan, and several European countries.
By contrast, China’s population distribution deviates from Zipf’s Law. Large cities are relatively smaller, and population distribution is more evenly spread. This pattern may be policy-driven, aimed at controlling urban expansion and promoting the development of small and medium-sized cities. However, this strategy has led to structural issues in the housing market—housing surpluses in smaller cities and shortages in major cities. The imbalance is particularly acute as people migrate from rural areas to urban centers and from smaller to larger cities.
To address this, reducing barriers to population mobility—especially by facilitating the orderly migration of people from rural and small urban areas to larger cities—would not only expand the real estate market but also stimulate domestic demand and alleviate housing market challenges. Research suggests that if basic social security services were provided and migration restrictions eased, the mismatch between housing supply and demand would be greatly mitigated. Adjusting housing supply structures to align with population movement patterns, reducing excess supply in third- and fourth-tier cities, and increasing housing availability in first- and second-tier cities would not only promote a healthier real estate market but also serve as a crucial component of broader macroeconomic policy.
Xu Gao made a speech in the same forum.
