Liu Wei: Forming an Economic Order That Is Both "Dynamic" and "Under Control"
The 2024 Central Economic Work Conference, building upon a summary of practical experience, further deepened our regular understanding [1] of economic work. It outlined "Five Must-Coordinates," the first of which is: "We must coordinate the relationship between an effective market and a proactive government, forming an economic order that is both 'dynamic' [2] and 'manageable.'" This provides an important framework for our deep understanding and mastery of the relationship between the government and the market—the core issue of economic structural reform.
Our Party's regular understanding of handling the government-market relationship has further deepened
In the theoretical and practical exploration of economic development with Chinese characteristics, our Party’s understanding of how to handle the relationship between the government and the market under the conditions of a socialist market economy has been continuously deepening. During the new period of reform and opening up initiated by the Third Plenary Session of the 11th CPC Central Committee, and especially after the decision on economic structural reform made by the Third Plenary Session of the 12th CPC Central Committee, market mechanisms were gradually introduced into China’s economic practice as a means of regulation. The report of the 14th National Congress of the CPC explicitly stated that the target of economic structural reform was to establish a socialist market economy system. Simultaneously, it clarified that the market should play a "basic role" in resource allocation under the macroeconomic regulation of the socialist state. Subsequent reform processes continuously emphasized strengthening and improving this "basic role." Discussing the government-market relationship on the foundation of the socialist market economy system has allowed our Party to develop a more profound understanding of their roles in resource allocation.
Entering the New Era, particularly since the decision on comprehensively deepening reform was made at the Third Plenary Session of the 18th CPC Central Committee, our understanding of the market's role in resource allocation and the relationship between the government and the market has deepened further. That session emphasized: "Economic structural reform is the focus of comprehensively deepening reform; the core issue is handling the relationship between the government and the market well, letting the market play the decisive role in resource allocation and better playing the role of the government." On one hand, elevating the market’s role from "basic" to "decisive" placed greater emphasis on the importance of market mechanisms. On the other hand, clarifying the need to "better play the role of the government" placed greater focus on the effectiveness of government regulation. The Third Plenary Session of the 20th CPC Central Committee made a decision to further comprehensively deepen reform, proposing to "give full play to the decisive role of the market in resource allocation and better play the role of the government." The 2024 Central Economic Work Conference proposed that we "must coordinate the relationship between an effective market and a proactive government, forming an economic order that is both 'dynamic' and 'manageable'." This reflects our Party’s continuous deepening of its regular understanding of economic work. By listing "leveraging the leading role of economic structural reform to promote the implementation of landmark reform measures" as one of the nine key tasks for 2025, the Party has greatly enhanced its practical resolve and theoretical consciousness in handling the government-market relationship.
The institutional foundation of an effective market lies in constructing a high-level socialist market economy system
The fundamental requirements of an effective market are reflected in two aspects: First, giving full play to the market's decisive role in resource allocation to ensure the market's sufficiency. Practice shows that the market economy is the most effective mechanism for resource allocation. To optimize resource allocation efficiency and maximize benefits, the role of market mechanisms must be fully utilized. Second, continuously increasing the intensity of the constraints that market mechanisms place on competitive behavior in resource allocation. Institutionally, enterprises in the market should be made to genuinely accept the "hard constraints" [3] of market rules. Market rules must reflect fair competition, the principle of exchange at equal value [4] must be implemented in the formation of transaction terms, and monopolistic behavior must be effectively prevented from undermining fair competition.
Constructing a high-level socialist market economy system is the necessary institutional foundation for handling the government-market relationship, forming an effective market, and achieving an economic order that is both "dynamic" and "manageable." The core lies in constructing a high-level system for market competition and high-level fundamental institutions of the market economy.
In constructing a high-level system for market competition, the key points lie in the development of systems for market entities and transaction systems. First is the system for market entities—namely, the corporate system. The level of a market economy is determined by the competitiveness of its market entities. This requires accelerating the construction of a modern enterprise system, enabling enterprises to truly accept hard constraints in terms of property rights, achieve effective internal checks and balances of powers, responsibilities, and interests within their governance structures, and consciously fulfill their external social responsibilities. At China's current stage, the key to building the system for market entities lies in adhering to and implementing the "Two Unswervinglys" [5] and cultivating more world-class enterprises. Second is the market transaction system—namely, the order of competition. In a narrow sense, the order of competition refers to the price determination system. Whether a market economy can effectively realize transactions depends on whether transaction terms can be smoothly reached. Price is the basic economic condition for a transaction. Whether competition is orderly depends on whether prices are truly determined by market supply and demand, and whether they reflect the principle of exchange at equal value required by fair trade. In a broad sense, transaction order refers to institutional arrangements affecting the realization of transactions, including various anti-monopoly systems, anti-price distortion systems, and competition systems against restrictions on the free flow of factors of production. At China's current stage, the key to building the market transaction system is to accelerate the construction of a unified national market while simultaneously advancing the reform of the market-based allocation of factors and improving the mechanism for factor price formation.
In constructing high-level fundamental institutions for the market economy, the key points lie in the development of the rule of law and the credit system. First is the rule of law. A market economy is an economy based on the rule of law; market entities must abide by contracts. This requires a force that transcends the market—the power of the state's superstructure—to provide protection. Only by improving the rule of law can we provide strong maintenance for the market competition system, including the protection of corporate property rights and market transaction systems. Second is the credit system. In terms of the institutional tools it employs, a market economy reflects credit relations; in terms of the moral foundation it rests upon, it requires the upholding of integrity. This necessitates improving the credit system and regulatory framework at the level of fundamental institutions, institutionalizing the moral order of "integrity."
The institutional condition for a proactive government lies in improving the macroeconomic governance system
In a modern market economy, macroeconomic governance is indispensable. This indispensability is reflected in two ways: First, market mechanisms allocate resources primarily through micro-level activities. For resource allocation at the macro level, market mechanisms struggle to produce a direct effect, necessitating macroeconomic regulation and governance. The primary subject of macroeconomic regulation and governance must be the government, specifically the central government, with macroeconomic policy as its primary means of achievement. Therefore, in terms of resource allocation, a "proactive government" refers to the government playing an active and systematic role in macroeconomic regulation and governance, achieving effective governance through scientific macro-control. Second, market mechanisms require a series of conditions to achieve effective resource allocation; in reality, these conditions are often difficult to satisfy fully. Consequently, market mechanisms always have certain limitations, which require the government to take action. A "proactive government" compensates for market failures, thereby improving the efficiency of resource allocation. It is for this reason that the relationship between the government and the market is the core issue of resource allocation in a market economy.
The Third Plenary Session of the 20th CPC Central Committee pointed out: "Scientific macro-control and effective government governance are inherent requirements for leveraging the advantages of the socialist market economy system." To achieve a "proactive government," it is institutionally necessary to improve the macroeconomic governance system. Different macroeconomic governance systems are built upon different basic systems and thus possess different characteristics. China’s macroeconomic governance system is built upon the foundation of the socialist system and possesses its own particularities and advantages, mainly manifested as follows:
First, the connotation of the governance system includes both macroeconomic policies and macroeconomic governance institutions. Specifically, as China is in the process of further comprehensively deepening reform, the reform measures themselves become important components of the macro-governance system. Reform itself is an important path to improving the efficiency of macroeconomic governance—a key characteristic that distinguishes China’s system from other market economies. Second, the macroeconomic policy system includes not only aggregate policies in the general sense (monetary and fiscal policy) but also structural and development policies. Macro-control possesses not only significant aggregate effects but also profound structural effects. Third, the adjustment of macroeconomic policy directions emphasizes both counter-cyclical regulation and cross-cyclical adjustment [6]. Fourth, regarding the relationship between macro-control and micro-operation, there is both government governance of market competition at the macro level and support for macro-control through the corporate system at the micro level; state-owned enterprises (SOEs), in particular, create important micro-level conditions for macroeconomic governance. Fifth, in terms of the methods of macro-control, regulation can generally start from the total demand side or be implemented from the supply side. The key lies in adjusting according to the changes in the principal contradiction [7] and the principal aspect of the contradiction of macroeconomic imbalances in different periods to effectively improve the level of macro-control. The system of socialism with Chinese characteristics provides a solid institutional foundation for achieving this shift in control methods.
Promoting a better combination of an effective market and a proactive government
To promote the continued steady, healthy, and sustainable development of the China's economy, we must coordinate the relationship between an effective market and a proactive government, forming an economic order that is both "dynamic" and "manageable." This means vibrant micro-entities, effective market mechanisms, scientific and moderate macro-control, and continuously improving governance efficiency and levels. This allows for coordination across micro and macro levels, short and long terms, aggregates and structures, and supply and demand. In the process of coordinating an effective market and a proactive government, we must respect objective economic laws and grasp the following contents:
First, grasp the internal link between the sufficiency and effectiveness of market competition and the necessity and standardized nature of government macroeconomic governance. In resource allocation, the government and the market are not opposed; they complement and promote each other, both aiming to improve resource allocation efficiency. The more effective the market mechanism, the more enterprises can accept the hard constraints of market rules, and the more sufficient the competition, the firmer the micro-foundation for effective macro-governance will be. Consequently, the level of macro-governance is likely to be higher, and market failures are more likely to be effectively compensated.
Second, scientifically define the functions of the market and the government. The functions of the market and the government in resource allocation are complementary. However, defining their roles does not mean mechanically carving out different fields and scopes. Both cover the entire process of resource allocation, but they address different problems and act in different ways. The market is more effective at handling resource allocation where property rights are clear and competition rules are fair; the government addresses resource allocation problems where the market struggles to function effectively. The market mechanism achieves resource allocation goals directly through competition among micro-entities, while the government relies more on indirect means to guide the activities of market entities from a macro level, realizing policy effects and achieving regulatory goals.
(Author: Liu Wei, former President of Renmin University of China) Source: Guangming Daily (January 21, 2025, page 11) Online Editor: Hui Hui