OECD Reviews of Regulatory Reform OECD Reviews of Regulatory CHINA Reform DEFINING THE BOUNDARY BETWEEN THE MARKET AND THE STATE CHINA China’s advance to a market economy is among the greatest economic success stories of modern times. China has made enormous progress in developing the modern legal and regulatory DEFINING THE BOUNDARY foundation for the market economy. The private sector is now the main driver of growth, and new laws have gone a long way toward establishing private property rights, competition, and BETWEEN THE MARKET AND THE STATE mechanisms for entry and exit comparable to those of many OECD countries. At the same time important challenges remain, including further clarification of the scope of state ownership, reform of relations among central and local governments, firmer establishment of the rule of law, and strengthening of regulatory institutions and processes. China’s transition has recently been reviewed under the OECD Regulatory Reform Programme. The review focuses on the overall economic context for regulatory reform, the government’s capacity to manage regulatory reform, competition policy and enforcement, and market openness. The review also examines the regulatory framework in the electricity and water sectors. As for OECD countries, the review follows a multidisciplinary and highly interactive approach. A number of OECD instruments and policies are used in this assessment, although the review also takes into account the specific challenges faced by the Chinese authorities. The review contains a comprehensive set of policy recommendations, which should support China in its efforts to implement regulatory reforms in order to boost economic growth, job creation, innovation and investment. O E C D R e v ie w s o f R e g u la t o r y R e The full text of this book is available on line via these links: f o www.sourceoecd.org/emergingeconomies/9789264059399 rm www.sourceoecd.org/governance/9789264059399 C Those with access to all OECD books on line should use this link: H www.sourceoecd.org/9789264059399 IN A SourceOECD is the OECD’s online library of books, periodicals and statistical databases. For more information about this award-winning service and free trials ask your librarian, or write to us at [email protected]. ISBN 978-92-64-05939-9 -:HSTCQE=UZ^X^^: 42 2009 08 1 P www.oecd.org/publishing OECD Reviews of Regulatory Reform China DEFINING THE BOUNDARY BETWEEN THE MARKET AND THE STATE ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT The OECD is a unique forum where the governments of 30 democracies work together to address the economic, social and environmental challenges of globalisation. The OECD is also at the forefront of efforts to understand and to help governments respond to new developments and concerns, such as corporate governance, the information economy and the challenges of an ageing population. The Organisation provides a setting where governments can compare policy experiences, seek answers to common problems, identify good practice and work to co-ordinate domestic and international policies. The OECD member countries are: Australia, Austria, Belgium, Canada, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, the Slovak Republic, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The Commission of the European Communities takes part in the work of the OECD. 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FOREWORD Foreword T he OECD Review of Regulatory Reform in China is one of a series of country reports carried out under the OECD’s Regulatory Reform Programme, in response to the1997 mandate by OECD Ministers. Along with the review of the People’s Republic of China, the OECD has assessed regulatory policies in 23member countries, and in Russia and Brazil. These reviews aim at assisting governments to improve regulatory quality – that is, to reform regulations to foster economic growth and attain important social objectives. The reviews draw on the 2005 Guiding Principles for Regulatory Quality and Performance, which bring the recommendations in the 1997 OECD Report on Regulatory Reform up to date, and build on the 1995 Recommendation of the Council of the OECD on Improving the Quality of Government Regulation. The country reviews follow a multi-disciplinary approach and focus on the government’s capacity to manage regulatory reform, including regulatory frameworks in specific sectors. Taken as a whole, the reviews demonstrate that the implementation of a well-structured programme of regulatory reform can make a significant contribution to better economic performance, boost opportunities for future investment and enhance social welfare. Economic growth, job creation, innovation, investment and new industries are boosted by effective regulatory reform, which also helps to lower prices and increase choices for consumers. Comprehensive regulatory reforms produce faster results than piece-meal approaches and help countries to adjust more rapidly and easily to changing circumstances and external shocks. At the same time, a balanced reform programme must take into account social concerns. Adjustments in some sectors have been painful, but experience shows that costs can decrease if reform is accompanied by support measures, including active labour market policies. While reducing and reforming regulations are key elements of a broad programme of regulatory reform, experience also shows that in more competitive and efficient markets, new regulations and institutions may be necessary to ensure compatibility of public and private objectives, especially in the areas of broad services to the public. The challenges faced by sectoral regulatory authorities are discussed at length in this report. Sustained and consistent political leadership is another essential element of successful reform, and a transparent and informed public dialogue on the benefits and costs of reform is necessary to build and maintain broad public support. The policy options presented in the reviews may pose challenges for each country. However, the in-depth nature of the reviews reflect the emphasis placed by the OECD on ensuring that the policy options presented are relevant and attainable within the specific context and policy priorities of the country. The Regulatory Reform Review of China is divided into three sections. The first covers the overall economic context for regulatory reform. The second section assesses China’s policies covering the government’s capacity to manage regulatory reform, competition policy and enforcement, and market openness. The final section examines the regulatory framework for the provision of public services and includes specific reports on the electricity and water sectors. OECD REVIEWS OF REGULATORY REFORM: CHINA – ISBN 978-92-64-05939-9 – © OECD 2009 3 ACKNOWLEDGEMENTS Acknowledgements T he OECD Review of Regulatory Reform in China could not have been completed without the co-operation of many Government officials from the People’s Republic of China. Special thanks are given to the Department of Economic System Reform of the National Reform and Development Commission, the OECD’s partner in the project. The OECD would also like to thank following Chinese agencies for the insights and input provided: Administration for Quality Supervision Inspection and Quarantine, China Bank Regulatory Commission, China Securities Regulatory Commissions, Ministry of Environmental Protection, Ministry of Commerce, Ministry of Water Resources, State Administration for Industry and Commerce, State Environmental Protection Agency, State Energy Regulatory Commission, the Legislative Affairs Commission of National People’s Congress and the Legislative Affairs Office of the State Council. A draft of this review was discussed with a Chinese delegation led by Xu Shanchang, Deputy Director General of the National Development and Reform Commission, during a meeting of the Group on Regulatory Policy on 1December2008. Special thanks is given to the following officials and individuals who acted as lead reviewers at the meeting: Philip Andrews-Speed, Director of the Centre for Energy, Petroleum and Mineral Law and Policy, University of Dundee, Scotland; Gary Banks, Chairman, Australian Government Productivity Commission; John Graham, Dean, School of Public and Environmental Affairs, Indiana University, United States; Charles Pigott, former Senior Economist, China Desk, Economics Department, OECD; Russell Pittman, Director of Economic Research and Director of International Technical Assistance, Economic Analysis Group, Antitrust Division, United States Department of Justice; and Pierre Van de Vyver, Director General, IGD-The French Institute for PPPs. This review benefited from input of experts from member Countries in their delegation in Paris and embassies in Beijing. It reflects contributions from the OECD Group on Regulatory Policy, the Working Party on Regulatory Management and Reform, the Global Forum on Competition, and the Working Party of the Trade Committee. In addition, the Secretariat would like to acknowledge the comments of the Business and Industry Advisory Committee (BIAC) China Taskforce and the Trade Union Advisory Committee (TUAC). As an input to the Review, the OECD organised two informal seminars in Beijing in September2007 and March2008. The OECD would like to acknowledge contribution of the following officials and individuals at those meetings: Wang Xixing, Assistant Dean, Beijing University Law School; Lu Xiaobo, Director, Weatherhead East Asian Institute, Patrick Jomini, Assistant Commissioner, Australia Productivity Commission; Graeme Hodge, Director of the Centre for Regulatory Studies, Monash University, Australia; Michael Young, Australian Team Leader, China-Australia Governance Program; Peter Jensen, Counsellor Development, Australian Embassy Beijing; Daniel Trnka, Director, Department for OECD REVIEWS OF REGULATORY REFORM: CHINA – ISBN 978-92-64-05939-9 – © OECD 2009 5 ACKNOWLEDGEMENTS Regulatory Reform and Public Administration Quality, Czech Ministry of Interior; Yasutomo Kojima, Economic Affairs Bureau, Japanese Ministry of Foreign Affairs; Shin Kim, Director, Regulatory Research Center, Korea Institute of Public Administration, Hyung-Jong Lee, Deputy Director, Economic Organizations Division, Korean Ministry of Foreign Affairs and Trade, Per-Arne Hjelmborn, Minister – Economic Affairs, Embassy of Sweden Beijing; Miguel Ceballos-Baron, Counsellor, EU Delegation, Beijing; Peng Xiaohua, Principal Counsel, PRC Resident Mission, Asian Development Bank, Daryl Biggar, Senior Economist, Australian Competition and Consumer Commission, Karen Hill, Director of Regulatory Services, Department for Business, Enterprise and Regulatory Reform, UK, and Daniel Assandri, Head of Power Systems, ABB (China) Ltd. The main authors of this review are Charles Piggott – Chapter1, The Economic Reforms of the People’s Republic of China; Nick Malyshev – Chapter2, Regulatory Governance; Michael Wise – Chapter3, The Challenges of Transition for Competition Law and Policy; Malory Greene – Chapter4, Enhancing Market Openness through Regulatory Reform; Reza Lahiji – Chapter5, Infrastructure Services–Lessons from 30Years of Reform in OECD Countries; Philip Andrews-Speed – Chapter6, Power Sector Reform; and, Simon Spooner–Chapter7, Water Sector Reform. Special thanks is given in the OECD Secretariat to Aziza Akhmouch, Greg Bounds, Irene Hors, Laura Munro, Francois Nguyen (IEA), Flemming Olsen, Peter Scherer, Raed Safadi, Jessica Hua Su, Xiao Wang and Charlie Tsai for useful insights and input; to Pedro Andres-Amo for his tireless efforts on all fronts, to Randy Holden who edited the review and to Jennifer Stein for the review’s layout and preparation. This project was managed by Nick Malyshev under the supervision of Josef Konvitz and with the encouragement of Mario Pezzini and Odile Sallard. It was carried out in the context of the horizontal Programme on Regulatory Reform which is headed by the Deputy Secretary-General Art De Geus. The Regulatory Reform Review of China was made possible with the financial support of Australia, Canada, the Czech Republic, Japan, and the United Kingdom. The OECD Review of Regulatory Reform in China is published under the responsibility of the Secretary General of the OECD. 6 OECD REVIEWS OF REGULATORY REFORM: CHINA – ISBN 978-92-64-05939-9 – © OECD 2009 TABLE OF CONTENTS TTaabbllee ooff CCoonntteennttss List of Abbreviations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Regulatory Reform Priorities in the Wake of the World Economic Crisis . . . . . . . . . . . 15 Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Part I The Macroeconomic Context Chapter 1. Economic Reforms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 The gradual transition to the market and its macroeconomic consequences. . . . . 32 Taking stock: Progress on reform so far and its contributions. . . . . . . . . . . . . . . . . . 48 Regulatory reform: The remaining challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 Part II Thematic Issues Chapter 2. Regulatory Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 Administrative reforms launched in the late1990s . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 Bureaucratic reality limiting more profound change. . . . . . . . . . . . . . . . . . . . . . . . . . 96 The institutional framework for the creation of regulation . . . . . . . . . . . . . . . . . . . . 98 Regulation at different levels of government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 Tools for regulatory quality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 Administrative and judicial review. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 Regulatory impact analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 Keeping regulation up to date and improving the business environment . . . . . . . . 109 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 Policy options for consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114 Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116 Chapter 3. The Challenges of Transition forCompetition Law and Policy . . . . . . . . . . . 119 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120 Competition policy foundations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120 Substantive issues: Content of the competition law . . . . . . . . . . . . . . . . . . . . . . . . . . 128 Institutional issues: Enforcement structures and practices . . . . . . . . . . . . . . . . . . . . 139 Limits of competition policy and enforcement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143 Competition law and policy in the transition to a developed market economy . . . 146 Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150 OECD REVIEWS OF REGULATORY REFORM: CHINA – ISBN 978-92-64-05939-9 – © OECD 2009 7 TABLE OF CONTENTS Chapter 4. Enhancing Market Openness throughRegulatory Reform . . . . . . . . . . . . . . . 151 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152 The economic and trade policy context. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152 The policy framework: Basic principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155 Transparency: Equal access to information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156 Non-discrimination: A core concept. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164 Unnecessary trade restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168 Internationally harmonised measures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172 Streamlining conformity assessment procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174 Some policy options for the future . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180 Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181 Part III Regulatory Frameworks ForPublic Services Chapter 5. Infrastructure Services: Lessonsfrom30Years of ReforminOECD Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190 Infrastructure services in OECD countries: The state of play . . . . . . . . . . . . . . . . . . . 191 Policy options and challenges regarding infrastructure services. . . . . . . . . . . . . . . . 199 Lessons for the reform of infrastructure governance in China. . . . . . . . . . . . . . . . . . 218 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223 Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223 Chapter 6. Power Sector Reform. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 230 The context of the reforms in2002-04 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 230 Reforms to China power sector, 2002to2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235 Key trends and changes in China’s power sector, 2004-08 . . . . . . . . . . . . . . . . . . . . . 241 Re-evaluation of China’s sector reform plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 254 Implications of recent lessons in OECD and developing countries . . . . . . . . . . . . . . 259 Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 264 Chapter 7. Water. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 268 Regulatory reform in China’s water sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270 Water quantity management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 292 River basin water quality and integrated pollution control. . . . . . . . . . . . . . . . . . . . . 296 Drawing on the experience of water utility management from OECD countries. . . 305 Lessons for China. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 316 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 319 Biblography. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 320 Boxes 1.1. How economic reforms contribute to growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 1.2. Exchange rate management during the first half of reforms. . . . . . . . . . . . . . . . 36 1.3. Local protectionism has been declining in importance . . . . . . . . . . . . . . . . . . . . 49 1.4. China’s social benefits system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 8 OECD REVIEWS OF REGULATORY REFORM: CHINA – ISBN 978-92-64-05939-9 – © OECD 2009