China’s “National Unified Market” – Standardizing the Domestic Market to Spur Internal Circulation
A new set of opinions from the central government describe how China will build a “national unified market” across a wide range of sectors and fields. The national unified market will seek to break down local protectionism and market segmentation by implementing standards and regulations that are applicable countrywide and integrating infrastructure across regions to increase market efficiency, promote fair competition, and ultimately boost domestic consumption and production. The national unified market is a key implementation of China’s “dual circulation” strategy and will likely act as a catalyst for further nationwide industry standards and market regulations in the coming years.
On April 10, 2022, the Central Committee of the Communist Party of China (CCCPC) and the State Council jointly released the Opinions on Accelerating the Construction of the National Unified Market (the “opinions”). This document outlines the creation of a “national unified market” to improve standardization and consistency in the implementation of regulations across a wide range of industries in China.
The construction of a national unified market was first proposed in the 14th Five Year Plan (FYP), released in early 2021, which sets out China’s economic development path for the period from 2021 to 2025. The 14th FYP calls for ”accelerating the construction of a large unified domestic market” and “optimizing the market environment by benchmarking against advanced international rules and best practices, promoting the coordination and unification of standards, rules, and policies in different regions and industries, and effectively eliminating local protectionism, industry monopoly, and market segmentation.”
According to the opinions, the aim of creating a national unified market is to “break down local protectionism and market segmentation, break open key blockages restricting the economic cycle, and promote the smooth flow of factors of production on a wider scale” while seeking to “accelerate the construction of a nation-wide unified market that is efficient, standardized, open, and promotes fair competition”.
The national unified market will act as a key tool to implement China’s dual circulation strategy, which aims to spur domestic demand (internal circulation) and simultaneously develop conditions to facilitate foreign investment and boost production for exports (external circulation).
Background: Local protectionism and market segmentation
Although the China market is one of the biggest in the world, it remains relatively segmented and inefficient, or as stated in the opinions, it is “big but not strong”. This is because it still suffers from a host of standardization and regulation issues, which lead to uneven growth of sectors across different regions and stymie the “internal circulation” of goods and services in the domestic market.
Local protectionism has been a fairly big obstacle to boosting domestic consumption in China, as provincial governments set up barriers for outside companies from competing with local companies in order to ensure growth within their own jurisdictions. Moreover, regulations and standards across sectors may vary significantly from region to region, meaning discrepancies in the quality of goods and services available across regions; thus, foreign companies may face a confusing array of requirements when entering a new region.
The aim of the national unified market is therefore to break down these barriers and boost domestic competition by further facilitating the flow of goods, services, and factors of production throughout the different regions of China, while also standardizing market regulations and standards across the country. To do this, the opinions propose widespread standardization of a range of industries and regulations, such as intellectual property rights (IPR) protection, market access, anti-monopoly regulations, and various industry-specific standards.
Standardizing market access
Intellectual property rights protection
The opinions call for ensuring consistent IPR protection by improving the institutional system for equal protection of economic property rights of all types of ownership. Moreover, the opinions state the need for standardizing the law enforcement of IPR protection regulations in order to ensure the rules are enforced equally. They propose to achieve this by improving coordination between law enforcement and judicial departments and clarifying rules for administrative law enforcement and judicial adjudication, and further standardizing the rules and procedures for compulsory measures involving property rights.
In addition, among other measures, the opinions call for:
- Protecting the property rights of enterprises and the personal and property safety of entrepreneurs.
- Promoting the innovation of the intellectual property litigation system.
Implementing a unified market access system
China implements a negative list for market access to dictate which industries are prohibited or restricted to private investment by companies in China. Although the list released by China’s central economic planner, the National Reform and Development Commission (NDRC), is applicable to the whole country, it has not stopped local governments from implementing similar lists of their own, further restricting companies from entering certain markets.
The opinions set out to stop local governments from implementing their own negative lists, calling for the strict implementation of a “one national list” administrative model and prohibiting different regions and government departments from issuing their own negative lists that contain information about market access.
Social credit system
China’s corporate social credit system (SCS), a national credit rating and blacklist system that rewards and punishes company behavior, seeks to improve the business environment by improving trust and compliance among market entities. The opinions seek to build upon the SCS by standardizing credit standards across regions and promoting transparency of information. Specifically, the opinions call for the creation of a national basic catalog of public credit information and forming a credit information network covering all credit subjects, all types of credit information, and all regions of the country.
The opinions also seek to improve the efficiency and implementation of the SCS by better allocating regulatory resources based on the credit risk of a market entity. This will be supplemented by compiling and publishing a national basic list of disciplinary measures for dishonesty that local jurisdictions can go by to evaluate and punish companies. The opinions also call for improvements to mechanisms for restoring bad credit and promoting new social credit legislation, indicating that more regulations will be formulated to promote the use of the SCS as a means of creating a more standardized and fairer business environment.
Promoting connectivity of market facilities
The measures seek to standardize access to key market resources, such as logistics, labor, land, energy, and technology. Ensuring equal access and fair competition for these resources will help promote the healthy development of various industries.
Optimizing digital and logistics networks
The opinions highlight the need to “build a modern circulation network”, which will help promote consumption and production by better integrating business and logistics infrastructure across the country. The so-called circulation network involves optimizing key logistics and business infrastructure to increase the system’s efficiency, such as by building more capacity for digital platforms and integrating online platforms and offline networks to better enable online-to-offline (O2O) consumption.
Moreover, to further optimize the country’s logistics networks, the opinions call for:
- Promoting logistics hubs, multimodal transport, and “pallet transport”, a more efficient way of shipping goods.
- Developing third-party logistics, supporting the construction of digital third-party logistics delivery platforms, promoting innovation in technology and business models in the third-party logistics industry, and cultivating a group of “globally influential” digital platform and supply chain companies.
- Building an emergency logistics system and improving the resilience of transportation facilities and logistics sites in high-disaster-risk areas in order to actively prevent the risk of food and energy shortages.
- Establishing and improving urban-rural integration, regional connectivity, safe and efficient telecommunications, energy, and other infrastructure networks.
Unifying the factor of production and resource markets
Creating more unity in the factor of production and resource market will help companies get better and more equitable access to key resources such as labor and land. To achieve this, the opinions call for unifying the land and labor market in urban and rural areas, as well as the secondary market for the transfer, leasing, and mortgage of construction land use rights.
In addition, the opinions offer ways of providing more equitable access to land for construction and enabling the free flow of labor across different regions in China. This includes improving cross-regional transaction mechanisms for the surplus quotas of urban and rural construction land and the quotas of supplementary agricultural land under the “linked increase-decrease system of urban and rural construction land” system. Under this system, the government maintains an equilibrium of construction land and agricultural land by reclaiming idle construction land for agricultural use, thereby enabling it to increase the amount of new construction land without decreasing the total amount of agricultural land.
Unifying the technology and data market
The opinions provide measures for unifying and standardizing the technology and data markets to facilitate trading and cooperation across sectors and regions.
The opinions seek to improve the technology trading market by:
- Strengthening intellectual property evaluation and trading mechanisms;
- Promoting interconnectivity of the technology trading markets in different regions of China;
- Improving scientific and technological resource sharing service system;
- Encouraging the exchange and interaction of scientific and technological information between different regions; and
- Promoting the opening and sharing of major scientific research infrastructure and equipment, and increasing international cooperation in the field of science and technology.
The concept of data as a “factor of production” was first introduced in 2019, providing a path forward for the creation of a data market in China. However, existing data regulations have thus far not clarified the definition of data ownership, which has made it difficult for the market to take off. Although they don’t provide clarity on the ownership issue, the opinions do offer a few other measures for cultivating the data trading market, namely:
- Establishing and improving basic systems and standards for data security, rights protection, cross-border transmission management, transaction circulation, open sharing, security certification, and more.
- Conducting in-depth data resource investigations.
- Promoting data resource development and utilization.
Building a unified national energy market
Ensuring energy security while staying on track to reach its carbon targets – peak carbon by 2030 and carbon neutrality by 2060 – is a key priority for China in the coming years. The “energy security” part of this goal cannot be understated, and it means that despite its climate targets, China will continue to rely on fossil fuels such as coal and gas for some years to come. The opinions seek to prop up energy security by improving the interconnectivity of energy supply chains and ensuring the standardization of energy infrastructure and trading markets.
Specifically, measures to standardize and stabilize energy supply include (but are not limited to):
- Improving the oil and gas futures product system, standardizing the construction of oil and gas trading centers, and optimizing the layout of key infrastructures, such as trading venues and delivery warehouses.
- Promoting the interconnection of oil and gas pipeline network facilities and opening them to various market players in an equitable manner.
- Steadily promoting market-oriented reform of natural gas and accelerating the establishment of a unified natural gas energy measurement and pricing system.
- Further leveraging the role of the national coal trading center and improving the unified national coal trading market.
Meanwhile, to further China’s carbon targets, the opinions also seek to create a “unified national ecological and environment market”, which, among other things, will involve creating a unified carbon emissions and water rights trading platform through which consistent industry standards and supervision will be applied. Moreover, the opinions call for market-based trading of emission rights and energy use rights and explore ways to establish systems for initial distribution, paid use, market transactions, dispute resolution, and support services for the emissions trading.
The opinions also propose the creation of green product certification and labeling systems to help better inform consumers and promote “green consumption”.
Unifying goods and service markets
Another aspect of the national unified market is to ensure that the quality of commodities sold in China is consistent across all regions. The opinions dedicate a section to measures for improving the quality control of goods and services and standardizing measures and evaluation metrics.
To improve the quality of commodities, the opinions propose the establishment of a quality grading and management system that can be applied throughout the entire supply and production chain and the full life cycle of the product.
Moreover, the opinions propose promoting quality standards in line with international standards for consumer goods and applying the same standards for domestic and foreign goods. It also calls for reforming the quality certification system and promoting the construction of national product quality inspection and testing centers and promoting mutual recognition of certification results across industries and regions.
The opinions also tackle the need to strengthen consumer rights and improve the quality of consumer services. Among other measures, the opinions call for:
- Unifying after-sales experiences: Improving and strictly implementing the defective product recall system, promoting cross-border and cross-regional market entities to provide consumers with unified and convenient after-sales service, and improving return and exchange channels for products in different places and stores.
- Facilitating consumer complaints and reports: Ensuring unimpeded channels for consumers to submit reports and complaints and optimizing consumer dispute resolution processes and feedback mechanisms.
- Improving transparency of consumer information: Establishing and improving the publicity system for consumer complaint information.
Promoting fair and unified market supervision
Improving market supervision and implementing consistent market standards across the country will be crucial for ensuring consistency in the safety and quality of goods and services across the country. The opinions, therefore, offer means of strengthening market supervision for a wide range of sectors, from food and drug safety to construction.
The following market supervision measures should be taken:
- Implement rigorous standards and mete out severe punishments for violations of food and drug safety standards and other key areas related to health and safety.
- Promote integrated online and offline supervision of new forms of business, such as online medical care, online education and training, and online entertainment.
- Strengthen the unified and impartial supervision in construction, and strictly investigate and punish violations.
- Strengthen risk monitoring and supervision and random inspections of important industrial products.
Regulating unfair market competition and market intervention
The opinions tackle unfair competitive practices across different regions in China by reiterating the requirement that all market entities should be treated equally. To promote more fair competition, the opinions call for improving the policy implementation mechanisms and establishing a coordination guarantee mechanism for fair competition policies and industrial policies and optimizing and improving the implementation of industrial policies.
The opinions also provide means for improving the legal rules for determining monopolistic behavior, including
- Improving the anti-monopoly review system for operator consolidation through classification and grading.
- Preventing platform companies from having data monopolies and preventing the use of data, algorithms, and technical means to exclude and restrict competition.
- Strengthening the audit of operator consolidation in fields such as finance, media, and science and technology, and those involving start-ups, new business formats, and labor-intensive industries.
- Strengthening supervision of network-based natural monopolies, such as power grids and oil and gas pipeline networks.
- Strengthening innovation and IPR protection of innovative small and medium-sized enterprises (SMEs).
The opinions also call for measures to break down local and regional protectionism by establishing a list of preferential policies related to enterprises and disclosing them to the public. They also state that local policies that impede the construction of a unified market and fair competition should be abolished, including policies that encourage local protectionism, market segmentation, and designated transactions. Significantly, they also state that local governments will be required to “clean up” areas that implement policies that discriminate against foreign-funded and non-local enterprises.
Local governments are also encouraged to continue to promote investment and attract more high-quality enterprise investment with high-quality institutional supply and institutional innovation.
How will this impact foreign investors in China?
The opinions provide good news for foreign investors in China, as they are essentially telling local governments that they must implement national laws consistently for all enterprises, regardless of where they are from. If the opinions have the desired effect, it will mean local and regional governments will be prohibited from discriminating against foreign companies, or companies from another region of China, or from passing rules or legislation to arbitrarily restrict market access.
At the same time, further standardization of various industries should also make it easier for companies entering and expanding operations throughout China as they will not have to navigate multiple different sets of standards, which will in turn help to streamline supply and production chains.
It is however important to note that the opinions do not constitute legislation, but rather will act as a catalyst for further regulation and implementation guidelines.
Moreover, establishing a national unified market and realizing the interconnection of goods and people will require years of development and institutional adaptation. It is also possible that the central government will have difficulty convincing local governments to implement regulations as required, as they try to juggle other incentives such as reaching local growth and development targets. For this reason, it will require considerably stricter regulations and implementation to ensure that the national laws and regulations are followed.
Over the past few decades, China has seen rapid infrastructure development, from railways to the internet, laying a solid foundation for the development of a national unified market. In the future, only by continuing to promote market-oriented reform in various fields, further opening the market, and truly transforming the role of local governments from production-oriented to service-oriented, can China realize the huge potential of the domestic market.
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at firstname.lastname@example.org.
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