Commentary: Remedies for economic challenges (2)

The key measures are to align revenue with expenditure responsibilities by re-centralizing some functions while allowing local governments to collect local taxes; and bring sub-national government borrowing and spending on budget, subject to regulatory oversights.

The enterprise sector: A central element is to increase competition between State-owned and non-State enterprises, especially in the "strategic" industries to prevent the abuse of market power from becoming a drag on the economy. This requires dismantling monopolies and oligopolies, and lowering entry barriers into State-dominated activities.

Further efforts and greater support for the private sector through diversified sources of financing will be crucial. After all, the rapid growth of the last three decades had been a result of allowing the private sector to play a significant role.

The factor markets: While extensive liberalization has occurred in product markets, continued distortions remain. The ability of governments to capture rent through their land institutions exacerbates the fiscal system. The differential treatment meted out to migrant and residential workers weakens the forces of urbanization and exacerbates social tension. The differential access to finance between State-owned and non-State enterprises distorts China's industrial structure.

In land markets, land tenure security and property rights, particularly in rural areas, should be ensured; the role of the State in land allocation or conversion should be minimized so land transactions can be more responsive to market needs; comprehensive land use planning in rural and urban areas must be introduced; and taxation of land and property should be instituted to ease the heavy reliance of local governments on land sales to generate revenue.

In labor markets, mobility has been hindered by the hukou (household registration) system. Workers are not moving with ease to the most productive and best paying jobs. With the expectant shrinking of the labor force in a few years, labor markets will have to be even more flexible to allocate hundreds of millions of migrant workers across sectors and areas; and labor market institutions must provide portable rights for affordable healthcare and social security. Equal opportunities to access jobs, education, and healthcare services will form the bedrock of policies for China's transition to an innovative, modern, and high-income economy.