Drivers of China’s success in Doing Business reforms and the way forward

China has recently achieved a remarkable improvement in its business environment as measured by the World Bank’s global Doing Business report. Over the past two years, China moved up by almost 50 places from 78th  in Doing Business 2018 to 31st position in Doing Business 2020 and was included among the Top 10 fastest global reformers for two years in a row.

A new World Bank paper on “China’s Doing Business Success: Drivers of Reform and Opportunities for the Future” documents the country’s business environment reform experience over the past few years, presents the institutional arrangements underlying China’s progress in Doing Business, identifies remaining opportunities for business environment reforms and captures lessons learned from China’s experience.

The paper identifies six key drivers of China’s reforms.

First, China has shown strong ownership of the reform agenda, which has been championed by President Xi Jinping, Premier Li Keqiang and other senior leaders both at the national level and in Beijing and Shanghai. Strong leadership in the context of a broadly centralized governance structure has generated considerable reform momentum. This has been a factor of China’s success but may not be easily replicable elsewhere.  

Second, while the overall reform direction was set by China’s national leaders, local governments were encouraged to undertake tailored and localized business reforms and pioneer policies that could then be promoted at a larger scale. Local experimentation has helped to generate success through policy learning and adaptation. China in this way adopted an approach to reforms that served it well in other areas in the past, whilst using the Doing Business ratings to monitor progress. This is a lesson other countries could learn from.

Third, to ensure effective implementation of the reform agenda, China has put in place strong accountability mechanisms and robust multi-stakeholder coordination at both the central and city level (in Beijing and Shanghai). This supported and aligned the reform efforts across various agencies and sectors. Regular monitoring and evaluation of the reform progress became an important component of the performance evaluation of government officials. High state capacity has also been helpful. Not all countries benefit from similarly effective government. But the simplicity and transparency of the Doing Business agenda can help countries set up strong accountability even when capacity is weaker.

Fourth, engagement with the private sector was key. Beijing and Shanghai moved from a government-driven work model towards a more open reform process with greater engagement and communication with the private sector. This has contributed to ensuring that the reforms effectively addressed entrepreneurs’ concerns and removed the key barriers that prevent them from starting, operating and growing their businesses. In this respect China learned from other countries, where engagement with the private sector has been a key factor of success.

Fifth, China’s success in reforms was driven by an intensive use of big data, blockchain and cloud computing technologies in e-government services. Beijing and Shanghai leveraged China’s well-developed digital economy to put government services online.

Finally, the Chinese authorities were eager to learn from others and absorb international best practices in Doing Business reforms. Openness to learning and sharing experiences has been a driver of business environment reforms around the world. China’s success now adds to this repository of knowledge.

However, past success does not guarantee future success and further efforts are needed to put China’s business environment at the global frontier across all regulatory areas covered by Doing Business  and beyond.

Within the Doing Business framework, China still lags behind global and regional peers in areas such as getting credit, resolving insolvency, paying taxes and trading across borders. There is also room to further improve construction permitting, starting a business and registering property, including by following practices adopted by the global top performers such as New Zealand, Singapore and the Republic of Korea.

Because the Doing Business indicators measure progress in just two cities, it will be also critical to effectively replicate good reform practices from Beijing and Shanghai around the whole country and upgrade the institutional and regulatory frameworks to sustain the reform momentum. NDRC’s own business environment ranking could be a tool to encourage reforms; it would be more effective if it were public. Given the size of China’s economy, upgrading the regulatory frameworks in all cities around the country would have a tangible impact on China’s economy.

Doing Business reforms are only one element of the overall business environment. China also faces broader institutional challenges in further improving its business environment. More needs to be done in areas including enhancing public access to data, strengthening the quantity and the quality of feedback from the private sector and further improving the legal framework to ensure strong enforcement of the reform agenda.

Finally, much remains to be done to strengthen competition and establish a level playing field for all business operating or wishing to invest in China. China could open further sectors of the economy to investment, especially in services. Effective implementation of the provisions of the FDI law and the adoption of international norms such as the OECD competitive neutrality principles on the treatment of SOEs would send a strong signal of China’s commitment to market competition. As we found in a study on China’s new drivers of growth, published jointly with the Development Research Council in September 2019, the country’s future growth prospects depend on allowing markets to play a decisive role in the allocation of resources. A good business environment, as reflected in China’s remarkable progress in the Doing Business ratings, is one but not the only part of this important reform agenda.