This required significant changes to the administrative system. The initial stages of democratic principles have been incorporated into the Chinese political system. While political decision making still relies heavily on ‘big men’, the decisions which they make are increasingly on the basis of significant review and consideration across the party and across society, particularly with respect of promoting new leaders to the Party leadership. While the political system is not fully democratic, it manages to reward talent and gets the best and brightest candidates to top positions.

Reform successes brought with them some significant challenges including uneven levels of regional development. In addition, the gradualist approach to reform meant that China does not yet have a fully integrated economy as reforms have been occurring at a different pace across different regions. Rapid development has also placed significant environmental and resource constraints on the Chinese economy. These issues highlight the need for a continuation and deepening of Chinese reform efforts.

Managing the Chinese economy through traditional macroeconomic instruments such as monetary policy and exchange rate policy also poses challenges for the Chinese economy. To date, China has adopted a flexible approach to the conventional application of these policy instruments. For example the reserve ratio for credit-giving institutions has been kept low for financial organisations which provide financing to the rural sector. This has allowed the farming sector to maintain easier access to investment funds in an attempt to reduce the uneven levels of regional economic development.

The Chinese exchange rate system is also the subject of considerable international interest and pressure as many believe it is currently contributing to the rise in global imbalances. The need to liberalise foreign currency markets has to be balanced however against China’s domestic economic and political constraints. Labour intensive industries in China may be very negatively impacted by any significant re-valuation.

It is important that any reforms in these policy areas have the flexibility to balance the interests of China with the demands of the international community. The experience in the international economy of external sector liberalisation will be very useful in helping to shape an effective reform strategy for China in this area.

Improving China’s policy efficiency will be the central element in effectively managing these issues into the future and central to balancing domestic and international obligations. This will involve:

• Developing a deeper understanding of what institutions within the economy have been driving the reform and interpreting the reform process. These include those institutions through which policy decisions are made and digested at the very top level.

• Analysing and improving those policy processes and institutional structures which exist to manage the impact of the integration of the Chinese economy in the global economy.

• Understanding and improving the processes that serve to assess the complexities of impact of structural reform on ability to assess the consequences of reform beyond their immediate impact given that unexpected consequences of reforms are an inextricable part of the reform process.

Three decades of reform are only the first step in the long march of Chinese people to achieve the goals of economic development and modernisation envisaged by Deng when the process began. Many achievements have been made in both political and economic reforms but to overcome the challenges now facing the Chinese economy deeper structural reforms are required. Many important lessons can be learned from the experience of other countries in the international community to help meet these challenges.

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This is exctracted from the conference summary from the EABER project on Institutional Strategies for Improving Micro Economic Policy Foundations.

The China Update is on Monday at the Australian National University with presentations by Jeffery Sachs (Columbia University), Jeffery Bader (Brookings Institution), Wing Thye Woo (Brookings Institution), Yiping Huang (Citigoup and Australian National University), Warwick McKibbin (Australian National University) and Ross Garnaut (Australian National University). Their chapters appear in the book China’s Dilemma: Economic Growth, the Environment and Climate Change which will be luanched tomorrow.