The key economic decisions at the recently concluded Third Plenum of the Chinese Communist Party's Central Committee are clear. "Marketization" has been emphasized - previous party documents talked of the market playing a "basic" role while the new formula is markets should play a "decisive" role. But economic policy "must unswervingly consolidate and develop the public economy, adhere to the dominant position of public ownership, state-owned economy to play a leading role, and constantly enhance the vitality of the state economy, dominance and influence." The non-state sector is encouraged, stated to be important, and to be a foundation of economic development, but it is within this overall framework. In short, marketization without widespread privatization is the policy conclusion.

Shanghai Free Trade Zone (FTZ) which is officially launched on September 29, 2013，is a pilot of deepening economic reform.[File Photo]

These decisions immediately focus attention on concretely understanding the relation of the state and the economy and for clarity on the driving forces of China's future economic development. More detailed decisions of the Plenum, such as on land and creating a new reform group, will unfold within the framework created by these two economic pillars.

The Third Plenum outlined the qualitative framework for China's economic policy - its "algebra" so to speak. It is therefore also necessary to examine the economic "arithmetic" which is required - the weight of different factors in translating the Plenum's decisions into successful economic policy.

The decision to maintain the state sector as dominant guarantees the rapid growth of China's economy and therefore China's relatively rapid rising in living standards. The West's recent severe recessions or slowdowns, for example the "Great Recession" after 2008 or the South East Asian growth deceleration after 1997, were driven by severe fixed investment falls. The private sector dominated Western and South East Asian economies have no mechanisms to halt this and therefore suffered economic slowdown.

The size of China's state sector, with its consequent ability to use government decisions to maintain investment levels, ensured China suffered no economic slowdown equivalent to the Great Recession or the East Asian debt crisis - China's is a far stronger tool of economic management than the purely fiscal and monetary instruments available to Western governments. That China will maintain the state sector as "dominant" therefore prevents any investment decline of the Western type and thereby equally removes from China the threat of their type of serious recession. It also allows quantitative mobilization of resources for economic growth and improvement in living standards - a point analyzed in greater detail below. Therefore there will be continued substantial economic growth by China over the next decade. More precisely, China's official target of doubling GDP between 2010 and 2020 should be comfortably achieved.

Despite its decisive advantage, however, the state sector has well known disadvantages in efficiency which must be tackled. This relates to the Plenum's emphasis on "marketization" - the role of which is to increase efficiency.

The overall framework for the necessity of markets is evident. As economic resources remain inadequate compared to human needs, only in a few areas - for example health care in advanced economies - can distribution be based essentially on need and not money. The Third Plenum's formulation of this is that China, which has still to reach the development level of an advanced economy, remains in the "primary stage of socialism" during which the market is the chief allocator of economic resources. Consequently, in the words of the Third Plenum communique a "core issue is to handle the relationship between government and the market."

But it is immediately obvious there is not a single thing called "the" market. There are at least three fundamental forms of market. Each therefore requires a different relation of the government to it.

•  There are necessarily monopolistic markets - sectors with such huge investment costs that duplication to create competition is impossible (railways, electricity grid); where the scale of production required for profitable operation is so large that competition by companies within a purely national market is impossible (large scale civil aircraft production), or which are monopolies for inherent political reasons (many military industries).

•  There are markets dominated by competition between small numbers of very large companies (banks, automobiles, telecommunications). This form of market is the dominant form of modern production - only 2,000 international companies have a turnover equivalent to 50 percent of world GDP.

•  There are markets dominated by very large numbers of small producers (restaurants, most fields of tourism).