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The following OECD assessment and recommendations summarise chapter 1 of the Economic Survey of China published on 2 February 2010.
China has weathered the global crisis remarkably well and its importance in the world economy is set to grow further
Since the OECD’s first Economic Survey of China in 2005, China’s economy has continued to expand rapidly, driven to a large extent by the development of the private sector. Exports were hit hard by the global crisis and activity slowed down sharply over the course of 2008. However, prompt and vigorous policy actions, as well as swift adjustment in the labour market, helped growth pick up by the second quarter of 2009, putting China in the lead of the global recovery. Going forward, China’s importance in the world economy is set to increase further, as are living standards within the country. In fact, China already has the world’s second-largest economy in purchasing power parity terms, and is expected to shortly achieve the same rank at market exchange rates. It already has the world’s second-largest manufacturing sector and is the world’s largest exporter of goods. Growth will likely continue to be driven largely by investment and a trend shift out of low-productivity agriculture, as the urbanisation rate, which is approaching 50%, continues to rise. While the size of the labour force is not projected to increase much, education levels have soared since the early 1980s, which will support future productivity growth.
Shares in world manufacturing value-added at constant 2000 market prices
Source: World Development Indicators; OECD estimates for 2009 and later.
Macroeconomic policy has helped limit the extent of the slowdown
In the face of the dramatic slump in exports in late 2008, both monetary and fiscal policy levers were used in China, even more forcefully than in many OECD countries. On the monetary side, policy interest rates were cut in steps, as were required reserve ratios. Meanwhile, the gradual appreciation of the renminbi vis-à-vis the dollar in motion since mid 2005 was put on hold, making for a sizeable effective exchange rate depreciation. Furthermore, a number of restraints on lending, put in place when the economy was overheating, were relaxed. On the fiscal side, low public debt and a high budget surplus facilitated the introduction of a massive stimulus package. Precisely quantifying the total additional fiscal impulse is difficult as some outlays and tax reductions were already programmed, but its scale clearly dwarfed fiscal responses in many OECD countries, both in absolute and relative terms. A major portion of the stimulus is in the form of extra outlays on transport, energy and other network infrastructure, where needs remain conspicuous. Some new spending is also directed at social programmes, notably in health care, and, to some extent, at environmental protection, areas that are key to ensure sustainable growth. The central government is slated to fund only part of the stimulus measures, with local governments, banks and state-owned enterprises financing the rest. Against this backdrop, credit soared during the first half of 2009. An important concern is that the resources thus invested generate sufficient returns down the road.
Imbalances remain but are being addressed
Saving and investment have long been very high in China. In recent years, both household and government net saving have increased further, leading to a widening current account surplus, which reached double digits as a share of GDP in 2007. During the global slowdown, imports held up better than exports, not least thanks to the injection of macroeconomic stimulus. As a result, the current account surplus is projected to shrink to around 5½ of GDP by 2010 and economic growth is set to rebound back to double digits. At the same time, government saving is projected to fall, which is a welcome change. In fact, in recent years, the scale of general government budget surpluses has not been fully appreciated by most observers, not least because the social security system is not integrated into the national budget. More generally, the quality and relevance of public finance data would be improved by publishing aggregate financial data for all urban development infrastructure companies and by greater transparency in the use of funds from land use-right sales (which amounted to over 5% of GDP in 2007). Households’ saving might also ease back gradually as the coverage and replacement rates of the broadly defined social safety net increase and weaken the precautionary motive. The deepening of household credit markets and population ageing might possibly work in the same direction. Other imbalances and tensions remain, such as the continued existence of inefficient capacity in some sectors of heavy industry, and severe environmental strains. On both scores, the government has recently made policy announcements, in particular regarding its intention to encourage more efficient energy use. Moving closer to market-based pricing could help create the right incentives in this area.
Higher levels of social spending need to be sustained
Looking ahead at the exit from the ongoing fiscal stimulus programmes, it will be important not revert to budget surpluses. China had an enviably strong fiscal position on the eve of the global economic crisis, and this will still be the case by 2010 11, even with higher levels of public spending. To support the social reforms launched or needed in areas such as education, welfare assistance, pensions and health, the composition of government outlays will need to continue to shift towards greater investment in human capital and social transfers, with more redistribution across the country. Greater public spending on education in particular can help both to boost productivity and to reduce inequality.
In sum, China has launched many reforms which are starting to bear fruit, by supporting domestic demand in the face of the global slowdown, helping to reduce internal and external macroeconomic imbalances and by restructuring China’s economy. In many countries, undertaking structural reforms involves painful trade-offs between short run costs and longer-run benefits, not least because public finances do not allow such reforms to be undertaken without offsetting restrictive fiscal measures. In contrast, China is in the fortunate position to have room for continued, ambitious social reforms whose financing can help bring down an uncomfortably high national saving rate. By stepping up social expenditure even as public infrastructure investment reverts to more normal levels, China will enjoy higher living standards and greater internal social cohesion, and contribute to a more harmonious global economy.
How to obtain this publication
The complete edition of the Economic Survey of China is available from:
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.
For further information please contact the China Desk at the OECD Economics Department at firstname.lastname@example.org.
The OECD Secretariat's report was prepared by Richard Herd, Samuel Hill and Yu-Wei Hu under the supervision of Vincent Koen. Research assistance was provided by Thomas Chalaux.