Remarks by Angel Gurría, OECD Secretary-General, delivered at the launch of the Economic Survey of China
22 March 2013, Beijing
(As prepared for delivery)
Vice-Minister, Distinguished guests, Ladies and gentlemen of the media,
It is a great pleasure for me to be once again in Beijing to present our latest Economic Survey of China and to participate in the China Development Forum.
Our latest Economic Survey deals with the major challenge facing China: how to achieve a continuing rapid growth that would indeed make China a “moderately prosperous society” by 2020. This goal is not beyond reach, particularly if reforms in a number of key areas are implemented; if urbanisation continues in an inclusive fashion; and if growth becomes progressively greener.
Let me share with you some of the main conclusions and recommendations of this study.
First the good news: More stable and balanced growth
China is now almost halfway through its 12th Five Year Plan and this period has brought it continued success. It has also been able to sail relatively unscathed through the first part of the global crisis, thanks to a package of stimulative economic policies and the economy’s impressive dynamism. China is now definitely on course to become the world’s largest economy around 2016, after allowing for price differences.
But these policies came with some adverse consequences. Inflation soared, asset prices jumped excessively and debt rose. Even if this debt is far from excessive, it creates uncertainty about the solvency of both the institutions that borrowed and those that lent.
Nevertheless, a more stable economic environment has now been achieved, with land prices falling and only moderate increases in inflation and property prices.
The price of this stability, however, was that growth troughed at 7,8% in 2012, its lowest level for many years, even though a still quite enviable one, and in stark contrast with the OECD area. Moreover, growth seems now to be rebounding and most recent indicators point to continued solid growth, albeit at a slower rate than in the past.
The most striking fact and very positive development is the extent of the economic rebalancing. Since 2007, the erosion of the share of household income in GDP has ceased and household investment in housing has risen. At the same time, increased social spending has helped reduce the government financial surplus. For the past two years, private consumption has even been growing faster than GDP. Exports have fallen markedly as a share of GDP. The current account surplus has consequently shrunk to below 3% of GDP. At the same time, China is investing more abroad. Consequently, its intervention in currency markets, to hold back the renminbi’s appreciation, has fallen markedly.
China thus enjoys a more stable and balanced growth. But to ensure sustainability, this growth must also become more inclusive. The most vulnerable cannot be left aside. China has an enviable record in reducing poverty; however, new challenges are emerging. The increase in internal migration is putting a burden on traditional family support systems, and health care expenses have threatened many with destitution.
The government has introduced many new policies in this area. Pension systems have been extended to previously uncovered groups, with nearly 800 million people now affiliated to a pension scheme, and 150 million actually receiving pensions. Moreover, health insurance coverage is now almost universal.
These new policies have resulted in rapid increases in social spending with current figures suggesting that spending as a share of GDP will exceed that of Chile, Korea and Mexico – a formidable achievement in a relatively short period of time! They have also started to reduce inequality. The poorer regions are now catching up to the richer ones, as the rural areas to the urban ones. In urban areas, incomes are also rising faster for the poorer residents than for those at the top.
These are indeed very important achievements. However, China still faces a series of structural challenges. Let me highlight three of them which we consider of crucial importance.
First, there is a need to re-launch reforms.
High GDP growth has been supported by strong productivity gains, especially in the industrial sector. Until around 2008, this was sustained by the reform of the state-controlled enterprises, which enabled to close part, but only part, of their productivity gap relative to private and foreign enterprises. This source of growth has now petered out, but there are still gains to be made. New reforms are needed to increase the competitive pressures on these firms. Levelling the playing field will also require that state holding companies pay more dividends to the government.
A more competitive and market-oriented financial sector could also allow a more efficient allocation of capital. In particular, it will facilitate reallocation of financing flows from state-owned enterprises to small and medium-sized private sector companies. At the same time, the move to deregulate interest rates needs to be completed. It can raise the rate of return on financial assets held by households, which have large holdings of bank deposits, thus raising their income.
However, this needs to be accompanied by increased prudential regulation. The gradual move of funds off the balance sheets of major banks and towards capital markets is, in itself, positive. But such a rapid rise, by almost three-quarters in the past year, has often heralded problems in OECD countries. We thus recommend greater disclosure and regulation of these products – especially in terms of portfolio diversity when the funds are sold to households.
Finally, we recommend a gradual move to capital account liberalisation. There have been steps in this direction. The renminbi is becoming an internationally traded currency, and the offshore market for the renminbi is becoming more liquid. However, there is only limited use for a convertible renminbi in China itself, due to the restrictions on the ability of banks to lend money back into mainland China.
A second key challenge is urbanisation.
Urbanisation is another key factor of more inclusive growth. In the past decade, over 60% of cities’ population growth has taken place in China’s 25 largest cities, which are also the most productive ones, with a GDP per capita equivalent to that of Portugal, measured in PPP terms. We thus suggest that urban policy should not undermine the dynamism of these large cities.
A key factor in future urban development, however, will be the availability of land. Due to the limited availability, strict quotas on the conversion of agricultural land into building land need to be eased. Farmers also need to be given more rights to sell and transfer their land use-rights, and when it is expropriated by local governments, their compensation must be based on a proportion of market value - as is the current case in Shenzhen.
Urbanisation also requires high investment in infrastructure, especially transportation. China still has only one half of the total length of paved road of the US, and one third of its railway network, for a comparable land area and a population more than four times larger. Major cities, in particular, are in need of subway system expansion and car management programmes to deal with congestion and associated costs to the local economy and residents.
But, more than anything, cities need to become inclusive societies. Providing different social rights to different groups is simply not sustainable. Migrants need to be fully included, and their children must have the same rights to education as others. Otherwise, they risk leaving school unqualified which will eventually lead to weakening, if not destroying, the Chinese dream. This leads me to the third key challenge.
The urgent need to green Chinese growth.
China’s exceptional economic expansion has led to considerable environmental pressures such as rising energy demand and pollution. Strong efforts have moderated emissions of some types of air and water pollution from very high levels. Greenhouse gas emissions, however, continue to rise. Poor air and water quality threaten human health, shorten life expectancy, create other costs and reduce well-being. This is particularly the case for small particles. This pollution is already having dreadful consequences in China. Moreover, the poor suffer disproportionally, thus working against the efforts by the government to reduce inequality.
Well-implemented market-based approaches should progressively replace reliance on command-and-control measures. Indeed, China’s environment fees and taxes are higher than in all but four OECD countries. But more action is needed to boost energy efficiency, beyond the nearly 4% increase achieved in 2012. This could be realized through energy and water pricing reforms that would provide stronger incentives for end-users to economise on their energy use.
We suggest giving serious consideration to the introduction of a carbon tax in order to further reduce carbon emissions. This would be both easy to implement and straightforward to administer. Of course, stronger standards are also necessary for both motor vehicles and fuels. And more efforts are also needed to overcome the reluctance of state-controlled oil companies to invest in low sulphur fuels. Finally, it remains critical to enhance environmental enforcement, particularly at the local level.
Ladies and gentlemen:
The 18th Party Congress and the recent meeting of the National Party Congress have set the scene for a period of reform. And I am happy to see that there is a clear convergence between the broad lines of reform as set out in government policy documents and those recommended in this report.
I am therefore positive that over the next two years, the Chinese government will continue upon its rapid and concrete path to boost economic growth. And I hope that our cooperation will support these efforts to ensure that this growth is more inclusive and greener, to the great benefit of the Chinese people’s well-being.