Published on 16 September 2005 Executive summary An Economic Survey is published every 1½-2 years for each OECD country. Read more about how Surveys are prepared. The OECD assessment and recommendations on the main economic challenges faced by China are available by clicking on each chapter heading below. Chapter 1 identifies the challenges for which the subsequent chapters provide in-depth analysis and policy recommendations.

Forward by OECD Secretary General Donald Johnston

Preface by OECD Chief Economist Jean-Philippe Cotis

Chapter 1.  Key challenges for the chinese economy
China’s economy has grown rapidly so far this decade. Government policies have moved markedly towards allowing market forces influence economic activity. Polices covering the price determination, foreign trade, exchange rates, foreign investment, entry barriers, internal markets, the operation of state-owned enterprise and the financial system have all been changed. These reforms have boosted growth that stems, in an accounting sense, mainly from a rapid pace of capital accumulation, relying on a level of national saving that is approaching half of GDP. The policy changes have allowed a much increased role for the private sector and substantial foreign investment. Sustaining the recent pace of growth will require further reform to ensure that there is a continued improvement in the framework for the private sector, to complete the reform of the banking sector and ensure a stable macroeconomic environment. There are also a number of imbalances in the economy whose resolution would help improve growth and wellbeing. In particular, policy changes are needed to reduce the disparities between rural and urban incomes and increase the pace of urbanisation. Welfare would also be improved by further reductions in the high level of pollution.

Chapter 2.  Improving the productivity of the business sector
This chapter appraises the performance of China’s businesses, relying on new empirical analysis of an up-to-date panel dataset of almost a million observations of firms. China’s privately controlled companies operate in very competitive product markets and are highly productive, creating most new jobs. However, their growth is still limited by various regulatory weaknesses that have yet to be fully addressed, even though considerable improvements in the regulatory framework have been made over the past few years. Key priorities include revising the company law, passing the new bankruptcy code, and proving greater regulatory support for protecting property rights. The state sector remains large and generally wasteful of resources; programmes that have transferred control of enterprises to outsiders and facilitated restructuring need to be expanded. If restructuring is combined with reforms in the factor markets for labour and land, growth will be made more sustainable and potential output growth raised.

Read also ECO Working Paper 471 Fast-falling barriers and growing concentration: the emergence of a private economy in China

Chapter 3.  Reforming the financial system to support the market economy
This chapter considers the changes that are needed to the financial system in China before it can adequately serve the growing private sector of the economy and provide diversified saving vehicles for individuals. Much progress has been made toward developing market oriented financial institutions and improving their internal capabilities to assess and manage risks and the stock and government bond markets have been developing rapidly. The basic institutions for an effective regulatory system have been put in place, and regulatory authorities are making good use of international standards and practices in their policies. Going forward, financial reform involves five main and related challenges. The first is to deal with the legacy of the banking system: a very high stock of non-performing loans and low capitalisation. The second is to reform the structure of the banking system so that it can better support the real economy. The third is to further develop the capital markets and foster the growth of institutional investors. The fourth, and ultimately the most important, is to strengthen the ability of financial institutions to behave commercially and manage risks prudently, while the fifth is to continue improving the supervisory structure so that systemic risks are contained. These issues are all the more daunting given that the business environment is still evolving away from a state administered towards a market economy.

Chapter 4.  Reforming public finances to better serve growth
Fiscal policy in China has followed an extremely prudent path, keeping the level of government debt low and stable but following counter-cyclical polices when needed. Public expenditure relative to GDP is lower than in the OECD area largely owing to much less developed social transfer spending. Public spending may need some restructuring away from capital expenditure towards education and health spending. Social transfer spending also needs reform, which should build on the existing system of individual retirement accounts. Taxation has been kept low and has taken, on the whole, a pro-growth stance. But domestic corporate tax rates need to be lowered significantly as do the higher marginal tax rates on earned income. At the same time the base of the value-added tax needs to be widened partially making up for revenue losses elsewhere. Expenditure is to a greater extent decentralised than revenue, making a large part of sub-national governments dependent on transfers. There is scope to reform the inter-governmental fiscal system including bringing expenditure responsibilities at each level of government in line with financial resources and improving accountability. Finally, the budgetary system in China needs to be made more comprehensive and transparent.

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A printer-friendly Policy Brief (pdf format) can also be downloaded. It contains the OECD assessment and recommendations, but not all of the charts included on the above pages.
To see the Policy Brief in Chinese, click here.

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For further information please contact the China Desk at the OECD Economics Department at [email protected].  The OECD Secretariat's report was prepared by Richard Herd, Sean Dougherty and Margit Molnar, under the supervision of Silvana Malle. Consultancy support was provided by Charles Pigott, Ping He and Xin Zhang.

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