Corporate governance

China needs far-reaching reforms in public and corporate governance, OECD says


07/09/2005 - China needs to make wide-ranging changes in the way it runs its public and private sectors if it is to continue on a stable growth path leading to full integration into the world economy, according to a new report from the OECD.

Governance in China reviews the state of governance in China’s public and private sectors. It concludes that the country’s governance arrangements as they stand at present suffer from a number of serious fault lines, particularly in relation to China’s public finances and social stability.

The report is the latest in a series of studies conducted by the OECD in co-operation with the Chinese government under a co-operation programme launched in 1995. China is not a member of the OECD, but it participates in the work of some OECD committees. OECD countries and China have a shared interest in helping China to develop its economy in a stable manner.

To date, China has already taken some steps to improve its public and private governance, the OECD report acknowledges. However, it observes, laws and regulations are often applied in an unsystematic manner and can be skewed by special interests.

China has made progress in strengthening the budget management and civil service systems – the two main pillars of public administration – but many weaknesses remain, leading to inefficiencies.  

Public resources that could be used to finance social services are absorbed by efforts to shore up loss-making state-owned companies and prevent default on loans they have received from state-owned banks. Local government structures are burdened by heavy spending obligations without appropriate matching revenues or an effective system of transfers. 

Decisions on public capital expenditure are taken by the National Development and Reform Commission, while the budget is managed by the Ministry of Finance. Staffing decisions with regard to public employees down to a certain level are made by yet another body, without compulsory co-ordination. In addition, the OECD notes, organizational and co-ordination problems result from the co-existence of structures inherited from the past with new institutions.

The OECD observes that economic growth alone will not solve all these problems, and recommends that China should:

  • redefine the role of public authorities: who does what needs to be decided before addressing issues relating to the sustainability and efficiency of public spending.
  • reform relations across levels of government, so as to ensure that local authorities act in accordance with national objectives in relation to issues such as the rural/urban balance, redistribution of wealth, the environment and central control versus local autonomy.
  • develop more effective tools for monitoring progress and evaluating the outcomes of government policies.
  • ensure greater consistency among laws affecting a particular area and see that laws mandating broad principles are accompanied by more specific regulations for implementation.
  • step up enforcement through a system of incentives accompanied by sanctions matching the potential benefits to miscreants from violations.
  • consolidate the framework for the market economy by giving market participants a level playing-field in terms of laws and regulations.
  • regulate businesses and individuals on a basis of economic performance rather than according to bureaucratic categories such as ownership classifications that are no longer valid.
  • establish a sound competition policy approach as a means to reduce market segmentation and local protectionism, consolidate the intellectual property rights regime and further restructure state banks and industries. 

Governance in China is available to journalists through the OECD’s password-protected website. For further information, journalists are invited to contact the OECD’s Media Relations Division (tél. 33 1 45 124 97 00).

Subscribers and readers at subscribing institutions can access the study via SourceOECD our online library. Non-subscribers will be able to purchase the study via our Online Bookshop.


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