www.oecd.org/eco/surveys/economic-survey-china.htm

OECD OECD Economics

2015 OECD ECONOMIC SURVEY OF CHINA

Towards higher quality growth

in the New Normal

Beijing, 20 March 2015

China’s impressive economic performance has led to fast income convergence

2

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

1995 1998 2001 2004 2007 2010 2013 2016 2019

Ratio GDP per capita at purchasing power parity

As a share of the OECD average

Source: OECD Economic Outlook Database.

China is shifting to lower, but higher quality growth

3

Source: OECD Economic Outlook Database.

-5

0

5

10

15

20

-6

-4

-2

0

2

4

6

8

10

12

14

16

1991 1994 1997 2000 2003 2006 2009 2012 2015

% % A. Real GDP growth

China OECD

Main findings

• The Chinese economy has performed extremely well and is now transitioning to slower but healthier growth – the “new normal”

• Significant economic and financial risks exist, but they appear to be manageable

• Firms do not all compete on a level playing field, which has created imbalances and put pressure on environmental resources

• Future growth will increasingly rely on the quality of human capital, raising the importance of an effective education and training system

• Living standards in rural China remain far below those in urban areas and agricultural labour productivity is low

• Regulations on deposit interest rates have contributed to inefficient resource allocation and financial risks

• Sub-national government debt is high in some provinces, but the associated risks are manageable 4

Key recommendations

• Open up more sectors to private investment and phase out implicit government guarantees enjoyed by state-owned enterprises

• Enhance lifelong skill provision, research autonomy and intellectual property rights

• Improve rural living standards by:

o Increasing and enforcing the property rights of rural households

o Extending urban public service provision to all migrant workers

o Expanding the coverage of rural social welfare payments

• Enhance macroprudential supervision while continuing to gradually liberalize deposit interest rates and the exchange rate

• Increase fiscal transparency and sustainability

5

Risks are on the downside, but appear to be manageable

• A correction in the property market is underway, but stringent housing investment regulations offer protection against systemic risk

• A stronger US dollar may adversely impact export competitiveness as long as the renminbi remains closely linked to it

• The recent declines in oil and other commodity prices may propel growth by more than anticipated

6

Providing the right skills to all

7

More vacancies per vocational high school than per university graduate

8

College graduates struggle to find a job

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

2007 2008 2009 2010 2011 2012 2013 2014

Ratio of job vacancies to job seekers

Ratio of job vacancies to job seekers

Vocational secondary educationUndergraduate, junior college, postgraduate and aboveUndergraduate, postgraduate and above

Source: China City Labour Force Survey, Ministry of Human Resources and Social Welfare.

Skill mismatches remain

0

20

40

60

80Equipment maintenance

Management of personnelresources

Negotiation

Operation monitoring

Operations analysis

Persuasion

Programming

Repairing

Technology design

Troubleshooting

Programming as well as management and other soft skills are falling short Percentage of graduates in the top ten skill categories with the greatest gap, 2013

University Vocational college

Source: Authors’ analyses based on MyCOS survey data.

Service-related knowledge needs to be improved

10

Source: Authors’ analyses based on MyCOS survey data.

0

10

20

30

40

50

60

70Sales and marketing

Personnel and human resources

Customer and personal service

Mechanical

Production and processing

Therapy and counseling

Design

Economics and accounting

Engineering and technology

Law and government

University Vocational college

Moving from “made in China” to “created in China”

Establish a workplace-training-based vocational education system

Enhance skill provision from early childhood to adult learning

Evaluate universities and staff more on quality of academic work and: Promote research autonomy Merit-based promotion Stronger intellectual property rights, to attract and retain

world-class researchers.

Increase education spending, including boosting teachers’ salaries

11

Providing equal opportunities in education

12

Inequalities mainly stem from the urban-rural divide

• Nearly 10% of compulsory-age children are migrants

• But only 80% attend public schools and 3% publicly-funded private schools

• Many migrant children cannot sit for the college entrance exam where they reside

13

Equal education opportunities for all

Improve access to pre-school education including by providing vouchers for use at private facilities

Open up public schools to migrant children or where such schools are not available, provide vouchers to enable them to attend private schools

Allow resident migrant children to sit for the college entrance exam irrespective of their parents’ work or social security status

14

15

Bridging the gap for rural areas

16

China is under-urbanised

• 100 million additional migrants from rural areas are expected by 2020

• The share of agriculture in the economy will diminish

India

United States

Indonesia

Brazil

Russia

Japan

South Africa

Korea

Chile

0.5 2 5 10 20 30 40 50

China 2000 China 2014

China 2020 projection

0

10

20

30

40

50

60

70

80

90

100Ur

ban p

opula

tion (

% of

total

)

GDP per capita (thousands current USD PPP, log scale)

Source: World Bank World Development Indicators database; National Bureau of Statistics; OECD (2013).

17

Agricultural labour productivity is low

0

5 000

10 000

15 000

20 000

25 000

30 000

35 000

0

5 000

10 000

15 000

20 000

25 000

30 000

35 000

1 2 3 4 5

Gross agricultural output per unit of labour

Gross agricultural output per unit of labour

Cross-country GDP per capita groups

China

Poorer countries Richer countries

Source: US Department of Agriculture, authors’ calculations.

18

Reforms to improve agricultural productivity

Land reform to improve allocation of land resources

Improve access to finance for farmers

Upgrade technical skills and training

Improve the sustainability of land use

19

Rural citizens typically move towards higher wages

The Hukou system constrains labour reallocation to the most productive centres

Universally introduce resident permits for migrant workers that allow access to public services

Shanghai Beijing

Tibet Autonomous Region

Zhejiang

Tianjin

Guangdong

Jiangsu

Qinghai

Liaoning

Ningxia Hui Autonomous Region

Fujian

Chongqing

Shandong

Yunnan

Inner Mongolia Autonomous Region

Sichuan

Hunan Shanxi

Xinjiang Uygur Autonomous Region

Guangxi Zhuang Autonomous Region Anhui

Gansu

Shaanxi Hebei

Heilongjiang

Hubei

Hainan Jilin

Guizhou Henan

Jiangxi

0

5

10

15

20

25

30

35

0 5 10 15 20 25 30 35

Inwar

d migr

ation

2005

-201

0 - S

ample

rank

(lo

west=

1)

Average wage 2005 - Sample rank (lowest=1)

Source: China Statistical Yearbook 2006, 2010 Census of China, authors’ calculations.

20

Rural income and health support need to be improved

• Incomes are almost three times higher in urban than in rural areas • Healthcare services in rural China are low compared with urban areas

0 1 2 3 4 5 6 7 8 9 10 11

0 1 2 3 4 5 6 7 8 9

10 11

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Shan

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ui Au

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Ratio Ratio Healthcare services

Ratio of medical staff per capita in urban to rural areas, 2013

Medical Technical Personnel Doctors Nurses

Source: China Statistical Yearbook 2014.

21

Boosting public support to rural areas

Expand rural social welfare coverage

Improve health services in rural areas

Allow portability of rural health insurance and pensions

22

Enhancing the role of the market

23

Structural reforms are needed to boost productivity

• Growth has been mainly driven by investment and to a lesser extent by productivity improvements in recent years

• Local SOEs and collective firms are less productive

0

2

4

6

8

10

12

14

0

2

4

6

8

10

12

14

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

% % Contributions to growth

Labour Capital Total factor productivity

Source: Authors’ calculations based on the Asian Productivity Organisation’s Productivity Database.

Market forces need to be given a greater role

Phase out implicit guarantees enjoyed by state-owned enterprises, so that all firms compete on a level playing field

Reduce state ownership in commercially-oriented service industries such as retailing, hotels, restaurants and construction

Open up more sectors to private investment

24

25

Enhancing the strength of the financial sector

Strict regulations on deposit interest rates and bank loan-to-deposit ratios remain

26

• Regulations have prompted private lending in the informal market at very high interest rates and non-SOE firms find it hard to access finance

• The allocation of capital could be further improved

0 2 4 6 8 10 12 14 16 18

0 2 4 6 8

10 12 14 16 18

Jan-2012 May-2012 Sep-2012 Jan-2013 May-2013 Sep-2013 Jan-2014 May-2014 Sep-2014 Jan-2015

% % Annual interest rates

Deposit rate Bank lending rate Private lending Wealth management product rate

Source: CEIC database.

27

Non-bank financing has grown recently

0

5

10

15

20

25

30

35

40

45

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

% of GDP Social financing flows

Bank credits Entrusted loans Trust loans Corporate bonds

Source: CEIC and China Trustee Association.

28

The market could play a bigger role in the financial sector

Continue to gradually liberalize deposit interest rates

Improve macroprudential supervision: Fully implement a deposit insurance scheme

Design an exit mechanism for failing financial institutions

Enhance financial stability through mandating provisions for actual bad loan exposures, including off-balance sheet loans

Full interest rate liberalisation should be preceded by greater exchange rate flexibility to help the economy absorb shocks

29

Improving fiscal sustainability and transparency

30

Sub-national debt is high in some provinces and lacks transparency

Sub-national debt is only reported by the National Audit Office and in an irregular manner

0 20 40 60 80 100Shandong

GuangdongHenan

ZhejiangFujian

HeilongjiangJiangsu

HebeiInner Mongolia Autonomous Region

JiangxiAnhui

LiaoningGuangxi Zhuang Autonomous Region

Ningxia Hui Autonomous RegionHubei

HunanJilin

Xinjiang Uygur Autonomous RegionShanxiTianjin

SichuanShaanxi

BeijingShanghai

HainanGansu

QinghaiYunnan

ChongqingGuizhou

Sub-national debt in % of sub-national GDP (mid-2013)

Full repayment responsibility Guaranteed debt Contingent liabilities

Source: Sub-national Audit Office and Finance Bureau websites.

Improving fiscal sustainability and transparency

Publish sub-national debt figures on a regular basis

Permanently prohibit local government investment vehicles from taking on new debt

Increase budget transparency

31

More information…

www.oecd.org/eco/surveys/economic-survey-china.htm

OECD OECD Economics

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