OECD Main Findings China Economic Survey 2015 towards higher quality growth in the New Normal

1. 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

2. 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.

3. 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

4. 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

5. 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

6. 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

7. Providing the right skills to all
7

8. 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 education
Undergraduate, junior college, postgraduate and above
Undergraduate, postgraduate and above
Source: China City Labour Force Survey, Ministry of Human Resources and Social Welfare.

9. Skill mismatches remain
0
20
40
60
80
Equipment maintenance
Management of personnel
resources
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.

10. Service-related knowledge needs to be
improved
10
Source: Authors’ analyses based on MyCOS survey data.
0
10
20
30
40
50
60
70
Sales 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

11. 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

12. Providing equal opportunities
in education
12

13. 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

14. 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. 15
Bridging the gap for rural areas

16. 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
100
Urbanpopulation(%oftotal)
GDP per capita (thousands current USD PPP, log scale)
Source: World Bank World Development Indicators database; National Bureau of Statistics; OECD (2013).

17. 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. 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. 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
Inwardmigration2005-2010-Samplerank
(lowest=1)
Average wage 2005 - Sample rank (lowest=1)
Source: China Statistical Yearbook 2006, 2010 Census of China, authors’ calculations.

20. 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
Chongqing
Shanghai
Tianjin
Zhejiang
Shandong
Beijing
Liaoning
Hubei
Jiangsu
Shaanxi
Sichuan
Gansu
GuangxiZhuang…
XinjiangUygur…
Anhui
Heilongjiang
Hainan
Fujian
Guizhou
Jiangxi
Hunan
InnerMongolia…
NingxiaHuiAutonomous…
Shanxi
Yunnan
Henan
Hebei
Jilin
Guangdong
Qinghai
TibetAutonomousRegion
RatioRatio
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. 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. 22
Enhancing the role of the market

23. 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.

24. 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. 25
Enhancing the strength
of the financial sector

26. 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. 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. 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. 29
Improving fiscal sustainability
and transparency

30. 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 80 100
Shandong
Guangdong
Henan
Zhejiang
Fujian
Heilongjiang
Jiangsu
Hebei
Inner Mongolia Autonomous Region
Jiangxi
Anhui
Liaoning
Guangxi Zhuang Autonomous Region
Ningxia Hui Autonomous Region
Hubei
Hunan
Jilin
Xinjiang Uygur Autonomous Region
Shanxi
Tianjin
Sichuan
Shaanxi
Beijing
Shanghai
Hainan
Gansu
Qinghai
Yunnan
Chongqing
Guizhou
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.

31. 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
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32. More information…
www.oecd.org/eco/surveys/economic-survey-china.htm
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