Economic Policy Reforms 2019

China

GDP per capita continued to catch up rapidly with that of the upper half of OECD. The New Era, where more emphasis will be put on the quality instead of the pace of growth, will likely reduce the speed of catch up. The income gap with more advanced countries reflects lower labour productivity as labour participation rates are higher than in OECD countries.

Income inequality, measured by the Gini coefficient for disposable income, is well above the OECD average. Moreover, the trend decline in inequality halted recently. Widespread air pollution is a pertinent problem with a large share of population exposed to high particulate matter concentrations.

Progress is apparent in all key priority areas identified in Going for Growth 2017. A wave of administrative simplification is sweeping across the country, though progress varies widely across provinces and municipalities.

To enhance overall efficiency through a better allocation of resources, the rule of law should be strengthened and a level playing field ensured. A better match between skills and labour market needs would support catching up in productivity. Gradually phasing out implicit guarantees for state-owned enterprises (SOEs) and other public entities would lead to better market selection, and hence lead financial markets to better price risks. Less room for discretionary decisions involving public money and a more redistributive tax-and-transfer system would make growth more inclusive.

Growth performance, inequality and environment indicators: China

Source: Panel A: OECD, Economic Outlook and Productivity Databases; Panel B: China National Bureau of Statistics; OECD, Income Distribution and National Accounts Databases; International Energy Agency (IEA), Energy Database; Panel C: OECD, Economic Outlook, National Accounts and Productivity Databases.

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Policy indicators: China

Source: Panel A: OECD, Education at a Glance Database; China Labour Statistical Yearbook 2017, China population and employment statistics yearbook 2017 and CEIC; Panel B: World Bank, Worldwide Governance Indicator.

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Beyond GDP per capita: China

Source: Panel A: OECD, Income Distribution Database, World Bank, World Development Indicators Database and China National Bureau of Statistics; Panel B: OECD, Environment Database.

Note: For the explanation of the sets of indicators above, please go to the metadata annex at the end of this chapter.

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China: Going for Growth 2019 priorities

Ensure a better match between skills available and those demanded in the market. Tertiary graduation rates have increased in recent years but the share of graduates in the labour force is still low compared to OECD countries. Moreover, many graduates do not appear to have the skills required by the labour market. Accessibility to academic higher education depends on household registration (hukou) status, weakening the degree of meritocracy of the higher education system.

• Actions taken: In 2018 the State Council issued the implementation details of a lifelong VET system for groups such as the unemployed, university graduates and rural workers. In 2017, colleges introduced 2311 new undergraduate majors across the country, such as big data technics, robotics engineering and data science. Foreign capital participation has been made easier in vocational schools since 2018. Integration and cooperation of vocational schools and colleges with industry is being enhanced, for example, by adjusting curricula. Guidelines published in 2017 set the same building standards for urban and rural schools and aim to improve the supervision of private schools.

• Recommendations: Review the criteria for establishing the number of students that can be admitted to existing programmes. Make vocational education more attractive by improving teachers’ qualifications and the reputation of such programmes. Streamline licensing procedures for all qualifications and ensure country-wide minimum standards. Enhance accessibility to universities, including top-ranking ones, for students coming from regions with fewer higher education institutions.

Strike a better balance between liberalisation and regulation in financial markets. Financial liberalisation brought to life a number of market players that are not subject to the same extent of regulation as traditional financial market participants.

• Actions taken: Steps to open up the financial sector taken in 2018 include allowing majority foreign ownership in the sector. Banking and insurance regulators have been merged and the central bank was equipped with additional powers as the lead financial regulator. Regulation was tightened on high-leverage and risky asset management products. Steps have been taken to lower financing costs for SMEs. The State Council published guidelines for improved statistics of the financial sector. Restrictions were put into place limiting illegal and unauthorised financing of subnational governments.

• Recommendations: Remove implicit state guarantees to public entities to enhance risk pricing by financial markets. Enhance financial literacy through financial education from an early age. Increase disclosure and transparency of all company accounts.

Reduce barriers to labour mobility and strengthen social security and public service provision. The registration system preserves an urban-rural divide, curtailing labour mobility and leading to persistent income inequalities. Social security coverage and the quality of public services differ significantly between urban and rural areas.

• Actions taken: Portability of health insurance is being made easier, with the number of medical facilities accepting direct payment exponentially increasing in 2018. Equalisation of public services across regions (i.e. urban-rural) is manifested in concrete measures: new documents have been released, defining the areas of public services to be covered and specifying financing responsibilities across government levels.

• Recommendations: Ensure more equal public service provision for all, regardless of registration status, to avoid overcrowding in the largest cities. Allow private practice in public clinics after working hours by charging rental fees to reduce queuing and arbitrage opportunities for black-market sales of hospital registration numbers.

Enhance the rule of law. Non-compliance with laws and regulations is widespread and a lack of transparency in many aspects of business provides room for discretionary decisions.

• Actions taken: Supervisory commissions at the provincial, city and county levels have been established countrywide starting in early 2018, taking the anti-graft campaign to a new level. Black lists of violators have been published and depending on the degree of offence, listed individuals are banned from various activities. Since July 2017 public interest litigation has become possible.

• Recommendations: Strengthen the protection of whistle-blowers to make officials less willing or less able to indulge in corruption.

1Address pollution. Pollution of air, water and land take a heavy toll on the population. Air pollution alone claims an estimated one million lives a year and the CO₂ intensity of the economy is higher than in OECD countries.

• Recommendations: Increase further environmental targets, strengthen enforcement and raise fines for violators to deterring levels. Address the major sources of pollution: continue switching from coal-fired to gas-fired power generation, reduce fertiliser use in agriculture and boost the extent of treatment required before releasing wastewater. Raising energy-related taxes and including coal in the tax base would not only reduce pollution but also strengthen climate change mitigation action.