OECD Economic Surveys: China 2022

Report

OECD Economic Surveys: China

18 March 2022

Available in:

English
français

Download PDF

1. Key Policy Insights

COVID-19 has hit the economy hard but the recovery is well underway

While the Chinese economy was hit hard by the outbreak of COVID-19 in the first quarter of 2020, rigorous testing, tracing and isolation and strict non-sanitary measures helped stabilise the state of the pandemic. Owing to the prompt measures to control the outbreak and effective macroeconomic stimuli, activity sharply rebounded in the second quarter of 2020 and returned to its pre-COVID-19 trajectory (Figure 1.1). While growth is slowing gradually in the medium term, it will likely remain strong and as recoveries of other countries are lagging, China’s contribution to world growth is large.

Notwithstanding this economic performance, imbalances have built up. Growth has been led by capital accumulation, supported by high savings. That growth model has led to misallocation of capital and falling investment efficiency. Moreover, the investment-led recovery from the COVID-19 crisis foreshadows the building up of further imbalances down the road. High investment was financed by debt, fuelled by interest subsidies and implicit guarantees for state-owned enterprises (SOEs) and other public entities. Effectively addressing sources of financial risk, such as high corporate leverage, real estate bubbles, excessive risk taking by small banks and non-bank financial institutions and steadily rising and concentrated household debt will help keep growth on a sustainable path.

The 14^th Five Year Plan emphasises the importance of the quality of growth. High-quality growth implies greater efficiency and inclusiveness and is not necessarily low growth. Even though some growth may need to be foregone in the short run to ensure efficiency gains for the long run with a wider spread of benefits of growth across society and less stress on a highly polluted environment. Against that backdrop, the main messages of this Economic Survey are:

Economic growth will remain high for the coming years, but it is slowing as the population ages and the labour force keeps falling. A new round of structural reforms is needed to boost efficiency-enhancing competition in product markets and hence improve the quality and resilience of growth.
Financial risks are mounting on the back of high and rising corporate debt, increasing defaults, in particular of property companies, failing banks and rising and concentrated household debt. The non-bank financial sector is a further source of risk as it serves low-rated borrowers. A sharper fall in housing prices would hurt real estate companies and through interlinkages could spread to other sectors.
Absolute poverty has been eradicated, but to make it sustainable, more employment opportunities and rising incomes are needed. Income inequalities remain high and so are inequalities in access to high-quality public services. Health insurance coverage is high, but the reimbursement rate is relatively low and even lower outside of the place of registration. The various pension schemes provide high replacement rates to some and inadequate source of living for others. Unemployment insurance only covers urban employees.

Figure 1.1. China’s convergence has been restored after a disruption caused by COVID-19

Drastic measures appear to have put a break to the spread of SARS-COVID-2

The sharp dive the Chinese economy experienced as a result of the COVID-19 outbreak in the first quarter of 2020 at -6.8% (year-on-year) was followed by a strong V-shaped rebound in the second quarter, and average annual growth for the full year wound up positive, at 2.3%. Growth then stabilised in 2021 and returned to its pre-pandemic gradually slowing path. Notwithstanding the extent of disruption and the fact that it occurred when the economy was already weakening, the economy has quickly returned to its pre-crisis level. Moreover, the rebound did not necessitate large stimulus packages like during the Great Financial Crisis.

The first reports of COVID-19 came out of China. Drastic measures, such as lockdowns and curfews were necessary, as the spread of SARS-COVID-2 was too fast to be halted by just using the otherwise effective conventional method of testing, tracing and isolation. Restrictions imposed on the movement of people when the virus started to spread were the main source of economic disruption. The lockdown of Wuhan on 23 January 2020 and soon after virtually the entire province of Hubei implied severe costs in economic terms but without it, it would have been hard to control the spread of the virus. Depending on the extent of the spread of the virus, the degree of control measures differed across the country. The disruption caused by the lockdown of Hubei was particularly severe as it is not only one of the largest sources of migrant workers in China, but also a large destination for migrants from other provinces. Moreover, Wuhan is a major industrial hub.

The stringent border controls, lockdown, tracking, tracing testing and isolation, were successful: by late March 2020, mobility restrictions in Hubei were lifted and on 8 April also in Wuhan. Even though the outbreak in the epicentre was controlled, sporadic emergence of clusters across the country have continued until today. As a consequence, border controls remain stringent, while contact tracing and testing continue. While in 2020 tens of millions of people have been vaccinated with an emergency approval, the first vaccine was approved for commercial use on the last day of 2020. In January 2021, further tens of millions of people have been vaccinated, all belonging to priority groups such as healthcare workers, people working or studying abroad and people who need to interact with many others in their work. As of November 2021, the vaccination rate was approaching 80% and exceeded 80% in early 2022. Notwithstanding plans to roll out the vaccine gradually to all eligible on a voluntary basis, the emphasis on wearing masks and physical distancing remains as vaccines do not provide full protection against contracting the virus. Moreover, the most recent omicron strain represents an even greater risk as it is confirmed to spread faster than earlier strains, although not much is known about its impact.

The COVID-19 crisis has mostly affected service sectors such as accommodation, entertainment, catering and trade. Hence, the transition from manufacturing to services has paused (Figure 1.2, Panel A). Transportation services that make up 4% of GDP nosedived when lockdown measures were introduced, though by early autumn 2020, domestic passenger flight services had recovered to pre-COVID-19 level. Accommodation and catering, jointly making up 2% of GDP, have been hard hit, though conversions into temporary quarantine centres and a surge in delivery services have mitigated the impact. Finance and IT continued to boom throughout 2020, even in the midst of the outbreak, providing support to growth. The digitalisation drive with the aim to provide goods and services without physical contact, including also in the government sector, boosted demand for financial and IT services. Mobile payments reached record highs and new applications mushroomed. Growth excessively relying on the financial sector, however, is unlikely to be sustainable. The rebalancing process from investment to consumption has also paused (Figure 1.2, Panel B).

As migrant workers (mostly rural residents taking up jobs in cities) were most susceptible to be laid off following lockdown and sanitary measures, the transition towards a more urbanised society has also paused. The pandemic highlighted some bottlenecks of the social security and employment protection systems. Migrant workers, most affected by both the plunge in services production due to physical distancing rules and closure of export-oriented factories due to slackened foreign demand at early stages of the pandemic often found themselves out of work in a matter of days. Even if their employer paid unemployment insurance for them, they are only eligible to a one-off assistance if the insurance was paid for at least a year. As a relief measure, between May and December 2020, people with an unemployment coverage of below one year counting from 1 January 2019 were entitled to temporary support equivalent to the local dibao (minimum subsistence subsidy) for maximum three months. China’s labour market is more flexible than in OECD countries, but during crises, it makes the laid-off more vulnerable, in particular in the absence of a well-developed social security and social assistance system. Migrant workers can hardly afford urban life without a job due to limited social protection, therefore many returned to the countryside when they lost their jobs. To provide some relief for workers stuck at home in less wealthier regions, the National Development and Reform Commission (NDRC) implemented a programme of bringing construction to the workers, where projects in those areas and nearby settlements got priority in reopening. This scheme provided work for over 300 000 people during the lockdown. The growth rate of migrant workers (i.e. the number of rural residents taking up a job in cities) was already low before COVID-19, and it turned negative for the entire year of 2020 (-2.7%).

Unemployment is only measured in urban areas in China, by the registry-based and survey-based indicators, neither of which appears to show a spike as a result of the outbreak and job losses (Figure 1.3). The registry-based unemployment rate has come down to 3.9% in the third quarter of 2021 from the 10-year high 4.2% in the fourth quarter of 2020 (which was only 60 basis points higher than the lowest rate during the last decade). As most people who are not eligible for unemployment benefits have no incentives to register, the survey-based unemployment rate is more reliable. It fell to 4% in December 2021 from a peak of 6.2% in February 2020 in the midst of the COVID-19 countrywide lockdowns. A useful indicator to assess labour market pressure in urban areas is the job vacancy rate, which is the ratio of job vacancies to jobseekers. Job vacancy rates had halved as a result of the collapse of demand following the outbreak, but have remained well above one and have levelled off. To get a clear picture about the actual size of job losses, labour force surveys should include questions regarding willingness to work longer hours to capture surplus labour in rural areas and an indicator capturing underemployment (i.e. working but fewer hours than one wishes) should be constructed.

Figure 1.3. COVID-19 does not appear to have much affected unemployment indicators

Employment creation has become the key focus of the government. With private enterprises, in particular the smaller ones, cutting back on expansion plans and new hiring, the public sector, both enterprises and the public administration have committed to hire more people than originally planned to act as a buffer. The public sector alone, however, is unlikely to be able to absorb all new entrants to the labour market. Temporarily, also graduate school places have been expanded, but more importantly, entrepreneurship is strongly encouraged. A greater role for the private sector, including by removing entry restrictions and levelling the playing field, would help job creation.

Investment became the key engine of recovery from the outbreak (Figure 1.2, Panel B above), pausing the rebalancing process toward consumption. Investment has three major components: industry, infrastructure and real estate development. The share of investment in the secondary industry (which includes manufacturing and mining as well as utilities) shrank over the past years and by 2020 became the smallest among the three (Figure 1.4). For many years, excess capacity in a number of industries weighed on investment, and stringent administrative measures have led to the phase out of obsolete capacity in coal and steel a year before the targeted deadline, as early as in 2019. In other industries, such as flat glass or cement, instead of administrative capacity reduction targets, the emphasis has been on meeting environmental goals and market-based capacity reduction. The COVID-19 outbreak led to a sharp fall in investment in industry, recovering to a slightly positive growth rate (0.1%) over the whole year of 2020. Investment in utilities and high-tech industries grew at double digits and the latter contributed most to stabilisation of overall investment. Infrastructure’s and real estate’s shares, in contrast to industry’s, increased over the past years, to 33% and 28% of total investment, respectively in 2021. Half of infrastructure investment goes to transport and public facilities. The share of private investment, which is less likely to flow to infrastructure owing to various barriers, shrank ca. 3 percentage points over the past five years.

Figure 1.4. Infrastructure investment exceeded a quarter of the total and goes mainly to transport and public facilities

Real estate investment growth has stalled as some large developers defaulted on their bond payments triggering falling sales. House prices fell in several smaller cities, but remained relatively stable in the largest ones (Figure 1.5). Average house prices in China increased sharply in the past five years, though at a similar pace as in Canada and at a much slower pace than during the forming of bubbles in Japan in the 1980s or Spain in the 2000s. The average, however, masks significant differences across regions. Housing in the large cities, such as Beijing, remains out of reach for average earners as it takes 50-60 years of average disposable income to purchase a 100 square metre apartment. Even in Chongqing, which is close to the national average, it is equivalent to 20-30 years’ of disposable income.

Figure 1.5. House prices have flattened in mega cities but are still not affordable for average earners

Producer price inflation had surged after three years of trending down, but appears to be levelling off (Figure 1.6). The surge may reflect increase in capacity utilisation and in import prices of raw materials such as iron ore. Consumer price inflation has remained benign following a surge during 2019 that peaked out after the COVID-19 outbreak.

Figure 1.6. Producer prices have shot up, while consumer price inflation remains moderate

Trade trends and policies amid the recovery

The COVID-19 outbreak had temporarily hit China’s international trade hard, first through domestic supply-side disruptions, followed by demand shocks in major markets. The automobile supply chain had been hard hit as Wuhan, the epicentre of the outbreak, is a major automobile hub and the chain was hit in a staggered way: first China then other countries along the chain. The semiconductor value chain was hit to a lesser extent as semiconductor makers in Wuhan remained in operation and kept hiring even in the midst of the lockdown. As China went into lockdown, some competitors, mainly in South and Southeast Asia, stepped in quickly and raised their market shares. Those producers that already had relationships with importers in those markets where China suddenly was unable to supply to could boost their exports swiftly. However, competitors had not been fully able to replace Chinese suppliers (Heise, 2020[1]). Moreover, owing to China’s swift control of the outbreak and V-shaped recovery, it was able to lift its exports to historical highs (Figure 1.7).

COVID-19 boosted China’s trade surplus through multiple channels: (i) the strong exports of COVID-related protection materials as well as the teleworking-related electronics goods and parts, (ii) picking up other countries’ export orders, (iii) relatively low raw material prices at early stages of the pandemic, (iv) lagging recovery of domestic consumption, thus weak demand for imports, though the import content of consumption is low in China and (v) wiping out tourism services imports, which had grown to similar magnitudes as the goods trade surplus by recent years (Figure 1.8). With trade being its largest component, the surging trade surplus is also lifting the current account surplus.

Figure 1.8. COVID-19 boosted the trade balance by lifting surplus on the goods and suppressing the deficit on the services account

The outbreak of COVID-19 adversely affected trade flows, including imports that should have taken place in 2020 as part of the commitments agreed with the United States (Figure 1.9). Trade tensions continue but the first step towards resolution has been made as an initial trade deal was signed between China and the United States. The agreement helped avoid the last announced round of tariff hikes by the US, which would have taken effect in December 2019. More importantly, it prevented a further escalation of the conflict and improved confidence. However, most of the already implemented tariff hikes will continue to bite. The commitment by China to buy those amounts of additional US goods and services could lead to trade diversion from other suppliers as weak consumer demand bites. China is importing large amounts of agricultural products as national reserves of corn (as well as soybeans and cotton) are being replenished (He, Hayes and Zhang, 2020[2]). Agricultural imports have exceeded the 2017 baseline, though remained still somewhat short of the commitments.

Figure 1.9. Commitments under the Phase I trade deal have been delayed due to COVID-19

China’s commitments to import in excess of the baselines

The trade conflict between the United States and China triggered a round of restrictions on both sides and heightened uncertainties in global trade and investment. It may also have a longer-term implication on offshoring considerations and global value chains. Moreover, several countries have acted based on the reported use of forced labour in China by initiating trade and other measures in sectors linked to global supply chains. The Chinese government disputes these reports. The perception of foreign investment and trade risks has consequently increased, along with the risk of possible interruptions in some supply chain sectors. Transparency and evaluation of labour conditions are important to assess China’s compliance with international labour standards. The sources of conflict go far beyond trade and investment: fair competition and government support are gaining renewed attention worldwide in the context of the pandemic. Market-distorting government support in steel, aluminium and shipbuilding have been in the centre of global disputes for some years now. While emergency support in the context of COVID-19 is considered to be justified, long-term structural government support can lead to distortions in global markets (OECD, 2021[3]). To level the playing field in global markets, subsidies should be transparent.

Global trade is also being adversely affected by ensuing further conflicts. Trade dispute settlement proceedings at WTO were initiated by Australia in response to the imposition of prohibitive tariffs on barley and wine imports from Australia seen as dumping by China. Then COVID-19-related restrictions on meat establishments and health-certificate issues with timber, alongside disruptions to other commodities such as coal, cotton and lobster, curbed Australia’s exports to its largest market. The results of dispute settlement are still to be seen, but such events will likely have an adverse confidence impact and potentially even trade diversion. It is important to engage with trading partners on outstanding trade issues in a timely, transparent and evidence-based manner consistent with WTO and bilateral agreement obligations. The adherence to international labour standards as stipulated codified in the ILO Fundamental Conventions should also be ensured also to minimise foreign investment risks and possible interruptions in some supply chains. This includes the need for all countries “to respect, to promote and to realize…the principles concerning the fundamental rights which are the subject of [ILO] Conventions,” including “the elimination of all forms of forced or compulsory labour.” (ILO, 1930). The EU-China Comprehensive Agreement on Investment, which has not entered into force, also has such provisions.

At the same time, China has lowered its average tariffs on imports from other countries in four rounds already since the beginning of the trade conflicts with the United States, cumulatively reducing the average tariff level by 2.3 percentage points to 7.5% as of end-2020 (Figure 1.10). China has recently stepped up its economic integration efforts. In November 2020, it joined the Regional Comprehensive Economic Partnership (RCEP) with ASEAN and four non-ASEAN countries. While for China, the only major other signatory is Japan, the importance of the Partnership goes beyond just reducing tariffs and other liberalisation measures among members. Through RCEP, China can also gain tariff-free access to major third markets, such as the European Union or the United States through the members that have such agreements with those countries. At the end of 2020, the European Union and China announced that they will sign an investment agreement, which since has been put on hold (Box 1.1).

Box 1.1. The EU-China Comprehensive Agreement on Investment (CAI)

At the eve of 2021, China and the European Union reached an agreement in principle on a long-negotiated Comprehensive Agreement on Investment. The Agreement seeks to redress some long-standing concerns by European companies in the Chinese market by rebalancing the market access asymmetries and levelling the playing field.

CAI further lifts market access restrictions in selected areas. Rules on state-owned enterprises, enhanced transparency of subsidies and the prohibition of forced transfer of technology aim at further levelling the playing field. CAI also encompasses a robust implementation and dispute settlement mechanism with a possibility to retaliate. Unlike any other agreement with China, it contains rules on sustainable development, including commitments by China to implement effectively the Paris Agreement on climate change, and to ratify ILO Fundamental Conventions on forced labour.

CAI includes steps towards more reciprocity, which is also important for China, as it will be seen as a responsible investor and hence be more welcome in EU markets. China is increasingly becoming a major global investor, as the 2019 Economic Survey discussed.

The ratification of the Agreement, however, has been put on hold by the European Parliament on the back of escalating geopolitical tensions between the two parties.

Source: Various news agencies.

Figure 1.10. China lowered its import tariffs since onset of the trade war

China’s economy was hard hit by COVID-19 in 2020, but growth has nonetheless reached 2.3% – making it one of the few economies that did not contract. A very robust recovery followed in 2021 (Table 1.1). Following the stimulus, the fiscal deficit also returned to more normal levels in that year. In 2022, stability will be the main focus, as the Central Economic Work Conference in December 2021 foreshadowed. Growth is projected to slow to 5.1% owing partly to the high base in the previous year, but also to carryover effects related to weaker economic performance in the second half of 2021.

	2014	2015	2016	2017	2018	2019	2020	2021	2022	2023
	Current prices (CNY billion)	% change
Real GDP	64,354	7.0	6.8	6.9	6.7	6.0	2.3	8.1	5.1	5.1
Exports of goods and services¹	5,184	-2.3	1.9	11.3	3.7	1.5	1.6	16.7	2.4	5.5
Imports of goods and services¹	12,263	2.6	6.4	6.8	6.3	0.4	-0.8	7.8	0.4	5.3
GDP deflator	-	-0.0	1.4	4.2	3.5	1.3	0.6	3.8	1.9	1.4
Consumer price index	-	1.5	2.1	1.5	1.9	2.9	2.5	0.8	1.7	2.4
Terms of trade	-	12.7	0.2	-6.8	-3.4	0.6	7.3	-8.8	-3.8	-0.4
Fiscal balance (% of GDP)
Overall²	-	-1.3	-3.0	-3.1	-3.1	-3.7	-6.9	-6.4	-6.0	-6.1
Headline³	-	-2.4	-2.9	-2.9	-2.6	-2.8	-3.7	-3.1	-3.0	-3.2
Current account balance (% of GDP)	-	2.7	1.7	1.5	0.2	0.7	1.9	1.7	1.5	1.5

1. OECD estimates.

2. The comprehensive fiscal balance encompasses the balances of all four budget accounts (general account, government managed funds, social security funds and the state-owned capital management account).

3. The headline fiscal balance is the official balance defined as the difference between the three items of (i) general budget spending, (ii) replenishment of the central stabilisation fund and (iii) repayment of principal on sub-national debt on the spending side and the three items of (iv) general budget revenue, (v) revenue from the central stabilisation fund and (vi) sub-national budget adjustment on the revenue side. The 2015 figure is the official deficit target.

Source: CEIC database and OECD Economic Outlook 110 database.

The above projections are subject to a number of risks, which overall are somewhat tilted to the downside. Allowing more indebted, unviable state-owned enterprises and other public entities to go bankrupt would sharpen risk perception, but in the short run may lower growth by decreased production. The lowering of the loan-loss coverage ratio for small banks increases their vulnerability to serial bankruptcies of smaller firms. Bankruptcies would spur unemployment, both in urban areas and among migrant workers (rural residents working in cities on a temporary basis). Outbreaks on a greater scale and in more locations across the country could take a toll on growth. Continuing lockdowns in other countries could disrupt value chains, hitting China’s parts and components producers and assemblers, although their reliance on imported inputs is decreasing. A faster-than-expected recovery from the virus crisis in Asian countries would boost not only exports, as these are the fastest growing markets, but also employment, as export-driven firms account for nearly a quarter of total employment. A prolonged trade conflict would likely entice further protectionist measures and take a toll on global trade and growth. The new regional trade agreement (Regional Comprehensive Economic Partnership), in contrast, will boost trade and provide better access to third markets. There are some potential tail events, whose probability is small, but their impact on the recovery could be high (Table 1.2).

Vulnerability	Possible outcome
Emergence of more COVID-19 clusters on a larger scale	Lockdowns of large cities or an entire province would derail the economy from its recovery path as it would break supply chains by inhibiting the move of goods and people.
Surge in corporate defaults	Disorderly defaults of property companies would drag down creditors, suppliers and homebuyers. Lagged recovery in some sectors and the end of debt moratoria can accelerate defaults, which have already surged recently. Large-scale defaults would adversely affect bank profitability, especially of small banks as well as non-banks, whose clients are riskier.
Large-scale mortgage-loan defaults	Once debt moratoria are over, heavily indebted households, especially those with very high debt service-to-income ratio, could default on their mortgage loans in large numbers leading to financial stress in smaller banks that are exposed to the housing sector.
Escalation of trade and geopolitical tensions	No progress following the Phase I deal with the United States and other bilateral trade disputes such as with Australia could take a heavy toll on export-oriented firms. Such tensions can potentially lead to “decoupling” not only in trade, but also in the broader areas of investment and technology with undesirable consequences on global growth. Regional instability could lead to adverse confidence effects.
Adverse impact on financial flows	Potential restrictions on financial flows to Chinese financial institutions operating in Hong Kong, China could also have an adverse impact, given the importance of the city as a financial centre.

Monetary policy is supportive

Monetary policy is increasingly price based (i.e. interest rates are increasingly used as policy instruments in contrast to monetary aggregates) and the transmission mechanism is improving. However, targeted policies still prevail. Moreover, the pandemic triggered a new wave of targeted policies, aiming to benefit sectors and individuals in the hardest hit industries and regions. The introduction of the loan prime rate in August 2019 (LPR, Box 1.2), as the benchmark lending rate, is an important step in the interest rate liberalisation process. The major change is that the LPR is now linked to rates set during open market operations (i.e. the PBOC’s medium-term lending facility or MLF), which is determined by broader financial system demand for central bank liquidity. Getting access to funds at rates that better reflect funding conditions will improve the transmission mechanism. More recently, on 21 June 2021 a new mechanism for determining the deposit interest rate ceiling was introduced, which, parting from the percentage over the benchmark-type of setting, uses instead a benchmark plus basis points-type of rule. Moreover, instead of the three different ceilings applied earlier, there will only be two ceilings: for state-owned banks and the rest. This measure is a further step in the interest rate liberalisation process and is expected to reduce the deposit rates and hence funding costs for banks.

Since 2017, the squeezing of the shadow banking sector - the major supplier of loans to the private sector and local government investment vehicles – while intended to strengthen financial stability, tightened financial conditions for these entities. Thus far, no viable replacement of shadow banking has emerged. Unlike in other countries in the region during their earlier development stages, in China the informal financial sector has so far not been formalised. Newly established private banks, whose number is approaching 20 in just a few years, used to be thought to address this issue. But they are also chasing large and high-rated borrowers, trying to lure them away from large banks by better services. In addition, the life-time responsibility of loan officers for the loans they extended is a strong disincentive to lend to risky borrowers, even though the tolerance rate for non-performing loans has recently increased marginally.

Box 1.2. New pricing mechanism for loan prime rates

On 17 August 2019 the People’s Bank of China announced (PBoC No. 2019/15) that the previous benchmark 1-year lending rate is replaced by the 1-year loan prime rate (LPR) as the new yardstick for new corporate loan pricing, which in turn is based on the medium-term lending facility (MLF). The loan prime rate is published on a monthly basis (on the 20th of each month at 9:30 am).

What is different now?

frequency of loan prime rate announcement is lowered from a daily to a monthly basis
linked to the 1-year medium-term lending facility rate instead of the 1-year benchmark lending rate
the number of participating banks is increased to 18 from the previous 10

Why is the change?

new step in interest rate liberalisation
to cut funding costs, which were reduced at the time of the announcement, as the 1-year benchmark lending rate was 4.31% while the loan prime rate announced on the day of the changes was 4.25% (the 1-year medium-term lending facility was 3.3%)
the loan prime rate exists since 2013 when it was introduced as the interest rate commercial banks charge their best clients and was supposed to reflect market conditions. However, it did not reflect funding conditions as banks kept their rates close to the benchmark

How does it work?

banks submit their loan prime rate quotations, based on what they have bid for PBoC liquidity in open-market operations (OMOs) (mainly referring to the rate of MLF), to the national interbank funding centre before 9 am on the 20th of each month
based on the 18 banks, PBoC publishes the loan prime rate at 9:30 am
banks have to follow the announced loan prime rate for 1-year and over-5-year new loans, but have more freedom in setting interest rates for other maturities

Source: People’s Bank of China website.

Monetary policy supported the recovery following the COVID-19 outbreak, then, as real activity rebounded, it became more neutral. This was needed not to fuel further the already bubbly real estate market. More recently, amidst economic headwinds, monetary policy is turning supportive again. The loan prime rate, the benchmark lending rate, which was unchanged for a long time, has been cut recently (Figure 1.11). Bank lending rates have been driven down, while the share of lending at or below the benchmark has increased. The monetary policy measures taken to revive the economy following the outbreak included the lowering of the reserve requirement ratio, reducing the interest paid on excess reserves, cutting the loan prime rate (earlier in 2020) and rates on medium-term lending facility (MLF) and open market operations. All these measures were effective to entice banks to lend, as illustrated by robust credit growth shortly after the outbreak (Figure 1.12), which resulted in soaring corporate debt. As growth started to lose momentum in the second half of 2021, two broad-based cuts of reserve requirement ratios were implemented (in July and December) and the re-lending rate for small firms and the agriculture sector was lowered. Furthermore, a new cycle of interest rate cuts appears to be starting: following the cut of the one-year benchmark lending rate by 5bp in December 2021, a month later it was cut by a further 10bp and the five-year benchmark lending rate by 5bp, to 3.7% and 4.6%, respectively.

Monetary policy should remain accommodative providing sufficient liquidity. As long as inflation is low and growth is moderate, policy rates should not be raised. Once economic growth becomes more robust and if policies need to tighten, it should be ensured that smaller and private firms have access to financing for their viable projects. Raising the tolerance ratio for loan officers with regard to non-performing loans helps increasing risk appetite. To overcome the lack of credible performance records, corporate disclosure and reporting requirements should be made transparent, as recommended in previous Economic Surveys, to enhance micro- and small and medium enterprises’ transparency and access to formal lending.

Figure 1.11. Lowering the benchmark lending rate is driving down lending rates

Figure 1.12. Credit expansion supported the economy during the COVID-19 outbreak

New credit flows (relative to the previous year)

Some measures are targeted to stimulate lending to smaller firms and the weight of financial inclusion in regulatory assessments has been raised. The central bank also introduced a programme to purchase qualifying credit loans from small banks and set up a special purpose vehicle to lend to small businesses. The two policy tools of the payment extension for inclusive finance for small and micro firms and the support plan for inclusive unsecured loans to small and micro firms were extended until end-March 2021. This does not, however, mean that debt moratoria were automatically extended as that depended on negotiation between lender and borrower.

Providing a lifeline to firms with liquidity problems has been a priority. This has partly been done through “crisis bonds” that benefit from a fast track approval procedure and re-lending through the China Development Bank and commercial banks. Firms affected by the crisis have access to subsidised loans at the maximum of 1.6% of interest. Low-interest loans will certainly help to refinance existing loans and to finance potential working capital and investment needs. However, many SMEs do not have access to formal bank loans, though their share in total loans has increased recently. They borrow from non-banks or from the informal financial system. In August 2020, the Supreme Court announced that the legally protected (through Civil Law) cap on informal lending will be lowered to four times of the loan prime rate. This is much lower than the former double-cap system of 24% and 36% (i.e. loans carrying an interest rate of 36% were recognised as legal, but in case of non-payment, the debtor was only be required to pay up to 24%) and not much higher than the weighted average informal interest rate in Wenzhou, the capital of informal finance, at the time of the announcement. The lower cap will potentially shut financing sources for high-risk high-return firms, therefore it should be set at a higher level.

Even though the cap does not apply to formal financial institutions, given the life-long responsibility of loan officers for the loans they approve and the non-performing loan (NPL) ratio featuring among their performance evaluation indicators, very risky borrowers are likely to be turned away by banks, not least due to a lack of collateral and credible repayment track-record. To overcome the former constraint, a recent regulation aims at promoting intellectual property right-based lending, which has started a few years ago, but is not yet available all across the country. Some local governments provide guarantees for intellectual property rights-based lending, others, such as Guangdong, Shanxi, Sichuan, Liaoning established a risk compensation fund to share the risks with the lenders in case the loan turns sour. Given the highly technical nature of intellectual property rights, those banks that do not have in-house experts, rely on third-party evaluators. Intellectual property rights-based lending should be made available around the country. This would make access to financing easier in particular for innovative firms in services industries, where firms are less likely to have collateral. Provide technical assistance and training for evaluators.

The exchange rate had been relatively stable in the past couple of years, fluctuating in both directions initially and more upwards more recently (Figure 1.13). The countercyclical factor (set by banks), originally introduced to signal preference with regard to the movement of the exchange rate, was phased out in late October 2020, as depreciation pressures ceased. More recently, due to the high current account surplus and bond market inflows, appreciation pressure on the renminbi has been increasing. To contain appreciation, the central bank increased the reserve requirement ratio for foreign deposits twice in 2021, each time by 2 percentage points, reaching 9% by end-2021. The measures also signal the central bank’s tolerance levels toward appreciation. The exchange rate is increasingly market determined: another step in the process was the relaxation of the reserve requirement for selling renminbi through foreign exchange derivatives. Greater market determination of the exchange rate will pave the way for further capital account liberalisation as the exchange rate can serve as a cushion to absorb shocks. Capital flows and foreign exchange reserves have been stable.

Figure 1.13. Capital flows and the exchange rate have been stable

An innovation is the introduction of the digital currency, for the time being on a trial basis, in cities such as Chengdu, Shenzhen and Suzhou. Although switching from cash to e-currency will forego the seignorage revenue (interest paid by banks for accessing central bank money), it has the advantages of being able to track transactions real time (Demmou and Sagot, 2021[4]). This will help fight money laundering, corruption, tax evasion, but raises privacy concerns. As a further step, the digital currency could also be used in cross-border transactions and such possibilities are being discussed with central banks in Thailand and the United Arab Emirates. Cross-border use of the digital currency would also accelerate the internationalisation of the renminbi.

Financial stability has been strengthened, though risks remain

Financial stability has been a key objective in the past few years. Following the 2015 stock market crash, avoiding systemic risk has become a preoccupation of regulators, leading to the 2017 establishment of the Financial Stability and Development Committee, whose role inter alia is to coordinate across regulatory agencies. Systemic risk could potentially stem from a number of sources: (i) smaller banks that rely on the interbank market to a great extent continue to fail, following the recent examples, (ii) shadow banking defaults multiply, (iii) more local government investment vehicles default on their debt and more firms, especially state-owned enterprises at the local level, default, (iv) households with excessive debt service burden default and (v) defaults in internet financing. Given the high degree of interconnectedness in the financial system between different types of banks, with non-banks, as well as between financing vehicles and bond markets and non-banks, contagion risks loom large. This warrants tighter collaboration between the related agencies to avoid systemic risk. Nevertheless, authorities are confident that there are sufficient buffers that could prevent systemic risk.

Deleveraging in the banking sector has continued, following the reining in of shadow banking and off-balance sheet investments over 2016-18. Smaller banks are still mainly relying on the interbank market for funding, raising funds through negotiable certificates of deposit and investing in high-risk high-return projects. Baoshang Bank’s (a smaller lender based in Inner Mongolia) failure shook the markets in mid-2019. More importantly, the only partial bailout (while fully guaranteeing small personal deposits, guaranteeing only the principle for interbank deposits with the bank up to CNY 50 million and an average of 90% for large-denomination creditor's rights of more than CNY 50 million) by the government following the bank’s takeover sharpened risk pricing. Hengfeng and Jinzhou, the two other defaulted banks, received capital injection from their local government owners and were reorganised. Smaller banks, of which there are over 4000 around the country, were hard hit by COVID-19, as they their activities tend to be more limited to certain regions and sectors. Those banks had higher-than-average NPL ratios before the pandemic outbreak, even though the overall non-performing loan (NPL) ratio at 2% has been moderate (Figure 1.14). To support smaller lenders, local governments issued special bonds to replenish their capital and supervisory authorities lowered their reserve requirement ratio and loan-loss provisioning coverage ratio (by 20 percentage points). According to the 2019 rating of over 4400 financial institutions (including all commercial banks and the four types of non-banks of conglomerate finance companies, leasing companies, car financing companies and consumer finance companies) by the People’s Bank of China, over 12% were classified as high risk, mostly rural small- and medium-size institutions. In late 2020, a merger wave swept across the country, where two or more smaller, mostly rural commercial banks, formed a single entity. The potential contagion effects stemming from small bank failure warrant a more comprehensive approach to bank restructuring: more rigorous monitoring and supervision as well as lowering their risk appetite. In addition, to effectively phase out implicit guarantees, the approach to handling bank failures should be consistent, i.e. creditors should at least partially be held responsible for their risk-taking.

Figure 1.14. The overall NPL ratio has been low, but varies greatly by lender and loan type

Chinese banks’ NPL ratio is also moderate in an international comparison (Figure 1.15). Bad loans are being written off and transferred to asset management companies on a massive scale, thus leaving them less visible on banks’ balance sheets. Also, due to debt moratoria for debtors hard hit by the COVID-19 outbreak, potential bad loans are not yet classified as such. In normal times, the special mention category sheds some light on the magnitude of future NPLs, but loans granted deferred repayment are classified as performing. The fallout from the outbreak, however, will likely boost the share of bad loans down the road. Stress tests of the banking sector indicate that under the severe stress scenario, many small- and medium-size banks would not meet capital adequacy requirements. To prepare for a surge in bad loans, banks should increase their provisioning and build up their capital. Furthermore, the banking system’s stress testing should be more transparent.

Figure 1.15. The NPL and special mention category ratios are not high for now

Shadow banking can be another source of systemic risk, even though it has been reined in in recent years (Figure 1.16). Trust companies - of which there are 68 but hardly any without having experienced a default - are in a perilous situation. They sell high-yield products backed by loans to banks and wealthy investors. As those loans are extended to high-risk borrowers such as local government investment vehicles, property developers or small- and medium-size firms, the COVID-19-related slowdown made many fail to honour their repayment obligation and thus the repackaged trust product also failed. The extent of defaults in 2020 at 310 (Source: Diyi Caijing) was therefore much higher than the 118 defaults in 2019. Not least because following the 377 bankruptcy filings by property developers (that are major clients for trust companies) in 2019, the following year 408 filed for bankruptcy (Source: Zhongfangwang). To strengthen the trust industry, in early 2020, the USD 1 billion minimum asset requirement for foreign investors in the trust industry was lifted. Greater disclosure of risks involved in trust products and more deterring fines for over-promising of returns would help reducing systemic risk. Some trust companies (13 as of end-2019) are owned by banks, which could be directly affected by defaults in the industry.

Figure 1.16. Shadow banking is being reined in

Overall debt is high, mainly corporate debt, which is higher than in most other major economies (Figure 1.17). The part of corporate debt accumulated by local government investment vehicles to finance urban construction projects would in other countries be classified as government debt. This share is unknown, but the magnitude of outstanding debt issued by local government investment vehicles (LGIV) at around 60% of GDP at end-2019 is indicative of the potential size. This figure is based on debt securities only, thus includes only around 2600 vehicles from the over 10 000 that exist. It is unlikely that all this debt would need to be bailed out by the government in case investment vehicles cannot service it (given that not all debt is related to financing urban construction projects), though possibly other types of debt (e.g. bank borrowing etc.) related to financing public infrastructure projects by any of the vehicles, would need to be. Overall official SOE debt at over 150% of GDP is very high and in addition to the above LGIV debt, also includes debt issued by ordinary non-financial SOEs and bank loans and other non-bond debt by LGIVs. As discussed in the chapter on improving the regulatory environment in this Survey, SOEs in the services sector are the major debtors.

Figure 1.17. Corporate debt is peaking off

SOEs and other public entities enjoy implicit government guarantees, which should be phased out by allowing such firms to go bankrupt to improve risk pricing. Furthermore, as the 2017 Economic Survey of China pointed out, the corporate insolvency framework needs to be more efficient inter alia by preventing creditors from blocking the procedure, reducing uncertainty and compensating the laid-off according to relevant laws. Deficiencies in the credit-rating market, including inflated ratings and weak warning systems hinder the healthy development of the bond market. The People’s Bank of China issued on 28 March 2021 a draft decision promoting high-quality and healthy development of credit ratings in the bond market, and proposed holding credit rating agencies accountable as independent third parties. In late April 2021, the securities exchanges published regulations seeking to restrict access of high-risk issuers to the corporate bond market. Local government investment vehicles, in particular those with low credit ratings, will find it difficult to issue corporate bonds with the exception to service existing debt.

The real estate sector is a source of particular risk as COVID-19 led to a surge of defaults and bankruptcy filings in the sector already in early 2020, then in 2021 defaults by some of the largest players shook the market. The sector is highly leveraged and depends on both formal and shadow banking and on both domestic and foreign borrowing. In the first half of 2020, 27% of trust products were invested in real estate, versus 40% a year before, reflecting increasing risk aversion. In the first three quarters of 2020, over a third of real estate sector debt was issued in foreign markets, involving exchange rate risk for unhedged issuers. In August 2020, to curb systemic risk, the central bank and the Ministry of Housing and Urban and Rural Development issued regulations governing monitoring and financing of key real estate firms. As a result of tightening of financing sources and rising costs, real estate firms switched to equity financing. Notwithstanding the sharp deleveraging by property companies, including by aggressive sales and discounts, it did not seem sufficient to rein in property company borrowing.

The China Banking and Insurance Regulatory Commission and the People’s Bank of China put a cap on banks’ lending to real estate at end-2020. From 1 January 2021, loans to the property sector are capped at 40% of total loans for the largest state-owned banks and banks’ mortgage lending should be no more than 32.5% of their outstanding credit. The same ratios for smaller banks are capped at lower rates, for instance for village and township banks, at 12.5% and 7.5%, respectively. Another regulation in early January 2021 tightened macro-prudential ratios related to foreign borrowing, making it more difficult to raise funds abroad. This is a reversal from the easing in March 2020, which attempted to ease access to foreign funds for firms recovering from the crisis. This measure is not limited to the real estate sector, but property companies will be more affected as they rely on overseas funding to a greater extent. Credit events in the second half of 2021 in the property market tightened borrowing conditions, reduced sales and investment in the sector. As the share of unsold properties reached the highest level in thirteen years, many cities adopted stimulus measures such as lumps-um or per-square-metre subsidies for first-time buyers, tax reductions, or broadening the definition of eligible home buyers. Orderly bond defaults will help sharpen risk pricing and work off excess capacities in the sector. A key issue remains how to prevent borrowing for other purposes from being channelled to mortgage financing, as was the case in the recent past.

Household debt to GDP is not very high (Figure 1.17, above), but has increased rapidly over the past decade and is highly concentrated, implying potential systemic risk. The People’s Bank’s household financial situation survey shows that in October 2019, over a third (34.7%) of household debt was owed by 12.8% of households whose debt payment-to-income ratio was above 40%. This average ratio is below the official cap of 50% (according to the 2004 guide for commercial banks by the China Banking and Insurance Regulatory Commission), but above the ceilings even for high-income households in some OECD countries. Moreover, nearly 3% of households are not only going beyond their means (i.e. above 40% of their income) to service their loans, but also belong to the lowest quintile in the income distribution. Furthermore, nearly 13% of household debt is owed by 4.5% of households who pay over 60% of their income to service debt and 1.3% of households not only pay over 60% of debt service but also belong to the lowest income quintile. These 1-3% of households with excessive debt burden and low incomes are particularly vulnerable to full or partial loss of income or layoff.

While consumer loans in general are less likely to default than corporate loans, within this category, mortgage loans are the safest and credit card loans the least safe for banks (Figure 1.14, above). The COVID-19 crisis, which hit poorer people disproportionately harder, has likely made some indebted households even more indebted. The cap on the repayment-to-income ratio should be lowered to avoid taking on excessive risks. In OECD countries, which implement a cap on the debt service-to-income ratio, it tends to be around 40%. Sometimes the statutory cap, where there is such, varies with the features of the mortgage loan (e.g. fixed or variable interest rate, maturity, currency etc.) and the borrower’s income level. Some countries, like France, do not have a statutory cap, but banks impose a 33% general cap, which can be somewhat higher for high-income earners.

Financial innovation can be efficiency-enhancing, but could potentially constitute a source of systemic risk if regulations lag behind and if the playing field is not even. China’s financial industry landscape is being transformed at a rapid pace, driven by digital technologies, the use of data and artificial intelligence (AI). Regulation is set to catch up with this development and a three-year plan was foreshadowed in 2019 to establish the framework for digital banking. China has licensed four online-only banks since 2014. In November 2020, the central bank called for greater government guidance in tech sector financing. A number of regulations issued since the summer of 2020 seeks to contain potential risks stemming from digital finance and micro-lending. Online micro-lenders now have to fund at least 30% of each loan jointly with banks. P2P lending, once a thriving business, is being reined in (Figure 1.18). Subjecting lenders to the same regulatory standards as their competitors and enhancing financial education would help curb risks. Also, people without repayment ability, such as students, should not be allowed to take up consumer loans.

Figure 1.18. P2P lending is being reined in

China is becoming increasingly a global investor and creditor. Its outward investment stock has exceeded that of Japan, both in overall terms and in the manufacturing sector. Data on overseas credit is hard to come by, but infrastructure projects raise concern about the debt burden in destination countries as well as potential losses for Chinese creditors in case of default. Infrastructure projects should be subject to thorough cost-benefit analysis and take into account the indebtedness of the recipient country. Overseas affiliates of state-owned enterprises should be regularly audited to avoid unviable investments and a loss of state assets.

Recommendation	Actions taken since the 2019 OECD Economic Survey
Avoid directing credit to state-owned enterprises and local governments as part of the fiscal stimulus.	As a result of COVID-19-related stimulus measures, state-owned enterprises and local governments got more indebted.
Explore steps towards greater exchange-rate flexibility, starting with making its formation mechanism transparent.	The China Foreign Exchange Trade System announced in October 2020 that market making banks phased out the use of the "counter-cyclical" factor in the pricing mechanism of the yuan's central parity rate against the dollar. The adjusted quotation model enhances the transparency, benchmarking and effectiveness of midpoint quotations at those banks.

Fiscal stimulus is supporting the economy

Fiscal policy has been supportive with a package equivalent to about 3-4% of 2019 GDP as announced by the government. With a falling revenue base related to tax reforms in recent years and temporary exemptions and reductions amid COVID-19, as well as emergency spending, the government deficit soared (Table 1.4). Measures to support the economy were already introduced in 2019 as the economy showed signs of slowing and further measures were deployed in 2020 in response to the COVID-19 outbreak. The frontloading of specialised local bonds strengthened infrastructure investment, which started to pick up slightly towards the end of 2019 and gained further momentum around mid-2020. The rebound of growth in the second quarter of 2020 was driven by investment, including in infrastructure. Increasing reliance on specialised bonds to finance infrastructure investment provides an opportunity to gradually phase out financing through local government investment vehicles, thus increasing transparency and accountability. This opportunity should not be missed.

	2017	2018	2019	2020	2021¹	2022¹	2023¹
Spending and revenue
Total revenue	33.9	32.4	31.5	29.8	28.3	28.0	27.9
Total expenditure	37.0	35.5	35.2	36.7	34.7	34.0	33.9
Budget balance
Fiscal balance, overall2	-3.1	-3.1	-3.7	-6.9	-6.4	-6.0	-6.1
Fiscal balance, headline2	-2.9	-2.6	-2.8	-3.7	-3.1	-3.0	-3.2

1. Projections.

2. The headline fiscal balance is the official fiscal balance, referring to the general budget account only, while the overall fiscal balance includes the other budgetary accounts.

Source: OECD Economic Outlook 110 database.

COVID-19 related fiscal measures lifted spending and contingent liabilities are growing

Some of the fiscal measures introduced in response to the virus outbreak (Box 1.3) are outright spending from the budget or tax reductions/exemptions, while others are quasi-fiscal spending such as subsidised lending through the China Development Bank. The size of some coronavirus-related measures is quantified, while others are open ended, which makes assessment of the overall size of fiscal stimuli difficult. Government spending was increased for epidemic prevention and disease control already in early February, reaching three-quarters of the annual budget for these purposes. Epidemic-related research and development spending is also being stepped up. Crisis-related measures will gradually be phased out, either by reaching the end of the grace period or by revoking the support. Emergency measures should only be withdrawn once economic recovery is fully on track. Targeted income support to low-income households and employment creation support would be effective measures to accelerate the recovery. Moreover, spending needs in many areas such as social security, health and education remain high. In addition to these areas, spending on certain types of infrastructure such as renewable energy, environmental infrastructure, urban transit systems, rural roads, environmental infrastructure and underground structures should also increase. A consolidation plan should be announced once the recovery is fully on track.

Box 1.3. Selected fiscal measures in response to the COVID-19 crisis

Revenue side

Soon after the COVID-19 outbreak, the Ministry of Finance announced a series of tax reductions and exemptions including six tax types and two types of fees. Major measures include the following:

Medical workers and others participating in the fight against the virus are exempt from personal income tax on their overtime pay/benefits and in-kind payment is not included in their salaries.
Individuals and firms donating through social organisations or government bodies above the county level can deduct the full amount of their donation from their income tax base.
Medical equipment and pharmaceuticals related to the new coronavirus are exempt from registration fees and airlines from contribution to the airline development fund.
Public transportation, logistics, courier and basic service companies are exempt from the value-added tax.
Allowing firms hit by the crisis to carry over losses for 8 years will result in lower corporate income tax revenues in the medium term. Provision of non-remunerated goods and services by the state-owned sector for crisis prevention will further reduce income tax revenues.
At the sub-national level, there are myriads of subsidy measures to support affected firms. A common measure adopted by many is the delay in the collection of social security contributions. Temporary exemption measures are also applied. Reduced contribution rates to pensions as well as to work injury insurance could originally be applied till end-2020, but then this measure was extended twice (till end-April 2022) to take into account the delayed recovery of hard-hit firms.

Spending side

Max. 1.6% interest rate, with half of the interest cost subsidised, for firms supporting the fight against the crisis in the frontline (medical material and daily necessities producers). By end-June, 7597 firms borrowing CNY 283.4 billion at 1.25% average interest rate benefitted from the scheme costing the budget CNY 2.94 billion.
From April 2020 till the end of the year, small entrepreneurs in retail and wholesale, accommodation and catering, taxi, distribution and transportation could temporarily benefit from subsidised loans up to CNY 200 000.
Two brand new hospitals were built using CNY 300 million provided by the National Development and Reform Commission.
Frontloading of special bond issues by local governments had already been decided in November 2019, but as a countermeasure for the crisis, the amount that was allowed to be frontloaded increased from CNY 1 trillion to CNY 1.29 trillion out of the CNY 3.15 trillion quota for 2020. This measure stimulated the economy without increasing public debt. Its effectiveness in early 2020, however, was muted by the inability of construction companies to resume work owing to the severe shortage of masks and other prevention materials and the indiscriminate quarantining of all migrant workers by several local authorities.
Horizontal fiscal transfers, i.e. financial support among provinces and cities without central-government intermediation, have also been popular, with wealthier areas competing in support to cities in the crisis-hit province.

Note: In addition to the above measures at the national level, sub-national governments adopted a large range of support policies.

Source: Various government websites and news agencies.

Excluding contingent liabilities, public debt is not particularly high at below 40% of GDP and given strong growth and low interest rates, it appears sustainable (Box 1.4). In some provinces, however, the ratios of debt to local output or to local revenues are high (Figure 1.19). As the 2019 Economic Survey recommended, debt ceilings should be linked to the sub-national government revenues also taking into account the stock of accumulated debt. The State Council Opinion on further deepening budget management issued in April 2021 links debt ceilings to sub-national government revenues. Furthermore, large amount of debts constitute contingent liabilities for the government, especially debt accumulated by local government investment vehicles. Debts accumulated to finance urban construction projects would be recorded in the general budget in other countries, but in China most are classified as SOE debt. However, these are contingent liabilities because in the event of failure by a local government vehicle, the government would potentially have to step in, as was the case in 2014. Such debt usually carries implicit government guarantees (explicit guarantees are prohibited). While the size of contingent liabilities is not disclosed, the 60% of GDP of outstanding debt securities of local government investment vehicles, as discussed above, provides a ballpark number. Not all of such debt will likely be assumed by the government in case of default, but other types of debt, in particular bank loans by those vehicles and other vehicles not issuing debt (hence not included in the 60% of GDP estimate) might need to be. To mitigate fiscal risks stemming from surging implicit local government debt, in August 2021, the China Banking and Insurance Regulatory Commission issued document 2021/15 (or often called Document No. 15), which prohibits the undertaking of infrastructure investment on behalf of local governments until it is budgeted.

Figure 1.19. The debt burden of sub-national issues and of urban construction bonds by investment vehicles are high in some provinces, 2019

Most debt by local government vehicles was accumulated at the city/prefecture level, though firms controlled by province-level entities have the highest leverage (Figure 1.20). In terms of regional distribution, investment vehicles in the Yangtze River delta provinces, including Jiangsu and Zhejiang, accumulated most debt, financing their urbanisation drive. LGIVs in economic zones of various types have also been active borrowers. Recent budget implementation regulations require government departments to disclose the budgets of each of their affiliates, while in the past they were consolidated into their departmental budgets, without clarifying the finances of each affiliate. Such affiliates should not enjoy implicit government guarantees and should face a level playing field. Following Document No. 15 by the banking and insurance regulator, the business model of local government investment vehicles started to change. On the one hand, they no longer deliver government infrastructure projects without corresponding funding and on the other hand, they are increasingly venturing into land and real estate development to replace troubled property companies. This will help contain fiscal and financial risks related to excessive borrowing and will provide a viable business model.

Figure 1.20. City-level investment vehicles in the Yangtze delta owe most debt, 2019

Box 1.4. Assessing debt sustainability

China’s official public debt-to-GDP ratio is below 40% of GDP, which is modest in international comparison. Even though the pandemic led to a surge in the deficit, debt ceilings and other budget rules will ensure that it returns to a sustainable level. Growth is also set to return to its original path, thus the outbreak-related rise in public debt will not threaten sustainability. Moreover, low interest rates, at least in the short term, will make debt servicing easier. Rapid population ageing and the related social security, healthcare and old-age care costs, however, will exert pressure on spending and ceteris paribus will increase the deficit. Such spending needs will be met by higher revenues (which currently are around 30% of GDP, a relatively low level in international comparison) through public revenue and social security reforms (discussed below in this chapter). In addition, spending pressures will be mitigated by sizeable potential efficiency gains related to improved collection and budgetary practices.

With the assumption of gradually slowing growth to 4% by 2040, a GDP deflator of around 3%, interest rates increasing to 4% and the primary budget deficit gradually turning into a surplus of 1%, public debt appears sustainable. A separate scenario assumes that part of the debt issued by local government investment vehicles (LGIVs) is taken on by the government. Here only bond issues are considered as that is where data are publicly available. The proportion assumed to be transferred to government accounts is two-thirds, the same as in 2014, when that share of accumulated LGIV debt showed up as local government debt. Another scenario assumes that in addition to the above partial debt relief, GDP growth gradually slows to 3% by 2040. While these two scenarios assume a much faster accumulation of debt than the baseline scenario, even with these assumptions debt will not be extraordinarily high in 2040 (Figure 1.21). For illustrative purposes, in addition to official public debt, total SOE debt is also plotted in the chart. While it is unlikely that all SOE debt would need to be assumed by the government, it is indicative of the upper bound of contingent liabilities. It is also indicative of the magnitudes of the additional debt burden if only a fraction of SOE debt needed to be assumed by the government. These contingent liabilities do not include PPP-related liabilities, reconstruction of shantytowns using development banks’ loans and other implicit or contingent liabilities for which no comprehensive data are publicly available.

Figure 1.21. Potential bailout of local government investment vehicles or SOEs could derail debt from the sustainable path

Budget transparency is increasing

The Implementing Regulations of the Budget Law, effective from 1 October 2020 (State Council Order No. 729) will likely improve budgetary transparency. The Regulations clarify the actors, the process, the content, legal responsibility and other crucial parameters related to budgeting. A major progress is that in addition to the four budgetary accounts, the Regulations also require public entities to disclose their departmental budgets; moreover, those should be consolidated with their affiliates. Even more importantly, the Regulations impose a stricter budget management framework for entities that only partly rely on budgetary funds by requiring them to report detailed spending of those funds. Those entities can open a special account with the Ministry of Finance’s approval and the People’s Bank of China will be in charge of managing and monitoring the bank account opened at a financial institution. Such entities will need to report their spending by the two categories of basic and project-related spending.

However, the Implementing Regulations still leave behind unanswered questions. They do not mention how to consolidate the four budgetary accounts and in the consolidation process how to deal with their interactions. Neither do they clarify how exactly basic and project spending should be defined. They do not specify whether and how the management of special treasury bonds and of special local government bonds, both issued in the government fund account, differs. Managing budget adjustment funds would be another area where further clarification is needed.

In addition, there could be further uniformity in the accounts and details disclosed by various budgetary agencies. For instance, it is hard to compare spending on disease prevention and control at the sub-national government level, as some report only their own spending, while others only consolidated spending with lower levels. Moreover, the level of details varies widely, some report only the high-level category of spending on health and birth control, others also the next level of spending on public health, but only few disclose the next level of spending on disease prevention and control.

Recommendation	Actions taken since the 2019 OECD Economic Survey
Link debt ceilings to sub-national government revenues.	The State Council Opinion on further deepening budget management issued in April 2021 links debt ceilings to sub-national government revenues.
Centralise the financing of some key spending items such as wage bills in education and health.	Central transfers under the direct transfer system, in particular for education, health etc. purposes are increasing.
Widen the base of the personal income tax and make it more progressive.	No action taken.
Introduce a recurrent tax on the holding of real estate and an inheritance tax.	In May 2021 an inter-agency meeting discussed pilots for the real estate tax. No action on the inheritance tax.
Further reduce horizontal disparities in spending, by for instance, progressive tax sharing schemes.	No action taken.
Conduct thorough cost-benefit analysis of large-scale infrastructure projects and enhance transparency of public investment.	The State Council Opinion on further deepening budget management issued in April 2021 promotes cost-benefit analysis for investment projects.

Ensuring sustainable and inclusive growth in the long run

The transitions that had been undergoing to make growth more sustainable and inclusive have paused as a result of the COVID-19 outbreak. These processes include rebalancing from investment to consumption, from manufacturing to services as well as moving people from rural to urban areas. China’s shift to a more consumption-led growth pattern was driven by the deceleration in investment rather than a surge in consumption. Consumption’s contribution to growth was relatively stable at 4 to 6 percentage points over the past couple of decades (Figure 1.22). Before the outbreak, it was closer to the lower end of that range and in 2020 it fell below that of investment. The outbreak encouraged further household precautionary savings towards potential future medical costs or as a protection in the event of losing employment. Thus, the household saving rate, which was 45% in 2019, will likely remain at elevated levels in the near future.

Figure 1.22. The saving rate is still very high

The rebalancing process from manufacturing to services had also paused as restrictions on the physical movement of people and distancing regulations affected services industries to a greater extent. As services recover, the rebalancing process will likely continue. Prior to the outbreak, the share of services in GDP increased significantly, but there is still ample room to catch up with advanced country shares (Figure 1.23). Even in advanced manufacturing economies, the share of services is above 60%. The business tax-VAT conversion over the past decade was an important step in putting services industries on a more equal footing with manufacturing industries. As a result of those reforms, now service providers can also get the VAT refunded on their inputs and all producers can get a VAT refund on their services inputs. Nevertheless, in some other aspects, services industries remain more restricted. Administrative monopolies are more common in services and entry and conduct are also more restricted than in manufacturing as discussed in the next chapter on regulation in product markets. To reignite the rebalancing process towards services, such restrictions should be eased. Accelerating the liberalisation of services would provide a strong base for long-term sustainable growth.

Figure 1.23. The services share is increasing as China is getting richer

The large-scale move of rural residents to urban areas has also paused as migrant workers who were laid off returned to the countryside. Targets of the New Urbanisation Plan, namely providing urban residential status to 100 million people was completed ahead of schedule, in 2019 (vs. 2020, the original deadline). At end-2020, the urbanisation rate reached 45.4%, an 9.5 percentage point increase in seven years. Accelerated hukou reforms, in particular granting equal access to education and healthcare to migrant workers in cities, would encourage more rural people to move to cities. Rebalancing from investment to consumption and from manufacturing to services as well as rural people’s moving to urban areas should resume as soon as the impacts of the pandemic subside as they are key ingredients to sustainable and inclusive growth.

Economic security measures have been featuring in major planning documents and continue to do so in the most recent ones as an ingredient of sustainable development. They include food, energy and technology. When the measures to guarantee availability of those are chosen, they should not conflict with other targets such as further opening up the economy. In some cases, for instance, a renewed emphasis on energy security redirected focus to exploration of domestic oil and gas fields and led to easier access for foreign investors (i.e. joint venture is no longer required). It should be ensured that increased emphasis on security in other areas does not lead to decreased openness and a waste of public funds.

Revamping the social security system for greater inclusiveness and sustainability

High-quality growth needs to be more consumption driven. Consumption, in turn, could be sustainably boosted only by reducing the need for people to save for old-age security, health and education, by providing a better quality of public services nationwide and equally importantly, by accelerating urbanisation (i.e. providing urban residential rights to migrant workers and moving people from rural to urban areas), which can unleash the consumption potential (Molnar, Chalaux and Ren, 2017[5]) should feel secure in the case of losing employment or in-between changing jobs if they are covered by unemployment insurance. Currently, it is mainly urban employees who are covered by unemployment insurance, employees of private enterprises and migrant workers to a much lesser extent. The coverage rate is 25% of the labour force. It should be extended to the entire labour force to reduce saving motives for the case of losing employment.

China has a relatively long life expectancy for its income level and a very short working life. Progressively raising the retirement age is finally decided and is set to be a major task for the 14th Five Year Plan started in 2021. Currently, men retire at 60, white-collar women at 55 and blue-collar women at 50. Notwithstanding the rapid rise in the expected life span in the previous decades, the retirement age was not touched for nearly 70 years. The retirement age should be the same for men and women, should be linked to life expectancy and should be phased in fairly quickly to cope with rapid population ageing. In addition, a long-term care insurance system should be adopted countrywide. Recent release of the 2020 population census data indicate that the measures to partially relax birth control policies did not reverse the rapid aging of the population and thus the remaining controls should also be abolished.

The raising of the retirement age will be key for pension system sustainability, but other parameters, such as the high replacement rate for urban employee pensions and the low ones for urban and rural residents should also change. The coverage rate at over 90% of the above-16 population not in education in 2019 needs to increase further. Currently the holes are filled by social assistance programmes, over 14% of the above-60 population receives government pension as part of social assistance programmes. The pension system could be more redistributive. Low-income earners contribute according to 60% of the average wage and high-income earners according to three times of it. The floor for contributions should be abolished and the cap raised.

The general features of the health system, such as under-resourcing, uneven geographical distribution of resources, especially of high quality resources, high out-of-pocket share of healthcare costs, limited availability of intensive care units, the level of efficiency of the emergency response system and other factors had a bearing on the outcome of the COVID-19 outbreak. Those features will also determine the system’s capability to make growth more inclusive and sustainable. Health insurance coverage is high at above 95%, but the reimbursement rate is relatively low and even lower outside of the place of household registration.

The currently segmented social insurance system across the types of employees and across regions should be unified. Unemployment insurance administered by over 700 jurisdictions should be pooled and extended to all employees. The first target is pooling at the province level. Pension administration is now required to be unified at the province level, though contribution rates by employers still vary somewhat, with some cities such as Dongguan in Guangdong and also in Zhejiang gradually raising their rates to the statutory level. This process, however, has paused due to pandemic-related support policies such as reduced social security contribution rates, which have now been extended till end-April 2022. Pensions should be pooled at the national level to avoid deficits in ageing provinces and surpluses in ones with young populations. More importantly, portability of social insurances across regions should be smooth without penalty for receiving services outside of one’s registered hometown.

Recommendation	Actions taken since the 2019 OECD Economic Survey
Distribute more evenly high-quality education and health resources to reduce incentives to move to mega-cities.	In April 2020, the Guiding Opinion on strengthening teaching staff in the new era was issued, which encourages rotation of teachers within counties.
Gradually ease restriction on access to public services for non-hukou holders and delink it from the hukou.	The National Development and Reform Commission issued a Notice in April 2020 (Fagai Guihua No. 2020/532) encouraging cities with urban residents below three million to abolish household registration restrictions altogether and cities with over three million inhabitants to largely abolish restrictions for major groups such as people with stable employment in the city or rural residents moving to cities with the purpose of studying or joining the army. The Notice also urges cities to provide the same public services for residents without a hukou in their jurisdictions. Mega cities remain an exception.
Abolish the floor and raise the ceiling for social security contributions.	No action taken.
Expand the coverage of early childhood education institutions and enrolment in rural areas.	According to the 2019 education sector report, the number of private kindergartens increased by 4.5% and the number of children enrolled by 0.37% in that year.
Increase the number of qualified teaching and medical staff in rural areas by more effectively rotating good quality staff. For instance, the required period spent in rural areas could increase to a week or a month at a time instead of a day to reach more remote regions.	In July 2020, the Guiding Opinion on strengthening rural teaching staff in the new era was issued, which encourages rotation of teachers within counties. The Opinion requires minimum three years in rural areas as a condition to become a school director. Newly hired teaching staff in villages will be transferred to the county seat within five years. The Opinion on revitalising rural human capital issued in February 2021 exempts college graduates from taking an exam when registering as village doctor.
Create suburban rail networks to allow for a better integration of rural regions nearby cities. Increase and improve rural roads to integrate such areas into commercial networks and enable commuting for work to cities.	Inter-city rails are a priority infrastructure target in the 14^th Five Year Plan.
Unify the pension system at the national level to ensure portability of pensions and improve financial sustainability of the system.	Pension funds have been unified at the province level, the next step is unification at the national level. COVID-related reduced contribution rates adversely affect financial sustainability of the system.

More taxes and greater profits from SOEs could boost public revenues

Given medium- to long-term spending pressures stemming from ageing of the population and greater demand for social security as well as infrastructure needs in environmental facilities, renewable energy, urban transit systems and underground structures, to finance those, revenue sources need to be boosted. More funds should be channelled also to education and healthcare. Some of that spending could also be financed by leaving parts of investment projects for the private sector and by efficiency gains, but given the current low revenue levels, those are unlikely to be sufficient.

As a result of both the generous tax exemptions in recent years and non-tax revenues (with land lease-related revenues being a major item) growing faster, the share of taxes in total revenues declined by over five percentage points in the past five years to around 44% in 2019 (Figure 1.24). Tax revenues hardly reach 20% of GDP, while in advanced OECD economies this ratio is often the double of that. China relies mostly on indirect taxes, in particular the VAT, though the VAT’s share in total revenues is roughly the same as that in OECD countries. In contrast to OECD countries and some other major non-members, income taxes are not a large source of revenue.

Figure 1.24. Taxes represent a small and falling share of government revenues

In particular, the share of personal income taxes is lower than in OECD countries and the 2018 tax reform reinforced this trend by exempting even average income earners from paying income taxes by raising the personal allowance. Following the reforms, reportedly only 4.6% of the population paid personal income taxes. Moreover, those who do, pay at very low rates. Private sector employees, for instance, start paying personal income taxes only at a wage 250% of the national average and even at this level they pay less than 1%. Earlier Economic Surveys recommended to widen the personal income tax base and to make it more progressive for high earnings by, for instance, abolishing the deductions such as mortgage payments that can now be deducted. Once the recovery is well established and the virus outbreak is firmly under control, such tax reform could secure a stable source of fiscal revenue and would reduce income disparities.

Figure 1.25. Few pay income taxes and at low rates

Income tax profiles of single earners at various incomes, 2019

The current tax and transfer system does little in reducing income inequalities (Figure 1.26) which are the greatest in the urban-rural dimension. According to the 2018 vintage of the China Household Income Project (CHIP), 81.3% of high-income people are urban residents, while only 3.3% are rural (the remaining are migrant workers) and only 0.3% of the rural population are categorised as high income in contrast to 4.9% of the urban. Regional disparities are also significant: 70% of high-income people live in the east with roughly the same 15-15% in the centre and west of the country. Accelerating hukou reforms granting the same access for migrant workers to public services and a more equitable distribution of high-quality resources across the country would be key to reducing inequalities between urban and rural and across regions.

Figure 1.26. The tax and transfer system is not very effective in reducing disposable income inequalities

2019

Wealth inequalities are similarly high: the top 10% holds two-thirds of net personal wealth, close to the shares in Russia or the United States (Figure 1.27).

Figure 1.27. The richest people hold a high share of net personal wealth

In addition, a recurrent tax on the ownership of real estate and inheritance taxes would help reducing wealth inequalities, which are high. Roughly three-quarters of household wealth is held in real estate, thus a tax on the ownership of real estate would be more effective in reducing wealth inequalities than taxes on dividends and capital gains levied at the shareholder level. Real estate taxes on the ownership of property are among the least distortive tax types and in many OECD countries are a stable source of revenues.

A major potential source of government revenues is profits from state-owned enterprises. SOE-related revenues are recorded in the state-owned capital management account (one of the four budgetary accounts) and most of such revenues in the past had been recycled to SOEs. In recent years, the share and amount of SOE profits that must be submitted to the government budget has been increasing (Box 1.5). This submission rate varies by sector, but the highest rate has reached the target 30%. SOE-related fiscal revenues should increase, in particular for financial institutions that were exempt from submission of profits for many years.

Box 1.5. What is the major source of SOE-related fiscal revenues in the state-owned capital management account and where are they spent?

Nearly 70% of SOE-related fiscal revenues in the state-owned capital management account are from SOE profits (Figure 1.28). Dividends and property transfers each make up over 10%, while the share of liquidation-related revenues is small. The tobacco industry, a state monopoly, became the largest contributor of SOE profits to the budget in the past five years. Submissions by oil and telecommunications companies, utilities and investment service firms are also significant. The jump of SOE-related revenues in 2019 can partly be explained by having reached the targeted maximum profit submission rates and partly by high profits.

Figure 1.28. SOE-related fiscal revenue is mainly from profits and continues to rely on the tobacco industry to the greatest extent

Until very recently, most of SOE-related revenues have been recycled back to SOEs in the form of, for instance, structural adjustment support or environmental protection subsidies. Part of SOE-related revenues in the state-owned capital management account have been transferred to other accounts, namely the general budget account and the social security funds account, to replenish the social security funds and to support general public spending. In 2020, over 40% of SOE-related revenues in the state-owned capital management account were transferred to the general budget account and smaller shares of funds have also been transferred to the social security funds (Figure 1.29). However, from the perspective of those two accounts, those transfers were very small. This is due to the small size of the state-owned capital management account itself.

Another way ordinary citizens benefit from SOE profits is through share transfers to the social security fund. In the end of 2020, shares in 93 central SOEs, including financial institutions worth around 1.7% of GDP were transferred to the national social security fund. Local SOEs are also transferring shares to local social security funds, starting with pilot schemes in Zhejiang and Yunnan.

Figure 1.29. An increasing share of SOE-related revenues from the state-owned capital management account goes to fund general spending, but their overall size is small

Growth should be more productivity-driven to be sustainable

Capital accumulation remains the major driver of growth with a somewhat smaller contribution by multi-factor productivity (Figure 1.30). Investment efficiency (measured by the incremental capital-output ratio) started deteriorating again, though as the share of infrastructure investment is expected to increase, efficiency increases are expected to follow. The high value for the incremental capital-output ratio indicates that a large amount of investment is needed to produce a unit of output and that returns on capital are lower than in the past. Also, given that investment is still needed in many areas, such as environmental facilities, suburban railways and underground structures, the low investment efficiency may also indicate that it is not channelled to where it would be needed. In addition, the share of private investment in the total decreased by 8-9 percentage points over the past five years to around 56%, also raising allocative efficiency concerns. Rigorous cost-benefit analysis would help avoid investing in unviable projects and thereby improve capital allocation efficiency. Also, greater private access to infrastructure investment projects would work in that direction. That could be done by requiring splitting the tenders by process or stage where possible, as discussed in the chapter on product market reforms in the Survey. The partial relaxation of the one-child policy may only have a limited impact on the size of the labour force and only in the long run. Growth needs to be driven by productivity to a greater extent to be sustainable.

Figure 1.30. Capital accumulation continues to drive growth and investment efficiency stopped falling

Product market regulation is an area, where stepping up of reforms could bring about tangible productivity gains. According to the OECD Product Market Regulation (PMR) indicators, the level of restrictions in China’s product markets are higher than in OECD Member countries and major emerging economies (Figure 1.31). It should be noted that the high value on the overall PMR indicator is related to the high weight of public ownership in the indicator as well as to the lack of certain practices in China, such as a regulatory impact assessment defined by OECD standards and regulation of lobbying defined by OECD criteria.

Figure 1.31. The overall Product Market Regulation indicator is higher than in other countries

Product Market Regulation indicators overall index, 2018

Labour productivity is increasing, but as of 2018, it was still 20% of that of the United States, about the same as Indonesia’s and half of Russia’s (Figure 1.32). The manufacturing labour productivity gap vis-à-vis the United States is smaller, again, similar to Indonesia’s, but greater than Russia’s or South Africa’s. On-going automation and digitalisation will likely speed up the catching up process, but also education attainment needs to increase (Figure 1.33). A more equitable distribution of high-quality education resources would help raising education attainment in rural areas. As the 2019 Economic Survey recommended, the financing of basic public services, such as education, should be centralised. Moreover, the current rotation schemes should be lengthened so that urban teachers can reach more inland areas to raise the quality of education there.

Figure 1.32. Catching up with the United States has been rapid but the productivity gap is still large

Figure 1.33. Education attainment needs to be raised

Highest educational attainment of 15-64 year-olds (2020)

At the regional level, the gap to the upper half of provinces in terms of GDP per capita is related to lagging labour productivity (Figure 1.34). The labour productivity gap can be as high as over 50% in some western provinces such as Gansu, Guangxi or Yunnan as well as in Heilongjiang in the northeast.

2020 was an unusual year also in the sense that there was no GDP target. Abolishing the GDP targets for good would provide an opportunity to focus on the quality of growth instead of the numerical target. Experience during previous years without a GDP target (which were 2000, 2001 and 2002) shows that important structural reforms can take place when there is no target as there is no need to worry about the potentially negative short-term GDP impact.

Figure 1.34. The GDP gap is related to lagging labour productivity in most provinces, 2018

Gap to the upper half of provinces in terms of GDP per capita

Recommendation	Actions taken since the 2019 OECD Economic Survey
Continue lowering import tariffs and dismantle non-tariff barriers.	MFN import tariffs have been reduced four times since the onset of the trade conflicts with the United States, cumulatively by 2.3 percentage points to 7.5% as of end-2020. However, bilateral punitive tariffs remain in place with the United States and Australia.
Dismantle restrictions on the entry and conduct of foreign firms, in particular requirements to form joint venture or transfer technology.	From 2020, entry and joint venture restrictions to several industries, including finance have been eased. Forced transfer of technology is explicitly prohibited.
Make public procurement more transparent and open it to all players. Subject all purchases above the defined threshold to the government procurement procedure and raise penalties for non-compliers to deterring levels. Purchases below the threshold should also be done in a transparent way.	Negotiations to join the WTO’s GPA are ongoing.
Strengthen intellectual property protection by more systematically prosecuting violators and raising fees.	In November 2019, the Communist Party of China Central Committee and the State Council jointly issued a directive entitled "The Guideline on Strengthening Intellectual Property Rights Protection" requiring to set up punitive damage compensation system for IP infringement to further beef up IP protection and ensure the IP right is under stronger protection. In December 2020, the Supreme People’s Procuratorate initiated a pilot in six province-level regions: in the process of handling criminal cases of infringement of IPR, the public prosecutor should inform the obligee of the 12 litigation rights he or she enjoys during the examination and prosecution stages. In December 2020, a draft revision to the Patent Law (effective from 1 June 2021) raised fines to a range of CNY 30,000 (USD 4,700) to CNY 5 million when the loss to patent holders and the benefits gained by violators cannot be determined. The current range is CNY 10,000 to CNY 1 million. The draft was submitted to the Standing Committee of the National People's Congress, for first review. The recent amendment to the Copyright Law coming into force on 1 June 2021 drastically raised the ceiling for statutory damages.
Enhance transparency and accountability and reduce the concentration of power in managers’ hands. Sign up to the OECD Anti-Bribery Convention.	No action taken.
Adhere to the OECD Declaration on International Investment and Multilateral Enterprises and Chinese companies operating overseas should follow the OECD Guidelines on Multinational Enterprises in their business conduct. Infrastructure projects should be subject to thorough cost-benefit analysis and take into account the indebtedness of the recipient country.	No action taken.
Improve the quality, coverage and timeliness of data releases, in particular basic National Accounts and fiscal data and follow international standards. Data should also be published in real terms on a timely basis.	January data are no longer released for several series such as international trade and fiscal revenues and spending.
Gradually remove implicit guarantees to state-owned enterprises and other public entities by allowing them to default. Apply the competitive neutrality principle when dealing with SOEs.	The number of defaulting SOEs has increased, in particular at the local level and among those controlled by central government agencies.
Reduce state ownership in commercially oriented non-strategic sectors.	The Opinion on improving the distribution and adjusting the structure of the state-owned economy issued in November 2020 requires SOEs to exit non-main and non-competitive activities.
Strengthen the rule of law and restrict the power of administrative departments to prevent the creation of administrative monopolies.	Article 9 of the draft amendment of the Anti-Monopoly Law includes the Fair Competition Review Mechanism and requires the streamlining of administrative action by government departments and preventing anti-competition behaviour.
Provide clear and detailed implementation rules to limit the discretionary power of implementing departments. Specify deadlines for administrative bodies to perform their duties and impose penalties for delay.	The Guiding Opinion issued by the State Administration for Market Regulation in January 2020 specifies discretionary power of regulatory authorities in administrative cases.
Define a mechanism through which administrative monopolies could be broken with potential sanctions for administrative bodies not complying. Strengthen the independence of anti-monopoly enforcement, make it more rule based and enhance its transparency.	Data releases on anti-monopoly enforcement have increased.
Remove the heavy burden for the plaintiff to prove abuse of power by administrative departments.	The Supreme Court interpretation document of administrative cases issued in February 2018 specifies exceptions where the plaintiff does not have to prove abuse of power by administrative departments. These include cases where the defendant makes it impossible for the plaintiff to provide evidence or where the property damage resulting from the behaviour of the defendant cannot be determined.
Strengthen whistle-blower protection to uncover and rectify more cases of protectionist behaviour.	The rules issued by the State Administration for market Regulation in November 2019 advocate the strengthening of whistle-blower protection.
Subject tender documents to the review of competition authorities to avoid any potential competition-hindering clause.	No action taken.
Ensure technology neutrality of environmental and other services to promote innovation and competitive markets.	No action taken.

Reigniting the energy transition to achieve climate change goals

COVID-19 has set back several ongoing processes to shift the economy to a more sustainable path, including energy transition. Before the outbreak, China was on the twin path of falling energy intensity and increasing use of renewables (Figure 1.35), though greenhouse gas (GHG) emissions had still been increasing due to rapid growth in overall energy demand. The composition of fiscal stimulus aimed at reviving the economy is heavily tilted towards infrastructure investment, implying greater energy intensity. This risks halting a 15-year trend, during which China's energy intensity dropped 42%, and could make it harder for China to achieve its long-run goals.

The Chinese government committed in September 2020 to reach net zero carbon emissions by 2060. According to the International Energy Agency’s scenario, this would be done by increasing the share of renewables, reducing energy intensity and boosting the share of nuclear energy (IEA, 2020[6]). The process would involve multiplying current renewables’ capacity several folds. Given that both solar and wind energy generation are becoming self-sustaining, not needing government subsidies, boosting capacity would be feasible. Another complication is the need to transport wind or solar energy generated in the west of the country to the east where most demand is concentrated. Reducing energy intensity is a challenge with the current industry structure, hence a greater emphasis on promoting low-carbon activities is needed. The Energy Research Institute of the Academy of Macroeconomic Research of the National Development and Reform Commission and the China National Renewable Energy Centre estimate that to achieve the Paris Agreement goal of reducing global warming to below 2 degrees Celsius by 2050 China would have to reduce carbon emissions to a quarter of the 2018 level and boost the share of renewables in total energy supply to 58% by that year (from 8% in 2018) (Energy Research Institute and China National Renewable Energy Centre, 2019[7]).

China’s new climate commitments are encouraging, but more could be done. On the fifth anniversary of the Paris Agreement in late 2020, the government announced plans to increase the share of non-fossil fuels in primary energy consumption to 25% by 2030 vs. the earlier commitment of 20% (and the current level of ca. 15%). This will mean robust investment in renewable energy in the coming decade mostly in wind and solar with targeted capacity of 1.2 billion kW in the same year, tripling the 2019 0.4 billion kW. However, this time the mushrooming of small-scale, inefficient wind power stations, some without connection to the grid, should be avoided. Equally important is the phasing out of fossil fuels. The construction of coal-fired power plants should be halted, as the 2019 Economic Survey recommended. If new electricity demand (by 2060 it is likely to more than double) is provided by renewables, solar power production would need to increase 16-fold and that of wind power 9-fold (Mallapaty, 2020[8]). To replace coal, nuclear energy output would need to increase 6-fold and hydro energy output double. The remaining 16% of coal, oil and gas production would need to be offset by carbon capture technologies and forestation. These ambitions would need a full revamp of the current system and massive investments in renewables. Furthermore, environmental regulations should be rigorously enforced and fines for violators raised to deterring levels. Environmental taxes generate little revenue. Diesel is taxed at a lower rate than petrol, even though its environmental impact is greater. Environmental taxes should be raised, especially on fossil fuels.

Figure 1.35. Room remains for greening growth

China has committed to reduce carbon emission per unit of GDP by 65% by 2030 relative to the 2005 level, vs. the previous commitment of 60-65%. The new 14^th Five Year Plan will provide more details. Key to climate goals such as peaking emissions in 2030 and cutting to net zero by 2060 is the launch of the national carbon market, effective from 1 February 2021. In its initial stage, the national emissions trading system covers the power sector, which accounts for about 30% of emissions. Among the 2225 companies that are the initial participants, there are also a few steel companies and by 2025 their number will quadruple, including more steel as well as petrochemical and non-ferrous metals producers. As the setting up procedure may take months before trading can start, it is too early to say how effective it is. The New Energy Vehicle Development Plan 2021-35 will also aid the efforts to reduce emissions. It aims at a 20% share for new energy vehicles by 2025, and a dominating share by 2035. New energy vehicles will also be more energy efficient, consuming 12 KWh per 100 km by 2035.

Air pollution continues to take a heavy toll on human lives. As a by-product of swift investment and industry-driven rebound, pollution intensity also recovered to pre-COVID-19 levels, prompting several localities to order temporary halt of production in polluting industries. Air quality is an essential ingredient of the quality of life and is positively associated with happiness. Moreover, people are willing to pay for better air quality, it is estimated that for one unit of improvement in the air quality index, an average family is willing to pay nearly CNY 550 (or 0.90% of annual household income) per year (Liu et al., 2020[9]). There is large variation in the willingness to pay for air quality: those who are more sensitive to pollution show higher willingness to pay for better air quality. Vulnerable groups such as people living in more polluted areas are also willing to pay more and so are those who are more educated and those viewing society as equal. Another study estimates that a household is willing to pay USD1.34 annually to remove 1 mg/m3 of air pollution (PM10) (Ito and Zhang, 2020[10]).

Recommendation	Actions taken since the 2019 OECD Economic Survey
Enforce regulations more strictly, raise fines for polluters, and raise environmental tax, in particular on fossil fuels.	At end-January 2021, the central environmental inspection group released a report with the details of its actions indicating strengthening enforcement and steepening fines. No action on the environmental tax.
Halt the construction of coal-fired power plants.	The end-January 2021 report by the central environmental inspection group indicates that in the three provinces inspected, coal production capacity was 30% above environmental assessment-approved capacity and the lack of control of building new power plants led to increased coal power installed capacity even in coastal provinces.
Increase investment in pollution treatment facilities and environmental infrastructure, in particular urban water treatment and environmentally harmless rural sanitary facilities.	According to the 2016-19 Ecological and Environmental Statistics Report, investment in the treatment of industrial wastewater increased in 2019.

The public health emergency reporting and prevention system are in need of improvement

In China’s public health emergency reporting system, the local centres for disease control (CDCs) are under the local government and with the latter’s agreement, report to the central CDC. This reporting system was streamlined as a result of the SARS epidemic in 2002-03 to facilitate faster emergency response (WHO, 2020[11]) and the Regulations for Public Health Emergency were issued in May 2003 (State Council Order No. 376). Awareness with regard to the regulations needs to be raised and enforcement improved to make it an effective tool. In particular, the within-2-hour reporting obligation counting from observation of a potential public emergency situation should be strictly followed. Also, as long as the local government is in a position to control information flows and as long as it is in its interest to hide certain types of information, the functioning of the system may be impaired. To overcome the disincentives for local government officials to report serious illnesses in fear of a negative impact on their career or being blamed for creating rumours, local CDCs should be directly controlled by the central CDC. The current fragmented system could be centralised to make emergency response faster and more effective. The decision to assess and interpret contagious disease-related information should lie at the central level. Public spending on contagious disease prevention and control is the responsibility of the central government (Box 1.6). Also, clear guidance should be provided about implementation under the reporting system. The mechanism for the infectious disease reporting system and information sharing should be clarified and its smooth functioning guaranteed.

Box 1.6. How are spending responsibilities for health spending split between central and local?

The Guiding Opinion on Reforming the Central-Local Split of Spending Responsibilities issued in 2016 (Guofa No. 2016/49) states that like other issues of national scope (such as international relations, defence, the use of key natural resources and national security), the prevention, control and treatment of large-scale infectious diseases is the responsibility of the central government. That is, the central government is in charge of financing and delivering related services. In case it delegates parts of the responsibilities to lower government levels, it must provide the corresponding funds.

More recently, in 2018, the Notice on the Reform of the Central-Local Split of Spending Responsibilities in the Area of Basic Public Services (Guobanfa No. 2018/6) applies a graduated burden sharing scheme with higher central share in the case of less wealthy provinces. The Notice requires this way of splitting the financing burden for seven spending categories, including assistance to basic healthcare insurance, basic public health services and birth control support. The central government assumes 80% of financing of those services in the poorest 12 provinces, 60% in 10, 50% in three, 30% in four and the five province-level cities, and just 10% in Beijing and Shanghai. In the case of another five services, including medical emergency services and services for the disabled, central support is determined by the fiscal situation of the local government.

In the same year, another notice, specific to the healthcare sector was issued: the Notice on the Reform of the Central-Local Split of Spending Responsibilities in the Area of Healthcare and Public Health Services (Guobanfa No. 2018/67). The Notice states that basic public health service provision is the joint responsibility of the central and local governments. The same graduated burden sharing scheme as above applies to basic healthcare services with a per capita standard spending amount specified by the central government. These services include for example, prevention, health literacy, old-age health services, administering of vaccines, keeping files of major disease groups such as diabetes or high blood pressure and public health emergencies. All contagious diseases that cross regional boundaries and other major public health services belong to the responsibility of the central government.

Source: Various regulations governing fiscal spending.

The central CDC is a quasi-government organisation (so-called shiye danwei) under the National Health Commission. Lower government levels also have their CDCs, altogether 3403 as of 2019. Governments at the county level and above have to establish a CDC, with the exception of central urban districts, whose disease control and prevention functions can be performed by the city CDC. The CDC is more like a research institute producing reports for the Health Commission. It does not have the authority to issue a warning or announce an emergency. To effectively handle any potential future outbreak, it should have greater powers and budget. China is not alone not having a powerful CDC; some OECD countries such as Japan did not have such an institution at all, as contagious diseases were not common in that country in the past century. The CDC should be in charge of assessing contagious illnesses, raising awareness and advising on how to address them. In addition, it should have the authority to investigate cases around the country reported through formal or informal channels. Better technical training and hence ability to judge potential public health emergency cases is crucial to make the reporting system work. In addition, prevention should also be strengthened, so that any potentially contagious case is properly isolated and all potential channels of transmission to other people are effectively cut.

Greater powers should come with bigger budgets and more qualified personnel. In 2018, 2.4% of general budget health spending went to support CDCs, which was a mere 0.1% of overall public spending. In less wealthier provinces, such as Gansu, Guizhou or Xinjiang, a slightly higher share of overall spending goes for that purpose (Figure 1.36). In the case of the central CDC, over 80% of its revenue came from the government budget. CDCs also receive remuneration for the services they deliver. As an increasing number of services are provided freely, CDCs’ foregone revenues should be compensated from the budget to allow them to perform their functions. CDCs across the country have a hard time to fill their positions with qualified personnel and the lack of training is an issue even in the wealthiest regions (Cheng, 2020[12]) (Liu, 2019[13]). China requires at least 1.75 CDC staff per 10 000 people, but in 2019 there were only 1.3, moreover the number of staff decreased compared to the previous year (Figure 1.37). In contrast, the minimum 70% of technical public health personnel share requirement is met (in 2018 it stood at 74.5%). Remuneration should be proportionate with the responsibility and the difficulty level of the job.

Figure 1.36. Spending on disease prevention and control is a small fraction of the total – 2018

Figure 1.37. Centres for Disease Control have been under-resourced

Number of CDCs and CDC staff per 10,000 people

In the current setting, whistle-blowers could have been the only ones to reveal the extent of the spread of the deadly virus, but in general, whistle-blower protection in China needs to be strengthened and in this particular case, the doctors who informed each other about the new virus, were reprimanded for their action. The police officer involved received administrative punishment afterwards. Whistle-blower protection should be strengthened, as the 2017 OECD Economic Survey of China recommended (OECD, 2017[14]).

The swift escalation of the situation in Wuhan suggests that there is room to strengthen the emergency reporting system, in particular its early warning function and its ability to cope with emergency situations. The management of communication was another challenge. Raising awareness was critical, but a delicate balance between preparing people for the outbreak and avoiding unnecessary discrimination of those coming from or even just born in areas with high infection rates should have been struck. Greater transparency about the disease and its spread would have worked in that direction. Real-time data release is key in raising awareness. After SARS, China built an infectious disease reporting system, where provincial health commissions report major variables related to such diseases daily. Doctors are obliged to report diagnosed cases in real time through an electronic reporting system.

Creating a moderately prosperous society

The outbreak coincided with the year to achieve a moderately prosperous society and eradicate extreme poverty. The process of becoming “moderately prosperous” by an increasing number of people has been fuelling China’s rebalancing the economy. Robust consumption growth was supported by strong income growth on the back of steady job creation. This process has paused as many firms have not been able to keep their employees, in particular smaller ones in the private sector. As the economy recovered, some companies started facing a shortage of workers, partly related to the fact that some migrants have not yet returned to cities.

A moderately prosperous society also needs to distribute income and wealth in a more equitable way. Inequalities are highest in the urban-rural dimension, therefore the revitalisation of the countryside is critical in lifting the wellbeing of rural people. The recently adopted 2020-25 Rural Industry Development Plan’s novelty is that it emphasises framework conditions and infrastructure for rural innovation in addition to developing specialty industries, food processing and tourism. The numerous specific targets, such as, for instance, the number of food processing plants over a certain size, however, may encourage inefficient investment.

The last mile appears toughest in poverty eradication

After China declared the eradication of extreme poverty by the official definition in 2020 (Figure 1.38), the major task now is to make poverty eradication sustainable. In China, unlike in many other middle-income countries, poverty is mostly concentrated in the countryside. Thus, poverty eradication has been mainly focusing on rural areas. Most of the poor are concentrated in highland areas with harsh climates and unfavourable conditions for agriculture, prone to natural disasters, and have connectivity difficulties. Due to such endowments, eradication of extreme poverty in the remaining dozens of counties had proven the most difficult. Promotion of non-agricultural activities, such as food processing, e-commerce, tourism and catering were ways to lift people out of poverty, but sometimes re-settlement was the only option. The China Development and the Agricultural Development Bank of China issued special resettlement bonds to finance the process (which totalled ca. CNY 194 billion as of the first quarter of 2020).

Figure 1.38. Poverty has fallen strikingly aided by increasing budgetary support

To get reclassified out of absolute poverty, households need to reach CNY 4000 per capita in 2020 (the threshold was first defined in 2011 at CNY 2300 in 2010 prices and lifted a number of times according to price developments since). Income alone is not a sufficient indicator, proved access to basic healthcare, secure housing and safe drinking water as well as schooling of children within the range of compulsory school age are also prerequisites. In fact, the non-income criteria are often the binding ones, hence most on-going poverty relief projects focus on safe drinking water and housing. This national poverty line is less than half of the internationally used one, defined by the World Bank at USD 5.5 per day for upper middle-income countries. By this measure, China’s poverty gap was 6.5% in 2016 (Figure 1.39).

Figure 1.39. China’s poverty gap is lower than in some OECD and BRIICS countries

Poverty gap at $5.50 a day (2011 PPP) 2018 or latest year

A new proposal for poverty eradication through solar power generation was introduced in 2016 and continued over the 13^th Five Year Plan in 2017 and 2019, with a total of a million and a half participating households and generating over eight million kWh of energy (Figure 1.40).

Figure 1.40. Solar energy for poverty projects have a million and a half households participating

A large part of poverty-related fiscal spending (roughly 70% in recent years) is under the agriculture category (Figure 1.41) and is often discussed as national poverty spending, but in fact relief funds (including the minimum subsistence allowance, the dibao as well as the support for extremely poor people, the tekun) and support for education and medical expenses also belong to this category (Yang, 2020[15]). Moreover, there are poverty-related spending items by most agencies, a particularly large one is in the area of transportation, which cannot be assessed from publicly available data. Therefore, these numbers provide at best a partial assessment of poverty-related spending. Poverty spending under agriculture goes mainly to rural infrastructure (roughly a third in 2019) and so do loans for similar purposes by the China Development Bank. Major infrastructure investment projects include transforming dirt roads into asphalted ones, building water pipes and electricity wires. Rural minimum subsistence allowance or dibao is the single major relief item with a two-thirds share, while education assistance is concentrated at the tertiary level (over 30% in 2017) followed by the primary (28% in 2017). More education assistance should go to lower levels, while at the tertiary level tuition and living expenses could also be covered by loans. Given the low reimbursement rates of medical expenses, health-related assistance appears limited, imposing a heavy burden on the families of people who need hospital care or long-term treatment. A more comprehensive assessment of spending and its outcomes is needed to enhance spending efficiency. An important step in that direction would be publishing spending also by the economic classification.

Figure 1.41. Most of poverty assistance funds are spent under the agriculture category in the budget

The rule of law needs to be improved

Corruption is a well-recognised hindrance to growth and inclusiveness in China, leading to efficiency losses in the allocation of resources and redistribution of income from the poor to the relatively rich. Indeed, empirical evidence shows that, for instance, industrial park sites chosen largely as a result of favourable political connections generate lower economic benefits than those chosen largely based on their economic fundamentals (Kahn et al., 2020[16]). Corruption perception based on Transparency International appears to be higher than in OECD countries, but comparable to other BRIICS economies such as India, Indonesia and South Africa (Figure 1.42, Panel A). The grasp on corruption tightened since 2013 (Figure 1.42, Panel C). The anticorruption and anti-extravagance campaign seems to have reduced the level of corruption at the local level, but at the same time it has also encouraged risk aversion and bureaucratic slack (Wang and Yan, 2019[17]). The sectoral components of the Control of Corruption index show that legislature corruption is as rare as in the largest OECD countries, and executive embezzlement is only slightly worse than in the United States (Figure 1.42, Panel D). In judicial corruption, China fares below the average of BRIICS countries, while in other forms it performs better.

Beside judges, civil servants appear to be most prone to corruption, shown by low scores (though comparable to those in the other BRIICS countries) on the public sector bribery subcomponent (Figure 1.42, Panel D). Corruption is widespread in all sectors, but it can potentially even threaten financial stability if it is in the financial sector. Greater accountability for civil servants’ actions is being gradually introduced, which is manifest in, for instance, the increasing number of the types of professions where a civil servant can be held responsible for a lifetime (i.e. even after leaving office, until they die). Recently land and spatial planners are added to this list (Ziran Zibanfa No. 2020/27), but judges, prosecutors and policemen have been in the system since 2013. Reflecting the high potential for corruption in the construction sector, engineers in charge of projects are also subject to lifetime responsibility (Jianshegui 2019/12, effective from 1 March 2020). The rational of the lifetime responsibility system is to prevent people getting the return after retirement for the favours they offered while in office. The rotation among senior officials is another way of fighting corruption. There has been a recent call for strengthening of oversight over the exercise of power. Indeed, excessive concentration of power without proportionate oversight and accountability are at the core of the issues. Making the abuse of power more deterring and leaving less discretion for decisions by individual civil servants are important, but enhanced transparency is also needed and so is stronger whistle blower protection to uncover cases. Authorities should consider joining the OECD Anti-Bribery convention.

Figure 1.42. Corruption is more rampant than in OECD countries

Policy recommendations

MAIN FINDINGS	KEY RECOMMENDATIONS
Macroeconomic policy support and financial stability
Economic recovery is gaining momentum and policy support is being withdrawn. Private and small firms are hard hit by COVID-19.	Keep monetary policy accommodative by providing the necessary liquidity and not raising policy rates as long as inflation pressure is low and growth is moderate. Raise disclosure standards for private and small firms so that they will be able to finance their viable projects even after policies tighten.
Economic recovery is firming but spending needs towards inclusiveness and sustainability are large.	Emergency stimulus measures should be withdrawn only when recovery is fully on track and spending on social security, health and education as well as on infrastructure investment (such as renewables, urban transit systems and environmental infrastructure) should increase.
Stress tests indicate that in a severe stress scenario many banks would have inadequate capital.	Abolish reduced loan loss provisioning ratios and disincentivise excessive risk taking by banks.
Generous tax exemptions and reductions continue to curb public revenues. At the same time most SOE profits are recycled to the sector.	Increase SOE-related fiscal revenues, in accordance with OECD SOE corporate governance guidelines, in particular for financial institutions to better meet longer-term spending needs.
Interconnectedness of the financial system with non-banks, financing vehicles and local governments is high, increasing the risk of contagion.	Tighten collaboration across relevant government agencies to prevent systemic risk.
NPLs are low as they are being written off, while capital appears adequate. Some failed banks are being bailed out upon failure.	Adopt a comprehensive and consistent approach to bank restructuring: disclose all NPLs so that banks will be obliged to build up their capital if needed and make creditors bear part of the costs of bank failure.
Trust products are defaulting in numbers, and the associated risks are not well understood by investors.	Enhance disclosure of risks involved in trust products and raise fines for over-promising of returns to deterring levels to reduce systemic risk.
Household debt is not very high, but concentrated and some low-income households have high debt service-to-income ratios	Lower the cap on the debt service-to-income ratio to avoid excessive borrowing by households.
Internet lending is booming, but lenders do not face the same regulatory costs as traditional lenders.	Level the playing field between internet-based and traditional lenders by subjecting the former to the same regulatory standards.
Some overseas infrastructure projects are not profitable and impose a heavy debt burden on recipient countries.	Subject overseas infrastructure projects to thorough cost-benefit analysis and take into account the indebtedness of the recipient country. Regularly audit overseas affiliates of state-owned enterprises.
Enhancing economic efficiency
Corruption mainly manifests in the form of public sector bribery.	Enhance transparency and accountability and reduce the concentration of power and managers’ hands. Sign up to the OECD Anti-Bribery Convention.
The share of services in value added has been increasing steadily but is still lower than in advanced economies.	Accelerate the liberalisation of services industries to build a better base for long-term sustainable growth.
Multiple bilateral trade disputes hamper international trade.	Engage with trading partners on outstanding trade issues in a timely, transparent and evidence-based manner consistent with WTO and bilateral agreement obligations.
There is no comprehensive and internationally comparable data in many areas, making it difficult to conduct evidence-based analysis.	Increase data disclosure in all areas of economic activity and report statistical data on an internationally comparable basis.
Strengthening inclusiveness
Income inequalities are large. Few people are subject to income taxes.	Once the recovery firms, revamp the fiscal revenue system by widening the base of the personal income tax and abolishing deductions.
Wealth inequalities are large.	Introduce a recurrent tax on the holding of real estate and an inheritance tax.
People’s access to public services is still to a large extent linked to their hukou or place of household registration.	Accelerate hukou reforms and grant equal access for migrant workers to public services.
Currently only urban employees are covered by unemployment insurance and there are over 700 jurisdictions administering it.	Extend unemployment insurance to the entire labour force and unify administration at the national level.
China has high life expectancy for its income level and low retirement age.	Ensure sustainability of the pension system by linking the retirement age to life expectancy.
Pension contribution rates vary across the country and there are multiple schemes. Contributions are a high burden for the low-income.	Unify the pension system across regions and schemes and make it more redistributive by abolishing the floor and raising the ceiling for contributions.
Absolute poverty by the official definition has been eradicated, aided by fiscal support.	Conduct and disclose comprehensive assessment of poverty-related spending and its outcomes to ensure that poverty eradication is sustainable.
Building a robust health system
COVID-19 highlighted the downsides of low reimbursement rates of healthcare expenses, pushing many people to the brink of poverty.	Reform healthcare by increasing the reimbursement rate of healthcare and medicine to avoid falling into poverty.
Centres for disease control are underfunded and are losing staff. A direct reporting system of infectious diseases to the central government has been established, but it can be blocked at the local level.	Ensure that local centres for disease control are well-funded and staffed so that they can help avoid future health crises. Clarify the mechanism for the infectious disease reporting system and information sharing and guarantee its smooth functioning.
Currently there does not exist a transparent and effective mechanism for global data sharing.	Increase transparency and data sharing with global health experts and organisations and undertake meaningful reforms to strengthen public health and disease surveillance systems.
Population is aging rapidly and pilot long-term care insurance systems have not led to a nationwide system yet.	Establish a long-term care insurance system in the whole country.
Greening growth
As recovery gains momentum, pollution is back. Temporary halting of industrial production in polluting industries is not a sustainable solution.	Accelerate the energy transition including by significantly reducing the construction of coal-fired power plants in line with China’s climate commitments.
Pollution is taking a heavy toll on human lives.	Raise environmental taxes on fossil fuels to reduce pollution and strengthen climate mitigation action.
The electricity market reform pilot to sell energy by producers directly to users does include renewables producers.	Allow renewables producers to sell the electricity they produce through the grid.
Green investment guidelines are voluntary.	Set the schedule for introducing a mandatory disclosure regime in line with the Task Force on Climate-related Financial Disclosures.

References

Cheng, J. (2020), “Wo guo jibing yufang kongzhi jigou tixi xiandaihua jianshe de sikao ji duice jianyi”, in Chinese, “Thoughts and suggestions on modern construction of disease prevention and control system”, Chinese Journal of Preventive Medicine Vol. 54(5). http://dx.doi.org/10.3760/cma.j.cn112150‑20200221‑00151.

Demmou, L. and Q. Sagot (2021), “Central Bank Digital Currencies and payments: A review of domestic and international implications", OECD Economics Department Working Papers, No. 1655, OECD Publishing, Paris, https://doi.org/10.1787/f06c0d89-en.

Du, B., Xi, X., Chen, D., Peng, J., & China Critical Care Clinical Trial Group (CCCCTG) (2010). Clinical review: critical care medicine in mainland China. Critical care (London, England), 14(1), 206. https://doi.org/10.1186/cc8222

Du, R., L. Liu, W. Yin, W. Wang, L. Guan, M. Yuan, Y. Li , Y. Hu, X. Li, B. Sun , P. Peng and H. Shi, (2020), “Hospitalization and Critical Care of 109 Decedents with COVID-19 Pneumonia in Wuhan, China”, Annals of the American Thoracic Society 17(7). https://doi.org/10.1513/AnnalsATS.202003-225OC

Energy Research Institute and the China National Renewable Energy Centre (2019), China Renewable Energy Outlook, 2019. Executive Summary available at http://boostre.cnrec.org.cn/wp-content/uploads/2019/12/CREO2019-Summary-191206.pdf accessed on 20 September 2020.

He, X., D.J. Hayes and W. Zhang (2020), “China’s Agricultural Imports under the Phase One Deal: Is Success Possible?”, Center for Agricultural and Rural Development Briefs Vol. May 2020, Iowa State University available at https://www.card.iastate.edu/products/publications/pdf/20pb29.pdf, accessed on 5 December 2020.

Heise, S. (2020), “How Did China’s COVID-19 Shutdown Affect U.S. Supply Chains?”, Federal Reserve Bank of New York Liberty Street Economics, May 12, 2020, https://libertystreeteconomics.newyorkfed.org/2020/05/how-did-chinas-covid-19-shutdown-affect-us-supply-chains.html.

IEA (2020), China’s net-zero ambitions: the next Five-Year Plan will be critical for an accelerated energy transition, IEA, Paris available at https://www.iea.org/commentaries/china-s-net-zero-ambitions-the-next-five-year-plan-will-be-critical-for-an-accelerated-energy-transition accessed on 10 January 2020.

Ip, E.C. (2020), “China’s new public health constitution: a cause for hope?”, The Lancet Vol. 5. https://doi.org/10.1016/S2468-2667(20)30050-5

Ito and Zhang (2020), “Willingness to Pay for Clean Air: Evidence from Air Purifier Markets in China”, Journal of Political Economy, Vol. 128(5). http://doi.org/078.041.128.019.

Jordà, Ò., S. R. Singh and A. M. Taylor (2020), “Longer-Run Economic Consequences of Pandemics,” Federal Reserve Bank of San Francisco Working Paper 2020-09 available at https://doi.org/10.24148/wp2020-09 accessed on 24 April 2020.

Kahn, E.M., W. Sun, J. Wu and S. Zheng (2020), “Do Political Connections Help or Hinder Urban Economic Growth? Evidence from 1,400 Industrial Parks in China”, Journal of Urban Economics 2020. https://doi.org/10.1016/j.jue.2020.103289.

Liu, H., Y. Fu, L. Dong, W. Zhang and Y. Lu (2019), “1998-2018 nian Shanghai shi jibing yufang kongzhi zhongxin renli ziyuan dongtai fenxi” in Chinese, “Dynamic analysis of human resources in Shanghai Municipal Centre for Diesease Control and Prevention from 1998-2018”, China Health Resources Vol. 22(4). http://doi.org/10.13688/j.cnki.chr.2019.19083.

Liu, L., Z. Yin, B. Xie and W. Zhou (2020), “Willingness to pay for better air quality: The case of China”, Cambridge Working Papers in Economics No. 2042.

Molnár, M. and T. Chalaux (2015), "Recent trends in productivity in China: shift-share analysis of labour productivity growth and the evolution of the productivity gap", OECD Economics Department Working Papers, No. 1221, OECD Publishing, Paris, https://doi.org/10.1787/5js1j15rj5zt-en.

Molnár, M., T. Chalaux and Q. Ren (2017) "Urbanisation and household consumption in China", OECD Economics Department Working Papers, No. 1434, OECD Publishing, Paris, https://doi.org/10.1787/d8eef6ad-en.

Molnár, M. and J. Lu (2019), "State-owned firms behind China’s corporate debt", OECD Economics Department Working Papers 1536, OECD Publishing. https://doi.org/10.1787/7c66570e-en.

Molnár, M. and H. Xu (2019), “Who patents, how much is real invention and how relevant? A snapshot of patenting firms and their inventions in China based on the 2015 SIPO China Patent Survey”, OECD Economics Department Working Papers 1583, OECD Publishing. https://doi.org/10.1787/9a4dd70c-en.

OECD (2021), Fostering Economic Resilience in a World of Open and Integrated Markets – Risks, vulnerabilities and areas for policy action, OECD Publishing, Paris. https://www.oecd.org/newsroom/OECD-G7-Report-Fostering-Economic-Resilience-in-a-World-of-Open-and-Integrated-Markets.pdf

OECD (2019), Economic Surveys: China. OECD Publishing, Paris. https://doi.org/10.1787/20725027.

OECD (2019), “Measuring distortions in international markets – the semiconductor value chains”, Trade Policy Brief, December 2019.

OECD (2017), Economic Surveys: China. OECD Publishing, Paris. https://doi.org/10.1787/eco_surveys-chn-2017-en.

OECD (2015), Economic Surveys: China. OECD Publishing, Paris. http://dx.doi.org/10.1787/eco_surveys-chn-2015-en.

Tsinghua Wudaokou and Institute of Financial Research, (2020), “Yanqingxiade zhongxiaowei jingji huifu qingkuang – Jiyu baiwan liangji zhongxiaowei qiye jingying shujude fenxi”, in Chinese, “Recovery status of micro and small firms under COVID-19 – Analysis based on operation data of millions of micro and small firms”, Research Report Vol. 62, available at http://thuifr.pbcsf.tsinghua.edu.cn/statics/2020/04/633d837b774b0cd5e33e.pdf accessed on 23 April 2020.

Wang, P. and X. Yan (2019), “Bureaucratic slack in China: The anti-corruption campaign and the decline of patronage networks in developing local economies”, China Quarterly Vol. 243. https://doi:10.1017/S0305741019001504.

WHO (2020), Report of the WHO-China Joint Mission on Coronavirus Disease 2019 (COVID-19), available at https://www.who.int/publications/i/item/report-of-the-who-china-joint-mission-on-coronavirus-disease-2019-(covid-19) accessed on 15 April 2020.

Yang, L. (2020), “Caizheng fupin zhichude zongliang jiegou yu wenti”, in Chinese, “Overall structure and issues with public spending on poverty alleviation”, available at https://www.thepaper.cn/newsDetail_forward_7679449 accessed on 15 June 2020.

Yang Z, Zeng Z, Wang K, Wong SS, Liang W, Zanin M, Liu P, Cao X, Gao Z, Mai Z, Liang J, Liu X, Li S, Li Y, Ye F, Guan W, Yang Y, Li F, Luo S, Xie Y, Liu B, Wang Z, Zhang S, Wang Y, Zhong N, and He J (2020), “Modified SEIR and AI prediction of the epidemics trend of COVID-19 in China under public health interventions”, Journal of Thoracic Disease 12(3):165-174. https://doi.org/10.21037/jtd.2020.02.64.

Featured topics

Agriculture and fisheries

Climate change

Development

Digital

Economy

Education and skills

Employment

Environment

Finance and investment

Governance

Health

Industry, business and entrepreneurship

Regional, rural and urban development

Science, technology and innovation

Society

Taxation

Trade

Energy

Nuclear energy

Transport

Featured topics

Agriculture and fisheries

Climate change

Development

Digital

Economy

Education and skills

Employment

Environment

Finance and investment

Governance

Health

Industry, business and entrepreneurship

Regional, rural and urban development

Science, technology and innovation

Society

Taxation

Trade

Energy

Nuclear energy

Transport

Countries A - C

Countries D - I

Countries J - M

Countries N - R

Countries S - T

Countries U - Z

Regional and global engagement

Countries

Countries A - C

Countries D - I

Countries J - M

Countries N - R

Countries S - T

Countries U - Z

Regional and global engagement

Publications

Publications

Featured publications

Data

Data

Featured data

News & Events

News & Events

Featured Events

About OECD

About

Engage with us

Work with us

Featured topics

Agriculture and fisheries

Climate change

Development

Digital

Economy

Education and skills

Employment

Environment

Finance and investment