Executive summary

Managing the gradual slowdown

Growth is still high, but is gradually and appropriately moderating
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Source: OECD Economic Projections 100 Database.

 https://doi.org/10.1787/888933461686

Growth remains high but is gradually moderating as the population ages and the economy rebalances from investment to consumption, from external to internal demand and from manufacturing to services. Orderly rebalancing requires addressing corporate over-leveraging, overcapacity in real estate and heavy industries, and debt-financed over-investment in asset markets. Fostering innovation and moving to more efficient and less energy-intensive production is key to raising productivity as well as to improving the quality of growth and making it more sustainable. At the same time, growth needs to become more inclusive. To measure progress on those fronts, better and more timely data provision is crucial.

Boosting corporate dynamism and performance

R&D spending is higher than in a number of OECD countries
2014 or latest
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Source: OECD MSTI database.

 https://doi.org/10.1787/888933461697

Spending on research and development is far above countries with similar GDP per head, though it remains behind the United States and Japan. Patent numbers are soaring on the back of generous subsidies but the share of invention patents is small. Business creation has been made easier through the removal and unification of licenses, but too many firms are unviable. Corporate governance is being strengthened, including for state-owned enterprises, through enhanced external monitoring and internal control, though on-the-ground progress needs to accelerate. Stepped-up efforts to curb corruption will improve the quality and resilience of growth.

Ensuring inclusive growth by enhancing opportunities

Disposable income of the top 20% over that of the bottom 20% of the income distribution
2016 or latest available
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Source: China National Bureau of Statistics, OECD Income Distribution Database.

 https://doi.org/10.1787/888933461704

Income inequality has declined and poverty even more so. Nevertheless, the income gap between the richest and poorest remains large. Policy reforms can greatly enhance the redistributive impact of the tax-and-transfer system, strengthen education and skills and improve the labour market opportunities of marginalised groups. Improving the adequacy and accessibility of healthcare and pensions would reduce the high household saving rate and benefit both individual well-being and economic growth.

MAIN FINDINGS

KEY RECOMMENDATIONS

Monetary policy and prudential regulation

The stance of monetary policy is broadly appropriate, but the use of targeted policy instruments is rising.

Rely less on targeted monetary policy instruments.

Consumer finance is expanding rapidly.

Enhance prudential regulation by requiring lenders to take into account borrowers’ repayment ability when extending loans.

Slower growth makes investment more risky and is driving funds to real estate and securities markets.

Restrict leveraged investment in asset markets.

Public spending and fiscal data

Fiscal stimulus, including through policy bank lending, raises short-term growth but may lead to poor investments.

Conduct a prudent fiscal policy. Increase public spending efficiency by channelling funds to where returns are high such as education, health and social security and avoid misallocation of capital by allowing banks to better price risk.

Incomplete or tardy general government data hamper fiscal policy assessment.

Improve the quality, coverage and timeliness of fiscal reporting.

Greening growth

Environmental standards are not enforced effectively enough and green taxes make up a very small share of tax revenues.

Effectively implement the December 2016 Environmental Protection Tax Law, stepping up enforcement efforts and raising environmental taxes.

China accounts for 27% of world carbon emissions and has committed to curb them. However, increased renewable capacity does not always translate into greater use.

Allow independent renewable generators to sell surplus energy and link renewable capacity expansion with the extension of the local power grid.

Promoting innovation

Innovation is flourishing though only strategically important projects and new- and high-tech industries benefit from support.

Broaden the number of sectors benefiting from government support for innovation.

Intellectual property right violations deter registration of patents.

Strengthen intellectual property right protection by more systematically prosecuting violators and raising fines.

Improving corporate governance and pushing ahead with SOE reform

SOE managers are often civil servants. The board often has a limited role in appointing and evaluating management and independent directors are not truly independent. SOEs are often burdened with social functions.

Professionalise the management of SOEs to make a clear division between business and politics. Hire truly independent directors and give the board authority to appoint and evaluate management as well as to decide management salaries and promotion. Where possible carry out SOEs’ social functions separately from commercial operations to boost the efficiency of the latter.

Controlling shareholders often expropriate minority shareholders through related-party transactions.

Require the regular publication of company accounts and enhance disclosure standards for all firms.

Top executives have been found to embezzle State assets.

Raise penalties for individuals committing fraud.

SOEs and other public entities enjoy implicit guarantees that inflate corporate debt.

Gradually remove implicit guarantees to SOEs and other public entities to reduce contingent liabilities.

SOEs have large market shares in many sectors.

Reduce state ownership in commercially oriented, non-strategic sectors. Let unviable SOEs go bankrupt, notably in sectors suffering from over-capacity.

Strengthening social inclusiveness

The gap between the richest and poorest is wide. Taxes and transfers have little redistributive impact. The system of social security contributions is regressive.

Base social security contributions on actual income earned. Increase central and provincial government social assistance transfers to poorer areas. Broaden the personal income tax base and increase tax progressivity. Implement a broad-based nationwide recurrent tax on immovable property and consider an inheritance tax that would include some basic inheritance allowance.

The retirement age is low, especially for women.

Gradually increase and unify the pension age to 65 and then index it to life expectancy.

Pension benefits cannot be readily transferred between locations, disadvantaging migrant workers.

Improve administrative procedures to make it easier to draw a pension in a different location from where it is earned.

Enrolment rates in early childhood education are relatively low for rural children.

Increase public funding for childcare and introduce incentives to encourage the participation of rural children in early childhood education.