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2019 OECD Economic Surveys: China 2019

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China’s growth continues to slow, but it is still high by international standards and contributes about a quarter of global growth. The growth model based on capital accumulation has led to misallocation of capital and excess capacity in a number of industries as well as falling investment efficiency, dictating a slower pace for investment. The reining in of shadow banking, an important source of financing for local infrastructure projects and for the private sector, weighs further on investment. Investment has been financed by debt, fuelled by interest subsidies and implicit guarantees for state-owned enterprises and other public entities. Slower growth implies lower enterprise profits and lower ability to service their debt, which has been accumulated primarily by state-owned enterprises and has reached unsustainable levels. Slowing growth and swiftly enacted tax cuts also imply lower fiscal resources to make growth more inclusive. In the medium term, productivity gains and more inclusive policies could sustain growth. Local protectionism increases transaction costs and hinders competition and restrictions on the hukou and the fragmented pension system limit labour mobility.

The Economic Survey of China assesses the country’s recent macroeconomic performance and proposes policy measures to promote higher-quality growth. Policy recommendations relate to how to integrate product and labour markets and enhance inclusiveness.

SPECIAL FEATURES: SINGLE PRODUCT AND LABOUR MARKET; REGIONAL POLICIES FOR EFFICIENCY AND EQUITY

 

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Realising regional potentials through better market integration

China’s regions have been experiencing impressive growth over the past decades, but their potentials could be better exploited by creating a single product and labour market. Local protectionism increases transaction costs and hinders competition, thereby taking a toll on productivity. Administrative monopolies have long thrived and are hard to dismantle. Restrictions on the hukou and the fragmented pension system limit labour mobility. Local regulations aim at, among other things, securing the collection of local taxes, without which cities could not afford to offer the same public services to migrants as to urbanites. Hence, dismantling local regulations and creating a single product and labour market needs to go hand-in-hand with the reform of inter-governmental finances.

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