China’s economy at crossroads 2019 OECD Economic Survey of China Beijing, April 2019
www.oecd.org/eco/surveys/economic-survey-china.htm
Main messages
• Growth has slowed somewhat but remains strong. • China will remain the major driver of global growth. • Financial risks from high corporate debt are rising and need to be addressed urgently. • Unifying product and labour markets across the country will boost productivity and inclusiveness.
2
China remains the major driver of global growth
Source: OECD Economic Outlook database.
3
Growth will continue to slow gradually Â
2017
2018
2019
2020
% change Real GDP growth
6.8
6.6
6.2
6.0
Exports of goods and services
11.0
5.1
4.5
4.8
Imports of goods and services
6.9
9.5
6.0
4.7
GDP deflator
3.8
2.9
2.2
2.1
Consumer price index
1.6
2.1
3.0
3.0
Terms of trade
-6.8
-2.6
-0.8
-0.6
Overall
-3.1
-3.1
-3.3
-3.5
Headline
-2.9
-2.9
-3.1
-3.1
1.4
0.2
-0.1
-0.2
Fiscal balance % of GDP
Current account balance % of GDP Source: CEIC database and OECD projections.
4
Fiscal stimulus supports growth Impact on the fiscal balance, % of GDP Tax cut and fee reduction Personal income tax
2018 1.44% 0.52%
Value-added tax
0.44%
Tax rebate for exports
0.07%
Tariffs
0.08%
Local government special bond limit Total
1.5% 2.94%
For 2019, the government announced a cc. 2% package for 2019. Increased quota for special bonds to finance infrastructure, further tariff and VAT cuts aim at supporting activity. 5
Trade frictions hurt not only both sides but also the global economy • 2018 summer: 25% tariffs on goods worth of USD 50 billion • 09/2018: USD 200 billion worth of Chinese exports 10% tariffs covering already roughly half of exports to the US • The first group matched by China, but in the second case, China imposed 525% tariffs on US goods worth USD 60 billion only most US exports covered • Impact: shave off ¼ per cent of Chinese and US GDP and reduce world trade by 0.4% by 2020 • Import volumes in both countries decline by ¾ per cent and in the US CPI inflation rise by 0.2 ppt in both 2019 and 2020 as a result of higher import prices due to tariffs • Other countries negatively affected through declining trade growth, though in the longer term, benefit from an improved competitive position in the US market 6
Rebalancing from industry to services is underway
Source: CEIC database. 7
Rebalancing from investment to consumption
Source: CEIC database.
8
The saving rate remains very high, even though has decreased over the past decade
Source: CEIC database.
9
The investment rate is high
Source: OECD calculations from the OECD Economic Outlook and the CEIC databases.
10
And investment efficiency is decreasing Incremental capital-output ratio
Source: OECD calculations from the CEIC databases.
11
The current account surplus shrank
Source: CEIC database.
12
Tariffs are significant Most- favoured-nation simple average duty (applied) 15
12
9
6
3 China
Brazil
Russia
United States
Mexico
2012
2014
Korea
Japan 0 2006
2007
2008
2009
2010
2011
2013
2015
2016
2017
Source: WTO. 13
Non-tariff barriers are soaring
Source: WTO. 14
China is now as an important investor as Japan
Source: CEIC and OECD Globalisation databases. 15
Key recommendations for more balanced trade and investment • Continue lowering import tariffs and dismantle non-tariff barriers. • Dismantle restrictions on the entry and conduct of foreign firms, in particular requirements to form joint ventures or transfer technology. • Adhere to the OECD Declaration on International Investment and Multinational Enterprises. Follow the OECD Guidelines on Multinational Enterprises and the Arrangement on Officially Supported Export Credits. • Infrastructure projects should be subject to thorough costbenefit analysis and take into account the indebtedness of the recipient country. 16
Addressing financial risks
17
Corporate debt has stabilised but remains too high
18
Debt of service industry state-owned firms nearly tripled in a decade
19
Shadow banking has been declining
Source: CEIC database.
20
NPLs are modest but on the rise
Source: IMF Financial Soundness Indicators database. 21
Local government debt is still high in terms of its ratio to revenues
Source: CEIC and Wind database, China Human Resources and Social Security Yearbooks and local finance bureaux reports on budget implementation.
With 18 provinces over 100% and 4 over 150% ratio in 2017
22
Key recommendations to address financial risks • Avoid directing credit to SOEs and local governments as part of the fiscal stimulus. • Link debt ceilings to sub-national government revenues. • Conduct a prudent fiscal policy. Channel funds to where returns are high such as education, health and social security and avoid misallocation of capital by allowing banks to better price risks. • Improve the quality, coverage and timeliness of fiscal reporting. 23
Creating a single product and labour market and other policies for greater efficiency and inclusiveness
24
Specifying providers for public goods and services is the most common form of administrative monopoly
Type of anti-competitive behaviour
Specific provider
Market access (goods and services)
Price fixing
Forced anti-competitive behaviour
Limit external participation in local tenders
Market entry and exit
Discriminatory pricing or subsidies
Source: Price Supervision and Anti-Monopoly Bureau, National Development and Reform Commission.
25
Most court cases related to administrative monopoly cases were in internet business
Source: Referee Instruments Network, available at http://wenshu.court.gov.cn
26
Enforcing of contracts is difficult
Note: A higher score means greater difficulty in enforcing contracts Source: Quality of the judiciary process-Enforcing of contracts indicator, World Bank Doing Business Indicators 2018.
27
Recommendations for a single product market by abolishing local protectionist measures • Strengthen the rule of law and restrict the power of administrative departments to prevent the creation of administrative monopolies. • 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. • 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. • Make public procurement more transparent and open it to all players. • Ensure technology-neutrality of environmental and other services to promote innovation and competitive markets. • Subject tender documents to the review of competition authorities to avoid any potential competition-hindering clause. • Strengthen whistle-blower protection to uncover and rectify more cases of protectionist behaviour.
28
Only a small share of patents are genuine inventions
Source: OECD compilation based on the 2016 SIPO China Patent Survey.
29
SOEs spend more on R&D per patent but own few patents per researcher
Source: OECD compilation based on the 2016 SIPO China Patent Survey.
30
State ownership is still high
Source: National Bureau of Statistics: China Statistical Yearbook, various editions. 31
Other key recommendations to boost efficiency • Strengthen intellectual property right protection by more systematically prosecuting violators and raising fines. • 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. • Reduce state ownership in commercially oriented, non-strategic sectors. • Enhance transparency and accountability and reduce the concentration of power in managers’ hands. China should sign up to the Anti-Bribery Convention. • 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. 32
Creating a single labour market and other policies for inclusiveness
33
The hukou remains a major source of inequalities of opportunity Total and migrant enrolment rates, 2017
Source: Migrant Workers Monitoring Survey, 2017 and Blue Book on Pre-school Education, 2018. 34
The pension system is fragmented with financial health differing across regions The ratio of pension fund surplus to pension annuity payments by province
Source: Zheng, B. (ed.) (2018), China Pension Actuarial Report 2018-2022.
35
Fiscal transfers reduce inequalities Within-province disparities have been reduced in expenditures, Theil index 2016
Withinprovince
GDP per capita
Revenue per capita
Expenditu re per capita
0.21
0.35
0.13
% Contribut ion to Total
70.4
Betweenprovince
0.09
% Contribut ion to Total
29.6
Total
0.29
71.3
0.14
28.7
0.49
49.7
0.13
50.3
0.27
The impact of revenue and spending items on inequalities, 2016 Revenue items and their combinations
Theil index
Tax revenue
0.29
General revenue
0.22
General revenue + total transfers
0.13
General revenue+ tax sharing
0.21
General government revenue+ fund revenue+ SOE operating revenue account + social security account revenue + total transfers+ tax sharing + bonds
0.11
Source: OECD calculations based on Ministry of Finance and local finance bureaux data. 36
Local governments are in charge of major public services
Source: OECD National Accounts, Regions and Cities database and Ministry of Finance and finance bureaus at the sub-national level.
37
The gap between own revenues and spending is the greatest at the county level Share of revenue and expenditure by government level, 2017
Source: Ministry of Finance and local finance bureaux. 38
The tax and transfer system is not very effective for income equalisation
Source: Standardized World Income Inequality Database v8.0 (Solt 2019). 39
Wealth inequalities are high
Source: World Inequality Database.
40
Few people pay income taxes
Source: OECD calculations based on the recent Personal Income Tax Law amendments and the China Integrated Project Survey database, 2013 vintage.
41
Income tax rates are very low, 2017
Source: OECD Taxing wages database for OECD countries and OECD calculations based on the recent Personal Income Tax Law amendments.
42
Key recommendations for providing equal opportunities • Distribute high-quality education and health resources more evenly to reduce incentives to move to mega-cities. Gradually ease restriction on access to public services for non-hukou holders and delink it from the hukou. • Centralise the financing of some key spending items, such as wage bills in education and health. • Abolish the floor and raise the ceiling for social security contributions. • Widen the base of personal income tax and make it more progressive. • Introduce a recurrent tax on the holding of real estate and an inheritance tax. • Target social assistance programmes better to the needy. 43
Environmental investment has stagnated
Source: China Statistical Yearbook on Environment 2017.
44
Key recommendations to make growth greener • Enforce regulations more strictly, raise fines for polluters, and raise environmental tax, in particular on fossil fuels. • Halt the construction of coal-fired power plants. • Increase investment in pollution treatment facilities and environmental infrastructure, in particular urban water treatment and environmentally harmless rural sanitary facilities. 45
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