CHINA - OECD.org

1 Paris2, rue Andr Pascal, 75775 Paris Cedex 16 Tel.: +33 1 45 24 82 00 CHINAIN A CHANgINg globAl ENvIroNmENtmarch 2015 This document is published on the responsibility of the Secretary-General of the OECD. The opinions expressed and arguments employed herein do not necessarily reflect the official views of OECD member countries.**This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.**Initiated by the oECD and the National Development and reform Commission of the People s republic of CHINA (NDrC), the report has been prepared by the oECD for the NDrC, to provide policy recommendations for the formulation and implementation of CHINA s 13th Five-Year Plan for Economic and Social Development.

2 **the document was prepared by the oECD Secretariat. Juan Yermo and victor Duggan coordinated the report, under the guidance of gabriela ramos and luiz de mello. the main contributors are: vincent Koen, margit molnar and ben Westmore (Economics Department); Kensuke tanaka, Derek Carnegie (Development Centre); misako takahashi, Kevin tu, Paolo Frankl, laszlo varro (International Energy Agency); virginia robano (Centre for Entrepreneurship, SmEs and local Development); gert Wehinger, Andrea goldstein, Ania thiemann, michael Chapman, Fianna Jurdant, thomas Dannequin (Directorate for Financial and Enterprise Affairs); Alessandro goglio, michele Cecchini, Andrea bassanini (Directorate for Employment, labour and Social Affairs); Janos bertok, Chad burbank, Edwin lau, Ioannis Kaplanis, Zsuzsanna lonti, tatyana teplova, Julio bacio terracino, Chlo lelivre (Public governance and territorial Development Directorate); Ir ne Hors and li Yan (global Secretariat relations); Nadim Ahmad (Statistics Directorate).

3 Peter Avery, molly lesher, brunella boselli, (Directorate for Science, technology and Innovation); Kelsey burns, Przemyslaw Kowalski, Aurelia Nicault (trade and Agriculture Directorate). Caitlin Connelly provided co-ordination support in the preparation and translation of the publication. Isabelle renaud provided production and administrative FOR ECONOMIC CO-OPERATION AND DEVELOPMENTthe oECD is a unique forum where governments work together to address the economic, social and environmental challenges of globalisation. the oECD is also at the forefront of efforts to understand and to help governments respond to new developments and concerns, such as corporate governance, the information economy and the challenges of an ageing population. the organisation provides a setting where governments can compare policy experiences, seek answers to common problems, identify good practice and work to co-ordinate domestic and international oECD member countries are: Australia, Austria, belgium, Canada, Chile, the Czech republic, Denmark, Estonia, Finland, France, germany, greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea, luxembourg, mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, the Slovak republic, Slovenia, Spain, Sweden, Switzerland, turkey, the United Kingdom and the United States.

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5 1 EXECUTIVE SUMMARY .. 2 CHAPTER 1. THE DOMESTIC BACKDROP TO GLOBAL CHANGE .. 8 CHAPTER 2. CHINESE ECONOMIC POLICIES FOR A CHANGING WORLD .. 13 Slower Growth, Continued Convergence .. 13 Responding to shifting patterns in global financial markets .. 14 Responding to shifting patterns in global investment CHINA has become an increasingly attractive destination for .. 16 Responding to shifting patterns in trade .. 22 Responding to shifting patterns in innovation .. 32 Responding to shifting patterns in global energy .. 36 CHAPTER 3. CREATING A POLICY FRAMEWORK FOR A STRONGER AND BETTER-FUNCTIONING MARKET-BASED ECONOMY .. 47 Setting the scene .. 47 Fostering growth by making regulation more conducive to competition .. 48 Supporting effective implementation of competition and consumer protection policies .. 54 Supporting SMEs and entrepreneurship .. 58 Reinforcing the efficiency and stability of the financial system.

6 59 Enhancing corporate governance in the private and SOE sectors .. 66 Combating business bribery .. 70 Enhancing labour market flexibility while protecting workers .. 72 CHAPTER 4. REFORMING THE STATE TO SUSTAIN THE CHANGING GROWTH MODEL .. 77 Modernising the public administration and promoting a culture of integrity .. 77 Building a quality justice system .. 82 Strengthening fiscal management at subnational level .. 84 REFERENCES .. 89 CHINA in a Changing Global Environment OECD 2015 1 Foreword As preparation continues for the 13th five-year plan, CHINA is at a crossroads. It is confronting the challenge of transforming what has been up to now a highly successful development model so that it can sustain stronger, fairer, greener and more balanced growth in the face of structural shifts domestically, and a rapidly changing global environment. Having sustained double-digit growth rates for more than three decades, CHINA is a shining example of how economic lift-off can be achieved through concerted and comprehensive reforms.

7 As growth dropped out of top gear in the 1990 s, the Chinese authorities showed impressive dexterity in adjusting the growth model by implementing another round of reforms. This heralded CHINA s entry to the WTO, and another decade of rapid export and investment-led growth. Growth is beginning to slow as the working-age population shrinks and the scope for catch-up diminishes. As demand rebalances in favour of more household consumption, CHINA needs to step up the latest round of reforms if it is to avoid the middle-income trap and ensure shared prosperity for all citizens. In the 21st century knowledge-based economy, this increasingly means that productivity gains will be the key growth driver, necessitating initiatives spanning a broad range of policy domains. At the same time, there is a need to improve the environmental sustainability of the Chinese growth model by limiting carbon emissions and air pollution while improving the security and diversity of energy supply.

8 CHINA has been successful in integrating into the regional and Global Value Chains (GVCs) that increasingly characterise global trade. However, it now faces growing competition from other countries in areas where it held historical comparative advantage, such as an abundant, low-cost labour supply. To move up the value chain , while serving its increasingly sophisticated domestic market, CHINA needs to put greater focus on innovation and knowledge-based capital, while phasing out counter-productive barriers to trade and investment, particularly in services. As market forces come to play a more central role in the economy, efforts will be needed to improve the business environment. Top priorities should include investing in human capital, facilitating labour mobility, easing access to finance for small entrepreneurs, reducing distortions to factor markets and eliminating harmful energy subsidies.

9 CHINA also needs to foster healthy competition in sectors where it is weak (such as in professional services and network sectors) while enforcing quality standards in under-regulated sectors (such as retail and land transport). There will also be a need to ensure a level playing field between state-owned enterprises (SOEs) and private operators, whether domestic or foreign, and to strengthen corporate governance and promote integrity across public and private sectors alike. To underpin a successful transition, elements of the state apparatus will also need to adapt and become more responsive to the needs of private citizens and firms. In particular, there is a need to strengthen rule of law, modernise and promote a culture of integrity in the public administration, and align the revenue raising capacities of sub-national governments with their spending mandates.

10 We welcome the opportunity, both through this report and the accompanying All on Board: Making Inclusive Growth Happen in CHINA , to provide timely input for the preparations for the 13th Five-Year Plan. We look forward to supporting CHINA s transition to a new, sustained, sustainable and inclusive growth model. Angel Gurr a Secretary-General, OECD 2 CHINA in a Changing Global Environment OECD 2015 Executive Summary CHINA has experienced rapid growth over the past decades, achieving middle-income status and lifting hundreds of millions of its citizens out of poverty. At the same time, the structure of the economy has changed fundamentally, with agriculture falling from roughly a third of the economy at the outset of reforms under Deng Xiaoping in 1978 to around 10% in recent years. The share of manufacturing has remained more or less stable at around a third of value added, but its productivity increased greatly owing to incentives for efficiency gains in the state-owned and collective sectors, as well as the growing role of the private sector.