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Since the OECD’s first Economic Survey of China in 2005, China has continued to expand rapidly. The economy is also weathering the global crisis remarkably well, not least thanks to prompt and vigorous macroeconomic policy action. Economic expansion is projected to continue over the medium run, and China’s share in the world economy is set to grow further. Despite the recent decline in the current account surplus, some imbalances remain, notably an overly high national saving rate, but ongoing reforms can be expected to help alleviate them over time. Structural reform has continued on a broad front in recent years, with an increasing focus on the need for social cohesion. Even so, efforts are under way or still needed in a number of areas to sustain improvements in living standards over the longer run.
Further upgrading the monetary policy framework. China’s monetary policy framework has gradually become more market-based, with money growth as the main intermediate target. Going forward, it will need to place less emphasis on quantity-based liquidity controls and more on interest rate changes. Allowing greater exchange rate flexibility and putting more weight on an inflation objective would offer greater scope to tailor monetary policy to domestic macroeconomic conditions.
Continuing financial market opening. Chinese financial institutions are now generally stronger and better regulated than a few years ago and the financial system is gradually opening up. However, further reforms are in order, including raising the ceilings on foreign investment in this sector, expanding the corporate bond market, creating a formal deposit insurance system for commercial banks and strengthening supervisory capacity. Moreover, continued vigilance is called for to avoid a build-up of loans that may underperform.
Lowering product market barriers. Competition is now robust in many sectors but product market barriers remain high overall, which may hold back growth over the longer run. Competition and productivity gains can be boosted by loosening the traditional ties between state-owned enterprises and central authorities, reducing administrative burdens, allowing greater private sector involvement in network sectors and lowering barriers to foreign direct investment in services.
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Unifying social safety nets. Ambitious reforms have been launched in the social sphere in recent years and tangible progress has already been achieved, in particular with respect to education and to the coverage of the social safety net, albeit with the exception of unofficial migrants. Further progress will require overcoming the enduring fragmentation of the welfare assistance, pension and health systems, accompanied by greater fiscal solidarity across the country.
Facilitating labour mobility. The labour market is resilient but segmented. The registration system and the attendant restrictions on migrants’ access to social services impede labour mobility and ought to be gradually relaxed.
Consolidating pension regimes. Providing sufficient replacement rates to pensioners will require shifting more of the cost of pensions, notably those in the rural areas, to the central government and raising retirement ages.
Pushing ahead with health care reform. Progressing towards universal, safe, affordable and effective basic health care will require that primary care play a greater role, hospitals be managed more efficiently, changes in some relative prices, better trained staff and ultimately merging the different insurance systems.
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