Main findings
Following three decades of unprecedented growth underpinned by deep structuralreforms, China continues to catch up with the OECD economies, albeit more gradually. Theworking-age population is declining and the relaxation of the one-child policy will not slowageing much. Growth will remain driven largely by investment but will require areacceleration in productivity. China’s transition is multifaceted – from rural to urban,public to private, investment to consumption and manufacturing to services – and willrequire unwavering commitment to structural reforms. The Third Plenum in late 2013 setout the associated roadmap, ahead of the start of the 13thFive-Year Plan (2016-20).
Reforms for more sustainable growth. Imbalances in the property and some heavyindustry sectors have started to unwind and while risks remain, they appear to be manageable.The property market price correction is likely to continue until the inventory overhang isworked off and more affordable prices broaden the group of home-buyers. State-ownedenterprises enjoy implicit government guarantees and easy access to cheap credit, whichmake it hard to reduce excess capacity and deter the construction of new overcapacity. Rapidbank and non-bank credit growth has fuelled financial stability concerns. Maturitymismatches on- and off-balance sheet imply liquidity risks. Sub-national government debtentails fiscal risks, even though land reserves and other assets provide a buffer.
Fostering inclusive urbanisation and services as drivers of growth. Urbanisation hastaken place on a massive scale but still has some way to go in China. The foreseen migrationof 100 million rural residents to cities by 2020, the extension of public services and socialsecurity to 100 million migrants already living in cities and the renovation of shanty-townhousing for another 100 million urban citizens, will boost economy-wide growth andproductivity. The share of services in value added has now overtaken that of manufacturingand will rise further as China becomes richer and urbanisation proceeds. However,productivity in the service sector is held down by the fact that the playing field is not level forall firms.
Providing the right skills to all. Growth will increasingly depend on the quality ofhuman capital and innovation. The knowledge taught and skills nurtured at school do notsufficiently match labour market needs. Workplace training-based vocational educationarrangements are woefully inadequate. Moreover, while the resources devoted to researchincrease rapidly, innovations are not being used to the full. Spending on education iscomparable to that in some other BRIICS economies, but lower than in OECD countries.Average starting salaries of teachers do not compare favourably with other professions andearning prospects are bleak. Education inequalities are stark, stemming first and foremostfrom the urban-rural divide and secondly from social stratification.
Boosting agricultural productivity and enabling further rural development. Livingstandards in rural China remain far below those in urban areas. In the agricultural sector,average farm size is very small, limiting the potential for mechanisation and economies ofscale in production. Many smallholder farmers have difficulty accessing finance and thereis scope for improvements in farmer education and technical assistance. China’s arableland per capita is low relative to other countries and the sustainability of farming isthreatened by the overuse of chemical fertilisers, poor water efficiency and degradation ofgrassland. Rural residents aspiring to move to cities continue to face policy impediments.For those who remain in rural areas, social welfare coverage is incomplete and healthservices lag significantly behind those in urban China.