China:
Economics, Trade and US Policies

With China as a major trading partner and investor in the US, the presentation on China’s economics and trade policies and interactions with the US by Margit Molnar, Head of the China Desk, Economics Department, OECD, provided important insights into the changing Chinese economy and explored their relevance to the states’ economies.

Dr. Molnar reported that following 3 decades of unprecedented growth underpinned by deep structural reforms, China continues to catch up with the OECD economies, although more gradually. Today’s GDP (Gross Domestic Product) per capita is now at about 40% of the OECD average. The working-age population is declining, and even the relaxation of the one-child policy will not add enough new workers to compensate for the aging of the population. The survey found that “China’s transition is multifaceted⎯from rural to urban, public to private, investment to consumption, and manufacturing to services⎯and will require unwavering commitment to structural reforms.”

China is now transitioning to slower but healthier, higher quality growth⎯the “new normal.” High-tech products, for example, are experiencing a greater than 100% growth rate. State-owned enterprises have reduced imports and are buying from domestic sources, which is shrinking the deficits of these enterprises. China also boasts a high level of both personal and corporate savings.

 China’s Impressive Economic Performance
Has Led to Fast Income Convergence

Reform of State-Owned Enterprises

The OECD survey found that while significant economic and financial risks exist in China, they appear to be manageable. Among these is the reliance on state-owned-enterprises (SOEs), which tend to have lower productivity. SOEs account for most of the agricultural sector and for 15%-20% of businesses in the construction, retail, and wholesale sectors. The SOEs enjoy privileges and incentives not available to private enterprises. As a result, firms do not all compete on a level playing field, which has created imbalances and put pressure on environmental resources. A necessary step for growth will be for China to open up more sectors to private investment and phase out implicit government guarantees enjoyed by state-owned enterprises.

Growth in China has been mainly driven by investment and, to a lesser extent, by productivity improvements in recent years. Structural reforms are needed to boost productivity.

Banking in China

China’s banking has been a state-run enterprise, and regulations on deposit interest rates have contributed to inefficient resource allocation and financial risks. Strict regulation of loan-to-deposit balances have strangled the ability of smaller local banks to lend to small businesses. But significant banking changes are occurring. A deposit insurance scheme is now in place. In 2015, the first private bank was licensed and 4 more private banks have been established in the Shanghai region, where the private sector is most developed. China must continue to enhance macroprudential supervision while continuing to liberalize deposit interest rates and the exchange rate.

Sub-National Debt

The debt level of sub-national entities in China is not transparent. While the China Central Bank’s debt is at 17% of GDP, the average debt of the provinces is 30% of GDP and as high as 70% of GDP in some regions. The costs associated with urbanization and falling real estate values are the sources of this debt. Local governments have relied on real estate for revenues and, as real estate values have fallen, so have revenues. A key recommendation of the OECD study calls for China to increase fiscal transparency and sustainability for sub-national units.

Improving Rural Life and Agricultural Productivity

Approximately 60% of China’s population still live in rural areas where the standards of living remain far below those in urban areas and agricultural labor productivity is low. For many, there is no early childhood education, and there are few resources to teach the skills needed in an advancing technological economy.

Steps must be taken to improve rural living standards by increasing and enforcing the property rights of rural households, extending urban public service provision to all migrant workers, and expanding the coverage of rural social welfare payments.

By 2020, 100-million additional migrants will leave rural areas and move to cities. Therefore, the share of agriculture in the economy will diminish. Reforms are required to improve allocation of land resources, increase agricultural productivity, focus on sustainability, and ease access to resources for farmers.

Focus on Human Capital and Education

Future growth will increasingly rely on the quality of human capital, raising the importance of an effective education and training system. To meet the challenges of future growth, China will need to enhance lifelong skill provision, research autonomy, and intellectual property rights.

The economy must move from “made in China” to “created in China.”

The OECD Survey recommendations for China could be read as a recipe for future economic growth for any country, including the US. The Survey recommended that China:

Establish a workplace-training-based vocational education system

Enhance skill provision from early childhood to adult learning

Evaluate universities and staff more on quality of academic work and:

Promote research autonomy

Merit-based promotion

Stronger intellectual property rights, to attract and retain world-class researchers.

The Survey concluded that China must increase educational spending, including boosting teachers’ salaries, providing equal educational opportunities for all, and improving access to pre-school education, including by providing vouchers for use at private facilities. In addition, the Survey suggested opening up public schools to migrant children or where such schools are not available, providing vouchers to enable them to attend private schools, and allowing resident migrant children to sit for the college entrance examination irrespective of their parents’ work or social security status.

Discussion

Tom Finneran (Moderator): What have been the drivers of China’s remarkable growth in the past 20 years?

Dr. Molnar: Investment and trade have been the major drivers of growth with significant investment in infrastructure, foreign direct investment (FDI) and the entry of foreign companies into China.

Sen. David Givens (KY): As I listened to your comments, I could have substituted “Kentucky” for “China.” In Kentucky, we, too, have a mismatch of skills to available jobs. The targets are always changing. Some 15 years ago, there was no Google. How can we educate to maintain the skills and knowledge needed for the next 15 years?

Dr. Molnar: That is the biggest question: “What to teach for the next 5 years?” On-the-job skills acquisition is helpful, but may apply only to labor-related skills. Success in the changing technological environment requires higher level skills, such as programming abilities, that require more education and training.

Sen. Sandy Pappas (MN): What about Taiwan’s relationship with China. How is that changing?

Dr. Molnar: There is much greater exchange and integration of production, trade, and financing between the 2 countries. Chinese banks are making loans to Taiwanese companies operating in China. The financial ties are stronger.

Sen. Ellen Roberts (CO): What about the demographic challenges China is facing with its aging population and the effects of the 1-child policy?

Dr. Molnar: Korea is the only country that is aging faster than China. China’s rate exceeds even that of Japan. China has relaxed the 1-child policy; if 1 parent in a single-child family was a single child, the family can apply to have a second child. Only about 20% of those who can apply do so because they cannot bear the costs of educating additional children. So this population demographic will surely be hard to reverse.

Speaker Biography

Margit Molnar

Margit Molnar is the Head of the China Desk at the OECD Economics Department. She has held various positions at OECD working on issues ranging from globalization, growth, productivity, macroeconomic policies to fiscal consolidation, financial sector performance, services and competition during the past 15 years. She had also been temporarily seconded to UNESCAP as Adviser.

Prior to joining the OECD, she consulted for the Japanese government project “The Asian Financial Crisis and Response of Macro-economy” in Japan, and conducted research for the Institute for World Economics of the Hungarian Academy of Sciences.

She is lead author of the 2015 OECD Economic Survey of China, the Perspectives on Global Development 2014, the Multi-Dimensional Review of Myanmar and of many other reports and articles. She received her Ph.D. from the Graduate School of Economics, Keio University in Japan, M.As from Budapest Economics University and Ritsumeikan University and B.A. (Economics) from Renmin University of China.

Other Foreign Relations articles:

Dr. Margit Molnar

Head of the China Desk

Organisation for Economic Co-operation and Development (OECD) Economics Department

 

China’s transition is multifaceted⎯from rural to urban, public to private, investment to consumption, and manufacturing to services⎯and will require unwavering commitment to structural reforms.

– OECD Survey

 

While significant economic and financial risks exist in China, the OECD survey found that they appear to be manageable.

 

Growth in China has been mainly driven by investment and, to a lesser extent, by productivity improvements in recent years. Structural reforms are needed to boost productivity.

 

By 2020, 100-million additional migrants will leave rural areas and move to cities.

 

The economy must move from “made in China” to “created in China.”

Sen. David Givens

Tom Finneran

Sen. Ellen Roberts

Sen. Sandy Pappas

Dr. Margit Molnar

Senate Presidents’ Forum

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