Notwithstanding the economy’s impressive performance and unprecedented poverty reduction, imbalances have built up. China’s growth has long been driven by capital accumulation, supported by high savings. However, the growth model has led to misallocation of capital and falling investment efficiency, and to excess capacity in some manufacturing industries and in the real estate sector, which needs to be worked off. High enterprise investment was financed by debt, fuelled by interest subsidies and implicit guarantees for state-owned enterprises (SOEs) and other public entities. Effectively addressing sources of risk, such as excessive corporate leverage, real estate bubbles and leveraged investment in asset markets will help keep growth on a sustainable path. The authorities may need to forgo some growth in the short run to ensure greater stability over the longer run, with a wider spread of the benefits of growth across society and less stress on a highly polluted environment.
Against this backdrop, rebalancing of the economy towards consumption is key. Progress has been made, with growth slowing only gradually. Consumption is supported by stable income growth, in particular in rural areas, which will help reduce the urban-rural divide and make growth more inclusive. Consumption-driven growth will also help rebalancing from manufacturing to services, and from external to internal demand.
Slowing growth implies lower profits for enterprises, and therefore greater pressure to improve efficiency. It also translates into slower growth of incomes and limits the fiscal resources available to make growth more inclusive. Improving corporate performance by boosting innovation activities and entrepreneurship, enhancing the standards of corporate governance and reforming SOEs by exposing them to market mechanisms would raise efficiency and boost household incomes, improve employment opportunities and raise people’s overall well-being.
Extract adapted from Overview of OECD Economic Survey of China 2017, available at http://www.oecd.org/eco/surveys/china-2017-OECD-economic-survey-overview.pdf
See http://www.oecd.org/china/economic-survey-china.htm and www.oecd-ilbrary.org. The report is also available in Chinese.
©OECD Observer No 309 Q1 2017