Remarks by Angel Gurría

Secretary-General, OECD

Beijing, People's Republic of China

20 March 2015

(As prepared for delivery) 

Ladies and gentlemen,

I am delighted to be back in Beijing to launch the 2015 Economic Survey of China. Let me thank the thank the Chinese government and particularly the State Information Center for the support they have provided during the preparation of this survey. This year is the 20th anniversary of cooperation between China and the OECD and we look forward to many years of fruitful collaboration ahead.

We are releasing this Survey at a time when the outlook for the global economy, according to our latest forecasts, is moderately improving. This is largely thanks to a series of recent positive surprises, including lower oil prices, bolder-than-expected action by the European Central Bank and easing by other central banks. Thus, low interest rates and a more competitive Euro.

Angel Gurría, Secretary-General of the OECD, presenting the 2015 OECD Economic Survey of China in Beijing.
Photo: Ministry of Finance of China

In China, following three decades of extraordinary economic development, the economy is shifting to a lower but still rapid and hopefully more sustainable growth path – the “New Normal” as it has been coined. GDP is set to increase by around 7% in 2015 and 6.9% in 2016.

This trend signals the government’s desire to forgo some growth in the short run in order to place the economy on a sounder footing in the long run. Policy makers are also increasingly emphasizing the quality of growth, spreading the benefits of growth more widely across society and reducing the strain placed on environmental resources. A “new normal” of somewhat lower but more sustainable and inclusive growth will be a much better normal!

In the years to come, productivity gains will be critical to further catch up to the income level of more advanced economies. This goal will require sustained policy effort. As highlighted in the Survey, the government has already devised many structural reforms to support China’s quest to become a “moderately prosperous society” by 2020. The Third Plenum of the 18th Party Congress in November 2013 emphasised strengthening market mechanisms and promoting innovation, while the Fourth Plenum in November 2014 focused on the importance of the rule of law.

Around these important policy announcements authorities have been gradually implementing their reform agenda, “crossing the river by feeling the stones”. Financial market liberalisation has been progressing steadily and steps have been taken to improve intergovernmental fiscal relations by allowing sub-national government bond issuance. There have also been important reforms to the one child policy and the hukou household registration system.

These are very noteworthy achievements, but there is still much work to do. Our survey focuses on three central challenges that are critical at this stage of China’s development: allowing the market to play a greater role in the allocation of resources, providing the right skills to all, as well as agricultural reforms and improving living standards in rural areas.  

Allowing the market to play a greater role in the allocation of resources

State owned enterprises have a large presence in a number of commercially-oriented industries. For instance, in the construction sector, they command over one third of revenues, creating barriers to the expansion of private firms. This is particularly detrimental at the current juncture when China strives to move up the value chain from producing goods “made in China” to a larger range of goods and services “created in China”. To strengthen private sector growth, state ownership in commercially-oriented industries such as retailing, restaurants, hotels and construction should be reduced and more industries should be opened up to private entry.

Policy distortions in financial markets have caused a misallocation of capital and an expansion of the shadow banking sector. Looking forward, a continuation of market-oriented reforms that liberalise deposit interest rates and allow greater flexibility in the exchange rate should improve capital allocation. Such financial deregulation must go hand-in-hand with well‑designed macroprudential supervisory institutions and policies, as shown by the experience of other countries.

Providing the right skills to all

It is essential that the skills taught in education are aligned with those needed by employers. Nowadays, it is not always possible for China’s college graduates to find a job: there are 10 graduates for every 9 jobs. And even if graduates find a job, they report that they feel poorly prepared for the job market, particularly with respect to programming, management and other soft skills.

At  the same time, there are more jobs for vocational high school graduates than there are applicants. To meet this demand for practical skills, vocational education efforts need to be stepped up: more students should learn marketable skills, more government support should be directed to such training and it should reach out to all ages. The rapid transformation of the Chinese economy makes life-long learning crucial for people to keep up with the changing skill needs of the labour market.

The Chinese education system also suffers from massive inequalities in opportunities. Especially children of families that moved from rural areas to the cities are at a disadvantage. Of those who move with their parents, around 17% do not have access to a publicly-funded school, meaning that they may not reach the minimum quality requirements to advance to higher eduation levels or even drop for economic reasons. And if they do make it through school and want to study further, migrant children may not be able to sit the college entrance exam in the place where they reside. Instead, they will need to return to their rural area of origin. Such discrimination in educational opportunities undermines China’s long-term growth objectives and should be eliminated.

Reforming the agricultural sector and improving rural incomes

China is underurbanised given its stage of economic development. Indeed, the government has announced plans for 100 million additional migrants from rural to urban areas by 2020. Such structural adjustment can deliver substantial opportunities for the rural economy and China as a whole, but entails major challenges calling for continued reform efforts.

Government policy will need to accommodate different groups of rural citizens as the transition of the rural economy continues to occur:

• For those who choose to stay in farming, there is ample scope to improve the allocation of land resources, access to finance in rural areas, education and training for farmers, and rural infrastructure. This will help raise agricultural labour productivity from its relatively low level. In addition, there is a need to further encourage a sustainable use of natural resources in agriculture.
   
• For those who choose to leave the farm, realising that their skills can yield a higher return in non-farm employment, good land reallocation mechanisms are needed, together with further reforms to the hukou system. This will make it easier for people to move to those areas where their skills yield the highest return.
   
• For those rural citizens who will struggle to adjust to the transition of the rural economy – often the elderly and less able – broader social welfare coverage, improvements in rural healthcare services and the portability of insurance and other social benefits will be particularly important.

Ladies and gentlemen,

Over the past decade, hundreds of millions of Chinese have been lifted out of poverty and malnutrition. China has experienced unprecedented urbanisation that has fuelled a vibrant economic development. These are remarkable achievements.

But going forward, the country needs to adjust its economic model to place the economy on a sustainable long-term footing. At the National People’s Congress a few weeks ago, the government reiterated its resolve to undertake the necessary structural reforms to achieve this goal.

The OECD stands ready to support the Chinese government in its quest for more resilient and inclusive growth. This year is the 20th anniversary of cooperation between China and the OECD and we look forward to many years of fruitful collaboration ahead to design and deliver ‘better policies for better lives’.

Thank you.