GIC China Witherell Nov 0905

The OECD China Survey: The Emergence of a Dynamic Private Sector Bill Witherell Senior Advisor to the OECD At China in the 21st Century The Global Interdependence Center’s 24th Annual Monetary and Trade Conference November 9, 2005 Federal Reserve Bank of Philadelphia 1

Outline A little background  The OECD Economic Survey of China: Private sector is driving growth Financial sector reform – a work in progress 

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What is the OECD? ď Ž

ď Ž

A forum in which governments work together to address the economic, social and environmental challenges of interdependence and globalization A provider of comparative data, analysis and forecasts to underpin multilateral co-operation

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A global outreach

OECD Member Countries Countries/Economies Engaged in Working Relationships with the OECD 4

OECD’s mission To promote policies designed: 

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to achieve sustainable economic growth and employment and rising standards of living in member countries while maintaining financial stability, so contributing to the development of the world economy to assist sound economic expansion in member countries and other countries in the process of economic development to contribute to growth in world trade on a multilateral, non-discriminatory basis

(Article 1 of the OECD Convention)

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OECD Economic Survey of China - 2005

On sale at Special GIC Price

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Percent of Value Added by Private and Public Sectors 1998

2003

Private Sector 50.4

59.2

Public Sector 49.6

40.8

Total

100

100

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Share of Transactions Conducted at Market Prices (%) 1991

2003

46

87.3

Guided and Fixed 54

12.7

Producer Goods: Market Prices

Retail Sales: Market Prices

69

96.1

Guided and Fixed 31

3.9 8

Financial Performance of Industrial Companies (rates of return on physical assets)

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GDP and Inflation 2003

2004

2005

2006

Real GDP Growth

9.5

9.5

9.0

9.2

Inflation

1.2

3.9

4.0

4.0

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Exceptional Extent of State Ownership in Financial System ď Ž

ď Ž

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All but one of major commercial banks controlled by central or local governments.

Same is true for virtually all smaller commercial banks.

Major life insurance companies and majority of trust and investment companies and securities companies owned or controlled by local governments.

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While effective in gathering savings, financial system had significant weaknesses, including: 

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Widespread inefficiency in allocation of capital leading to high levels of nonperforming loans Weak credit culture Uneven financial discipline with smaller SOEs and non-state enterprises often facing tougher standards Limited development of financial institutions other than banks

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Financial System Reforms – Some Major Achievements 

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Extensive reform and modernization of regulatory and supervisory systems, in line with international standards High level of NPL’s reduced; significant capital injections by government Banks modernizing lending, risk management and accounting systems and practices Banks free (in principle) of obligation to extend policy loans Door opened somewhat to foreign investors Competition in banking sector markedly higher 13

Further Reforms Are Needed, including, in the Banking Sector: 

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Complete reorganization of banking system, restoring financial solvency where necessary Improve governance of banks Further diversify banking sector, reducing concentration Increase non-state participation in banking sector, including by foreign financial institutions 14

Broaden financial markets by further developing equity and bond markets 

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Liberalize initial public offer systems for both equities and bonds to make them more market-driven Increase tradable portion of SOE shares Improve access of financial institutions to the securities markets Fully integrate government bond market Reform regulations to permit development of institutional investors as the “leading force” in the capital markets 15