OECD Economic Survey of China 2022 - Presentation

OECD ECONOMIC SURVEY OF CHINA 2022

China’s economy in transition: From swift recovery to high-quality growth

https://www.oecd.org/economy/china-economic-snapshot/

OECD Economics

Main messages • Growth has strongly rebounded.

• Financial risks stemming from high corporate debt are rising and need to be addressed swiftly. SOE debt surged, especially at the local level.

• For more inclusive growth, more equitable income and wealth distribution and stronger social protection are needed.

• Product market reforms should accelerate to strengthen growth.

2

China’s economy has recovered swiftly Real GDP Index 2019Q2 = 100 130 125 120 115 110 105 100 95 90 85 80

2016

2017

2018

2019

2020

2021

2022

2023

Source: OECD Economic Outlook database.

3

Investment remains an important driver of growth Contributions by factor of production % points 16 14 12 10 8 6 4 2 0 -2 -4

2000

Capital

2003

2006

Labour

2009

TFP

2012

Output growth

2015

2018

2021

Note: 2020 is estimate and 2021 is forecast. TFP = Total Factor Productivity.

Source: Conference Board Total Economy Database.

4

Growth will slow 2019

2020

2021

2022

2023

Real GDP (%)

6.0

2.3

8.1

5.1

5.1

Exports of goods and services (%)

1.5

1.6

16.7

2.4

5.5

Imports of goods and services (%)

0.4

-0.8

7.8

0.4

5.3

Consumer price index (%)

2.9

2.5

0.8

1.7

2.4

Terms of trade (%)

0.6

7.3

-8.8

-3.8

-0.4

-3.7

-6.9

-6.4

-6.0

-6.1

-2.8

-3.7

-3.1

-3.0

-3.2

0.7

1.9

1.7

1.5

1.5

Fiscal balance (% of GDP) Overall Headline Current account balance (% of GDP)

Note: The urban unemployment rate is registration based. Headline balance is the official fiscal balance, overall balance is the internationally more comparable aggregate balance of the four government accounts.

Source: CEIC database and OECD Economic Outlook 110 database.

5

Taxes represent a small and declining share of government revenues Structure of revenues % of total revenues 100 90 80 70 60 50 40 30 20 10 0

2010

Value added yax (VAT)

Corporate income tax (CIT)

Personal income tax (PIT)

Excise tax

Other tax

Social Security Fund

2012

2014

2016

2018

2020

Note: Total revenue includes revenues in the general, fund, social security and state-owned capital management accounts. Health, pension, injury, maternity and unemployment contributions and disbursements are done through the Social Security Fund. Tax revenue is 15% and total revenue is 25% of GDP. Source: Ministry of Finance.

6

The tax and transfer system is not very effective Income inequalities Gini coefficient 0.8 0.7

Gini: disposable income

Gini: market income

0.6 0.5 0.4 0.3 0.2

0

SVK CZE SVN ISL NOR BEL FIN SWE NLD DNK AUT HUN DEU IRL FRA CHE LUX CAN EST GRC OECD JPN PRT AUS NZL ESP RUS GBR ITA KOR LVA ISR LTU USA TUR CHN MEX CHL CRI IDN BRIICS COL BRA IND ZAF

0.1

Source: Standardized World Income Inequality Database v9.1 (Solt 2021).

7

People pay little income taxes Tax rates at 2.5 times the average wage % 60 50

Average income tax rate

Average tax wedge

Marginal income tax rate

40 30 20 10 0

China - private firms

OECD average

Germany

Korea

Note: The tax wedge includes social security contributions by both employers and employees. Calculations for China were based on the 2018 personal income tax reforms. Tax rates at 250% of the average wage and marginal income tax rates for OECD countries are as of 2017.

Source: OECD Taxing wages database for OECD countries and OECD calculations based on the Amendment to the Personal Income Tax Law passed by the 5th meeting of the 13th Congress of the NPP Standing Committee on 31 August 2018 and National Bureau of Statistics data.

8

The share of real estate in investment increased Structure of fixed asset investment CNY Billion 70000

Real estate

Secondary industry

Infrastructure

Others

60000 50000 40000 30000 20000 10000 0

2014

2015

2016

2017

2018

2019

2020

Source: CEIC database.

9

House prices have moderated Housing prices in cities by tier Y-o-y, %

All

Beijing, Shanghai, Guangzhou and Shenzhen

40

Tier 1

Tier 2

Tier 3

Tier 4

30 20 10 0 -10

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

Note: Tier 1 comprises 17 cities, Tier 2 22, Tier 3 21 and Tier 4 10.

Source: CEIC database.

10

Shadow banking is being reined in Total credit and shadow banking Y-o-y % changes

Total credit (stock)

Core shadow banking

20 16 12 8 4 0 -4 -8 -12

2015

2016

2017

2018

2019

2020

2021

Source: CEIC database.

11

Corporate debt remains high Non-financial corporate debt, 2020Q2 % of GDP 180 160 140 120 100 80 60 40

SWE

FRA

CHN

CAN

FIN

JPN

KOR

ESP

PRT

AUT

RUS

USA

GBR

TUR

ITA

HUN

DEU

GRC

IND

BRA

ZAF

0

IDN

20

Source: Bank of International Settlements database.

12

SOE debt has increased fast Debt of SOEs, listed non-financial and industries firms % of GDP 180

Industrial

Listed non-financial

SOE

160 140 120 100 80 60 40 20 0

2006

2008

2010

2012

2014

2016

2018

2020

Source: Ministry of Finance and CEIC database.

13

SOE debt surged mainly at the local level Debt of SOEs at the central and local levels % of GDP

Listed central

120

Listed local

Central

Local

100 80 60 40 20 0

2005

2007

2009

2011

2013

2015

2017

2019

Source: Ministry of Finance and CEIC database.

14

The contingent liabilities of local governments are high Local government investment vehicle debt by province and level of government Province

Jiangsu Zhejiang Sichuan Shandong Hubei Tianjin Hunan Guizhou Chongqing Henan Guangdong Anhui Jiangxi Beijing Yunnan Shaanxi Fujian Shanghai Guangxi Hebei Gansu Jilin Xinjiang Liaoning Shanxi Inner Mongolia Heilongjiang Ningxia Qinghai Tibet Hainan 0

1000

City

2000

3000

District/county

4000

5000

Note: Local zones include all economies ones below the national level.

Source: OECD calculations based on PPP Zhihu

National zone

6000

7000

Local zones

8000

9000

10000 CY billion

15

A large share of the population is exposed to heavy pollution Population exposure to PM2.5, 2019

China

OECD

0%

10%

[ 0-10] µg/m³

20%

30%

40%

[10-15] µg/m³

50% [15-25] µg/m³

60%

70% [25-35] µg/m³

80%

90%

100%

[>35] µg/m³

Source: OECD Green Growth Indicators database.

16

Greenhouse gas emissions have increased over the past decade Tonnes of CO2 equivalent per capital greenhouse gas emissions 2018

14

2010

12 10 8 6 4 2 0

China

OECD

Source: World Bank database; OECD Population database; and OECD calculations.

17

Key recommendations for more inclusive and sustainable growth •

Gradually phase out implicit guarantees to SOEs and other public entities by not bailing them out upon their default.

•

Increase SOE-related fiscal revenues.

•

Increase spending on social security, health and education.

•

Widen the personal income tax base and abolish deductions.

•

Introduce a recurrent tax on the holding of real estate and an inheritance tax.

•

Raise environmental taxes on fossil fuels and increase renewables and transport infrastructure investment.

•

Ensure sustainability of the pension system by linking the retirement age to life expectancy.

•

Unify the pension system across regions and schemes and make it more redistributive by abolishing the floor and raising the ceiling for contributors.

18

Accelerating product market reforms

19

Regulations are too complex Product market regulation overall index, 2018, from 0 (least restrictive) to 6 (most restrictive) 3.0 2.5 2.0 1.5 1.0

0.0

GBR DNK ESP DEU NLD SWE NOR AUS LTU NZL LVA EST SVN CZE HUN ITA PRT FIN IRL OECD CHL ISR AUT JPN ISL POL SVK CHE GRC FRA MEX LUX BEL KOR USA CAN COL RUS TUR CRI ZAF BRA IDN CHN

0.5

Note: Data for the United States refer to January 2021, for China and Indonesia to 2020, while data for Costa Rica and Estonia to 2019. All other countries as of 2018.

Source: OECD Product Market Regulation database.

20

Energy markets are highly regulated Natural gas regulation sub-component of the PMR indicator, 2018, from 0 (least restrictive) to 6 (most restrictive) 3.5 3.0 2.5 2.0 1.5 1.0

0.0

GBR DEU USA-NY LUX CZE IRL AUS SVN ESP BEL NLD AUT DNK ITA SWE GRC ISR EST LVA HUN LTU PRT OECD JPN COL POL SVK FRA TUR CAN NZL FIN ZAF NOR MEX BRA IDN CHL RUS KOR CHN CHE

0.5

Note: Data for the United States refer to January 2021, for China and Indonesia to 2020, while data for Costa Rica and Estonia to 2019. All other countries as of 2018. There are hundreds of competitors in the natural gas market and the sector is vertically separated, but the largest players remain state owned.

Source: OECD Product Market Regulation database.

21

Price controls are still fairly prevalent Price controls sub-component of the PMR indicator, 2018, from 0 (least restrictive) to 6 (most restrictive) 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0

0.0

SWE ISL AUT ITA GBR IRL DEU LUX NLD EST DNK NZL NOR AUS SVN HUN CZE ZAF FIN OECD USA ESP LVA CHL POL SVK CHE ISR CAN FRA JPN LTU PRT GRC BRA RUS COL BEL CHN MEX CRI KOR TUR IDN

0.5

Note: Data for the United States refer to January 2021, for China and Indonesia to 2020, while data for Costa Rica and Estonia to 2019. All other countries as of 2018.

Source: OECD Product Market Regulation database.

22

Government procurement is restrictive Government procurement sub-component of the PMR indicator, 2018, from 0 (least restrictive) to 6 (most restrictive) 4.0 3.5 3.0 2.5 2.0 1.5 1.0

0.0

HUN LTU GBR IRL NZL AUS NLD PRT EST BEL DEU TUR KOR SVK GRC NOR CZE CHE AUT POL COL ISL OECD LVA DNK FIN SVN ITA LUX ESP SWE CHL FRA MEX ZAF CRI ISR RUS CHN IDN JPN USA CAN BRA

0.5

Note: Data for the United States refer to January 2021, for China and Indonesia to 2020, while data for Costa Rica and Estonia to 2019. All other countries as of 2018.

Source: OECD Product Market Regulation database.

23

Restrictions to trade in digital services OECD Digital Services Trade Restrictiveness Index, 2020 0.6 0.5

Infrastructure and connectivity

Electronic transactions

Payment system

Intellectual property rights

Other barriers affecting trade in digitally enabled services

0.4 0.3 0.2

CHN

IND

ZAF

RUS

BRIICS

COL

TUR

POL

CHL

BRA

IDN

AUT

ISR

HUN

KOR

OECD

DEU

IRL

SWE

ITA

FRA

DNK

JPN

NLD

MEX

FIN

GBR

AUS

CHE

USA

NOR

0

CAN

0.1

Source: OECD Services Trade Restrictiveness Index database.

24

Recommendations for further liberalising product markets •

Strengthen the rule of law and restrict the power of administrative departments to prevent the creation of administrative monopolies.

•

Dismantle existing administrative monopolies and apply the Fair Competition Review Mechanism rigorously.

•

Unify market regulations across the country to create a single market.

•

Strengthen intellectual property right protection.

•

Open up further sectors for foreign investment and abolish the requirement of joint ventures.

•

Apply the competitive neutrality principles in the allocation of subsidies and subject the use of public funds to rigorous cost-benefit analysis and third-party evaluation. Make subsidies more transparent.

•

Implement accounting separation and pay fair compensation for SOEs for their services.

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More information…

https://www.oecd.org/economy/china-economicsnapshot/ OECD Economics OECD

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