Section 3 China in search of new growth models · 2018-11-21 · Section 3 China in search of new growth models. ... such as clothing, footwear and furniture but also with regard

Section 3 China in search of new growth models In this section, we first show that China has achieved rapid economic growth and is expanding its

presence globally. Next, we point out that the various conditions that have supported China’s rapid growth are now starting to change. Finally, we look at structural problems and challenges that China will need to overcome in order to achieve further growth.

1. China’s expanding presence

China is expanding its presence in the global economy in terms of GDP, exports and imports and foreign currency reserves due to its high economic growth.

(1) GDP

In the late 1970s, China embarked on the policy of economic reforms and opening up and started to shift to a market economy and accept foreign investment, and in 2001, China acceded to the World Trade Organization (WTO). For more than 30 years, China maintained an average annual economic growth rate of around 10% in real terms (Figure II-1-3-1).

As a result, China’s dollar-based nominal GDP surpassed major European countries’ in the late 2000s and Japan’s in 2010, making China the second largest economy in the world after the United States (Figure II-1-3-2). In particular, in the five-year period following the global economic crisis (from 2008 to 2013), China’s dollar-based nominal GDP nearly doubled due to additional effects of the appreciation of the yuan, the Chinese currency, even while advanced countries’ GDP remained sluggish.

Moreover, the economic size of some Chinese provinces has grown so large as to equal the size of a major Asian country, so China is gaining an economic influence over neighboring countries through trade (Figure II-1-3-3).

207

Figure II-1-3-1 Trends in China’s average annual economic growth rate

0

2

4

6

8

10

12

14

16

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

(%)

Tiananmen Square protests (1989)

Asian financial crisis (1997)

Global financial crisis (2008)

1980-2013 (33 years)Average growth rate 9.9%

Joined the WTO(2001)

Source: WEO, April 2014 (IMF).(Year)

Figure II-1-3-2 Trends in nominal GDP (dollar basis) among major countries

0

5

10

15

20

25

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

the U.S.

China

Japan

Germany

France

UK

Brazil

Russia

Italy

India

(Trillion dollars)

Notes: Shows the top 10 countries by GDP in 2013.Source: WEO, April 2014 (IMF).

China’s GDP

2005 Replaced France in 5th place2006 Replaced the UK in 4th place2007 Replaced Germany in 3rd place2010 Replaced Japan in 2nd place

the U.S.

Japan

China

Germany

China joined the WTO (2001)

IMF prediction


(Year)

208

Figure II-1-3-3 Total value of production by Chinese provinces and municipalities and major Asian countries and regions (2013)

0

500

1,000

1,500

2,000

Notes: 1. Figures for China and Japan are broken down by province/prefecture; all others are for the whole country/region.2. Total local production in China’s provinces and municipalities and Japan’s prefectures has been converted into dollars at the annual average exchange rate.3. Actual figures for 2010 have been used for the prefectural statistics for Japan only.Source: WEO, April 2014 (IMF), Annual Report on Prefectural Accounts (Cabinet Office of Japan), CEIC Database, National Bureau of Statistics of China.

(Billion dollars)

Guangdong Province: Largest economy of China’s 31 provinces, autonomous regions and municipalities

Indonesia: Largest economy of the ten ASEAN members

(2) Exports

China’s trade has also expanded markedly. Since the collapse of the IT bubble in the United States in the early 2000s, both Chinese exports and imports have almost consistently been growing at an annual rate of higher than 20% (Figure II-1-3-4). In particular, as the growth in exports has been more prominent, China has been recording a large trade surplus since the mid-2000s. In 2008, the trade surplus hit a record high of 297.4 billion dollars (equivalent to 6.6% of GDP), and in 2013, the surplus came to 261.4 billion dollars (2.8% of GDP)103.

A look at countries’ shares of global exports shows that China’s share has been rapidly growing while the shares of Japan and the United States have been moderately declining104 (Figure II-1-3-5).

By product item, China’s share has been growing not only with regard to light industrial products such as clothing, footwear and furniture but also with regard to machinery, including general machinery (personal computers, etc.) and electrical machinery (mobile phones, etc.) 105 (Figure II-1-3-6).

103 Although the value of China’s trade surplus in 2013 was not much different from 2008, the ratio of the

trade surplus to GDP declined steeply because the dollar-based nominal GDP nearly doubled. The ratio of

the trade surplus to GDP peaked at 7.5% in 2007. 104 The value of global trade was cited from U.N. Comtrade data obtained through the World Bank’s WITS

system. 105Nearly half of the imports and exports of China are conducted by foreign companies (in 2013, foreign companies accounted for 47.3% of exports and 44.9% of imports).

209

Figure II-1-3-4 Trends in China’s trade

-200

-100

0

100

200

300

400

500

-20

-10

0

10

20

30

40

50

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Balance of trade (right axis)

Growth of exports

Growth of imports

(%)

Source: Global Trade Atlas.

(Billion dollars)


Dotcom bubble burst(2001)

297

261

(Year)

Figure II-1-3-5 Trends in the share of major countries in global exports

0

2

4

6

8

10

12

14

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

China the U.S. Germany Japan France Netherlands ROK Russia Italy Hong Kong

(%)

Notes: Shows the top 10 countries by exports in 2012.Source: World Bank, WITS; United Nations, Comtrade.

ChinaGermany

the U.S.

Japan

(Year)

210

Figure II-1-3-6 Share of major Chinese export goods in global exports

0

10

20

30

40

50

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Footwear(HS64) Apparel(HS61、HS62) Furniture(HS94)Electrical machinery(HS85) Steel products(HS73) General machinery(HS84)Precision instruments(HS90) Total for all goods Plastics(HS39)Motor vehicles(HS87)

(%)

Notes: Top 10 export items in 2012 by HS 2-digit classification (accounting for approximately 67% of the total value of China’s exports). However, the share for apparel has been calculated based on the total for HS61 and HS62.Source: World Bank, WITS; United Nations, Comtrade.

FootwearElectrical machinery

Furniture

ApparelGeneral machinery

(Year)

Total for all goods

(3) Imports In addition to exports, imports by China have been increasing, expanding China’s presence as an

export destination for countries around the world. In particular, in 2009, when exports to the United States and Europe declined steeply in terms of value (a year-on-year fall of 25%) just after the global economic crisis, exports to China dropped only slightly (year-on-year fall of 6%), resulting in an increase in China’s share as an export destination (Figure II-1-3-7).

A breakdown of exports to China by country shows that in neighboring countries such as Indonesia, Malaysia and Thailand, the share of exports to China in overall exports has continuously been growing since before the global economic crisis. A similar trend is seen in the United States (Figure II-1-3-8). In resource-producing countries such as Australia and Brazil, the share of exports to China has been expanding at an accelerated rate since the global economic crisis. In particular, as both Australia and Brazil depend heavily on specific items such as crude oil, coal and iron ore, China’s share as an export destination has increased rapidly, making these countries’ economic structures prone to be affected by the Chinese economy (Figure II-1-3-9).

211

Figure II-1-3-7 Trends in the shares of major export destinations worldwide

0

2

4

6

8

10

12

14

16

18

20

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Japan China

the U.S. UK

Germany France

(%)

(Year)Source: World Bank, WITS; United Nations, Comtrade.


China’s share rose substantially after the global financial crisis.

the U.S.

Japan

Germany

China

212

Figure II-1-3-8 Trends in the shares of destinations for the exports of major countries

0

5

10

15

20

25

30

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

(Indonesia)

Japan Chinathe U.S. EUOf which, Germany Of which, the UKOf which, France

(%)

China

EU

the U.S.

Japan

China: 2ndGlobal financial crisis (2008)

Source: World Bank, WITS; United Nations, Comtrade.(Year)

0

5

10

15

20

25

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

(Malaysia)

Japan Chinathe U.S. EUOf which, Germany Of which, the UKOf which, France

(%)

China

EU

the U.S.

Japan

China: 1stGlobal financial crisis (2008)


0

5

10

15

20

25

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

(Thailand)Japan Chinathe U.S. EUOf which, Germany Of which, the UKOf which, France

(%)

China

EUthe U.S.

Japan

China: 1stGlobal financial crisis (2008)


213

0

5

10

15

20

25

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

(the U.S.)

Japan

China

EU

Of which, Germany

Of which, the UK

Of which, France

(%)

Source: United Nations, Comtrade.


China

EU

Japan

China: 1st

(Year)

0

5

10

15

20

25

30

35

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

(Australia)

JapanChinathe U.S.EUOf which, GermanyOf which, the UKOf which, France

(%)

China

EUthe U.S.

Japan

China: 1st

Source: World Bank, WITS; United Nations, Comtrade.


(Year)

0

5

10

15

20

25

30

35

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

(Brazil)

JapanChinathe U.S.EUOf which, GermanyOf which, the UKOf which, France

(%)

China

EU

the U.S.

Japan

China: 1st



(Year)

214

Figure II-1-3-9 Major exports of Australia and Brazil and the destinations thereof

Australia (HS27: mineral fuels)

Australia (HS26: ores)

Global economic crisis(2008)


Japan

Japan

China

China

EU

EU

(Year)

(Year)

Japan

Japan

China

China the U.S.

theU.S. EU

EUOf which, Germany

Of which, Germany Of which, UK

Of which, UK Of which, France

Of which, France

Australia’s Major Exports (2012)(Billion dollars, %)

Item Value of exports Share

Mineral fuels

Ores

Precious stones

Cereals

Meat

General machinery

Chemicals

Aluminum

Pharmaceutical products

Copper

Other

Item Value of exports

Brazil (HS26: ores)

Brazil (HS27: mineral fuels)



EU

China

Japan

EUChina

the U.S.

Japan

Japan Japan

China

China China

the U.S.

the U.S.

EU

EU EU

Of which, Germany

Of which, Germany

Of which, UK

Of which, UK Of which,

UKOf which, Germany

the U.S.

Of which, France

Of which, France Of which, France


EU

China

(Year)

(Year) (Year)

Brazil (HS12: seeds and fruits)

Brazil’s Major Exports (2012) (Billion dollars, %)

Share

Ores

Mineral fuels

Seeds and fruits

General machinery

Meat

Sugar

Motor vehicles

Iron and steelFood by-products (soybean meal)

Cereals

Other


(4) Foreign currency reserves

215

China’s foreign currency reserves increased rapidly in the 2000s. In line with the increase in foreign currency reserves, the value of U.S. government securities held by China as investment assets also grew rapidly, and at the end of 2008, China surpassed Japan to become the largest holder of U.S. government securities in the world (Figure II-1-3-10).

Figure II-1-3-10 Trends in the value of China’s foreign exchange reserves and the value of its U.S. Government bond holdings

0

5

10

15

20

25

30

35

40

45

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Value of China’s foreign exchange reservesValue of China’s U.S. government bond holdingsChina’s share in the value of U.S. government bond holdings by foreign nationals (right axis)Japan’s share in the value of U.S. government bond holdings by foreign nationals (right axis)

Notes: The lines showing the U.S. government bond holdings indicate the shares of the value of such holdings by foreign nationals accounted for by both countries.Source: CEIC Database, People’s Bank of China, U.S. Department of the Treasury.

(Billion dollars) (%)

Japan’s share

China’s share

Value of its U.S. Government Bond Holdings

Value of foreign exchange reserves

(Year)

2. Changes in the various conditions that have supported China’s high growth and the distortions of growth

Above, we looked at China’s expanding presence. However, the various conditions that have supported China’s high growth are now starting to change, and distortions of growth are becoming apparent.

(1) Loss of demographic dividends

Until now, the working-age population in China has been growing, and this has had favorable effects on expansion of production activity (so-called demographic dividends). However, in the future, the aging of society is expected to proceed because of the effects of China’s one-child policy. According to a projection by the United Nations, China’s working-age population will gradually decline after peaking in 2010 (Figure II-1-3-11). The ratio of the working-age population to the overall population is also projected to decline from 2010 onwards, while the ratio of the elderly population is projected to increase. Therefore, how to deal with a slowdown of the economic growth, the aging of society, and social security have become issues that cannot be avoided. Against this backdrop, China

216

has relaxed the one-child policy. However, it will take a long period of time before the effects of the relaxation of the one-child policy on the population structure appear.

Figure II-1-3-11 Trends in China’s demographic structure

0

10

20

30

40

50

60

70

80

90

100

0

2

4

6

8

10

12

14

16

18

20

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

Elderly population (aged 60 or above)

Young population (aged 0-14)

Working-age population (aged 15-59)

Proportion of working-age population

(100 million people) (%)

Notes: 1. Population estimates by the United Nations. There are high, middle and low scenarios; the middle scenario is shown here.2. The definition of working age takes into account the use of the 16-59 age bracket in a January 20, 2014 press release by the National Bureau of Statistics of China.3. According to a Chinese government announcement, the working-age population peaked in 2011 and was on the decline in 2012 and 2013.Source: World Population Prospects: The 2012 Revision (United Nations).

Working-age population peaks

Elderly population

Working-age population

Young population

Proportion of working-age population

2000-2010Increase of 120 billion

people

2010-2020Decrease of 15 million people

*According to a Chinese government announcement, the working-age population has already peaked, in 2011.

(Year)

(2) A decline in surplus rural labor force (Lewisian Turning Point106)

At the same time as the peaking-out of the overall working-age population, a change is also starting to occur with regard to the movement of the working-age population by region and industry. Until now, inland regions have been supplying a surplus rural labor force to coastal urban regions as migrant workers, but the surplus labor force has been dwindling. While it is difficult to statistically identify the surplus rural labor force, the job opening to application ratio in urban regions rose close to 1.0 immediately before the global economic crisis, and although the ratio fell temporarily after the global economic crisis, it later exceeded 1.0 and has risen further (Figure II-1-3-12).

106 The Lewisian Turning Point theory, proposed by British economist Arthur Lewis, maintains that when a

surplus labor force in the agricultural sector is depleted as a result of a labor shift to the industrial sector

during the process of industrialization, wages rise due to a tightening of the labor supply-demand balance.

217

Figure II-1-3-12 Trends in China’s ratio of job openings to applications (urban areas)

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: Chinese Ministry of Human Resources and Social Security , CEIC Database.

(Times)

1.10 timesGlobal financial crisis (2008)

The ratio of job openings to applications rises

The ratio of job openings to applications reaches almost 1 (0.98).

Number of openings

Number of applicants

(Quarter, year)

(3) Wage rise Amid the tightening of the labor-supply balance in urban regions, there is upward pressure on

wages. Furthermore, the government of China supports a wage rise for the sake of raising the people’s living standards and increasing consumption, so wages in China, the low level of which was previously regarded as an advantage for the country, have risen to almost the same level as wages in Thailand and Malaysia (Figures II-1-3-13 and II-1-3-14).

Figure II-1-3-13 Trends in the average wage in China (manufacturing industry)

0

5

10

15

20

25

0

10

20

30

40

50

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Average wage

Growth rate (right axis)

(Thousand yuan) (%)

Source: Chinese Ministry of Human Resources and Social Security, CEIC Database.

The growth rate is consistently higher than 10% compared with the previous year. Moreover, it progressively accelerates.


218

Figure II-1-3-14 Monthly base salary at Japanese companies overseas (worker, manufacturing)

0

100

200

300

400

500

Malaysia China Thailand Philippines Indonesia India Viet Nam Pakistan Laos Sri Lanka Cambodia Bangladesh

Notes: Salary excludes benefits, as of October 2013.Source: Survey on Business Conditions of Japanese-Affiliated Firms in Asia and Oceania (2013 survey) (JETRO).

(Dollar)

(4) Yuan’s appreciation

As was mentioned earlier, China has been recording a large trade surplus. However, the exchange rate of the yuan remained pegged to the dollar, so other countries started to call for correcting the situation. Since 2005, China has shifted to a managed floating system, and as a result, the yuan has been rising against the dollar moderately, eliciting voices of concern over a deterioration of export competitiveness, mainly from exporting companies in coastal regions (Figure II-1-3-15).

Figure II-1-3-15 Trends in the Chinese Yuan renminbi exchange rate

80

90

100

110

120

130

140

150

1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

(Dollar/Yuan, where January 2000 = 100)

Notes: Average for the month.Source: People’s Bank of China, CEIC Database.

July 2008Goes back to effectively being pegged against the dollar, in response to the global financial crisis.

June 2010The renminbi returns to a flexible rate.

July 2005The renminbi switches to a managed float regime

Strong yuan

Weak yuan

(Month, year)

219

(5) Dependence on other countries’ economies through exports Looked at from another angle, the rapid expansion of China’s exports may be viewed as an

increasing dependence on other countries through exports. China’s ratio of exports to GDP peaked (at 35.7%) in 2006 (Figure II-1-3-16). A breakdown of Chinese exports by destination country shows that the ratio of U.S.-bound exports to GDP peaked at 7.5% (2006) and the ratio of EU-bound exports to GDP peaked at 7.0% (2007). In Japan’s case, the ratio of exports worldwide to GDP peaked at 16.3% (2007), while the ratio of U.S. bound exports to GDP peaked at 4.8% (1985). Thus, China’s export-to-GDP ratio peaked at a higher level than Japan’s export ratio (Figure II-1-3-17). Although China’s export-to-GDP ratio declined after the global economic crisis, a slowdown of the Chinese economy is apt to affect other countries, and at the same time, China itself has become prone to be affected by other countries.

Figure II-1-3-16 Trends in China’s exports as a proportion of GDP

0

5

10

15

20

25

30

35

40

0

2

4

6

8

10

12

14

16

1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Japan

the U.S.

EU27

ROK

Hong Kong

World (right axis)

Source: World Bank, WITS; United Nations, Comtrade; WEO, April 2014 (IMF).

(%) (%)World peak35.7% (2006)

the U.S. peak7.5% (2006)

EU peak7.0% (2007)

Japan peak3.9% (1995)

(Year)

220

Figure II-1-3-17 Trends in Japan’s exports as a proportion of GDP

0

2

4

6

8

10

12

14

16

18

20

0

1

2

3

4

5

6

7

8

9

10

1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

China

the U.S.

EU27

ROK

Hong Kong

ASEAN

Worldwide (right axis)

Source: World Bank, WITS; United Nations, Comtrade; Cabinet Office, CEIC Database.

(%) (%)

World peak16.3% (2007)

the U.S. peak4.8% (1985)

China peak2.7% (2011)ASEAN peak

2.1% (2008)

(Year)

(6) Trend in inward direct investment Under the policy of opening up, direct investments by foreign companies have been contributing to

economic growth, mainly in coastal regions. It has been pointed out that foreign direct investments have not only contributed to economic growth through an expansion of production but also promoted spillover of technologies and knowhow through the integration of related industries from within and outside China. For China to improve the quality of its economic growth in the future through sophistication of industries and creation of high value added, direct investments are expected to play an important role. However, in recent years, growth in direct investments has stalled (Figure II-1-3-18). Although Japan is a major investor and maintains a high share of foreign direct investments in China, the value of its direct investments has recently been declining and the growth rate (on a year-on-year basis) of direct investments has remained negative107 (Figures II-1-3-19 and II-1-3-20).

107 There is a discrepancy between the direct investment data included in Japan’s international balance of

payments statistics (published by the Ministry of Finance and the Bank of Japan) and China’s direct

investment statistics (published by the Ministry of Commerce). Here, we used Japan’s international

balance of payments statistics.

221

Figure II-1-3-18 Trends in foreign direct investment in China

0

20

40

60

80

100

120

140

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Other

Hong Kong

Netherlands

France

Germany

UK

the U.S.

Taiwan

ROK

Singapore

Japan

Overall

(Billion dollars)

Notes: “Other” includes the Virgin Islands and the Cayman Islands.Source: Chinese Ministry of Commerce, CEIC Database.

China joined the WTO (2001)


Asian financial crisis (1997)

Figure II-1-3-19 Foreign direct investment in China (2013)

Singapore6.1% Japan

6.0%

ROK2.6% the U.S.

2.4%

Taiwan1.8% Germany

1.8%Netherlands

1.1%France0.6%

UK0.3%

Hong Kong62.5%

Other14.8%

Notes: “Other” includes the Virgin Islands and the Cayman Islands.Source: Chinese Ministry of Commerce, CEIC Database.

222

Figure II-1-3-20 Trends in Japanese direct investment in China

-80

-40

0

40

80

120

160

200

0

500

1,000

1,500

2,000

2,500

3,000

3,500

1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1

2008 2009 2010 2011 2012 2013 2014

Direct investment

Growth rate(right axis)

(100 million yen)

Source: Bank of Japan website.

(%)

Ongoing negative growth (compared with the previous year).

(Quarter, year)

(7) Widening income inequality

During the process of remarkable economic development, distortions of growth have become apparent. A typical example of such distortion is the widening income inequality, and the Gini coefficient, a major indicator of inequality, rose. Although it has recently declined somewhat, the Gini coefficient has still stayed above 0.4, which is viewed as a warning level (Figure II-1-3-21). Although China’s Gini coefficient is lower than Brazil’s, it is higher than the coefficients of other Asian countries such as India, Indonesia, the Philippines and Thailand. The Gini coefficients of advanced countries such as Japan, the United States, Germany and France are lower than the coefficient of China (Figure II-1-3-22).

Although inequality between provinces and between urban and rural regions is narrowing, it is still wide. For example, a comparison of per-capita GDP in 31 provinces, cities and autonomous regions shows that there is a difference of a factor of almost 5 between the highest and lowest per-capita GDP areas (Figure II-1-3-23). In coastal regions, there are many high-income areas which have achieved development mainly because of export industries, while income is relatively low in central and western provinces, where industrial foundation is weak (Figure II-1-3-24).

Income inequality between urban and rural regions is also still wide. In the 2000s, the income growth rate in rural regions gradually accelerated and has recently stayed above the income growth rate in urban areas. Even so, the value of income in urban regions is around three times as high as that in rural regions (Figure II-1-3-25). It should be noted that under a family registration system, there are restrictions on the free movement of people from rural to urban regions.

223

Figure II-1-3-21 Trends in China’s Gini coefficient

0

0.1

0.2

0.3

0.4

0.5

0.6

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

IMF estimation Announced by the National Bureau of Statistics of China

Notes: Data to 2004 are IMF calculations (IMF, WEO, October 2007), while data since 2003 are figures announced by the National Bureau of Statistics of China.Source: WEO, October 2007 (IMF), National Bureau of Statistics of China.

IMF estimation

Announced by the National Bureau of Statistics of China

Warning level = 0.4

*Gini coefficient-The Gini coefficient is an indicator typically used for measuring inequality.-It ranges between 0 and 1, with figures closer to 0 indicating less inequality, while figures closer to 1 indicate more inequality-A figure of 0.4 is regarded as the warning level signaling an increased likelihood of social unrest.

Figure II-1-3-22 Comparison of the Gini coefficient in major countries

-0.1

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

China India Indonesia MalaysiaPhilippinesThailand Brazil Mexico Japan the U.S. Germany France

2013 2014 2010 2011 2009 2009 2010 2009 2010 2014 2011 2010 2010 2010

Notes & source:1. National Bureau of Statistics of China (for China); World Bank, WDI (for emerging economies); Ministry of Health, Labour and Welfare, Survey on the Redistribution of Income (for Japan); OECD Database (for advanced economies other than Japan).2. The most recent data in each database have been used, but there are differences between countries in the year used, due to limitations in those data.

(Emerging economies) (Advanced economies)

(Year)

224

Figure II-1-3-23 China’s GDP per capita by region (2012)

0

2

4

6

8

10

12 Ti

anjin

Bei

jing

Shan

ghai

Jiang

su

Inne

r Mon

golia

Jiang

zhe

Liao

ning

Gua

ngdo

ng

Fujia

n

Shan

dong

Jilin

Cho

ngqi

ng

Hub

ei

Shaa

nxi

Nat

iona

l ave

rage

Heb

ei

Nin

gxia

Hei

long

jiang

Xin

jiang

Shan

xi

Hun

an

Qin

ghai

Kai

nan

Hen

an

Sich

uan

Jiang

xi

Anh

ui

Gua

ngxi

Tibe

t

Yunn

an

Gan

su

Gui

zhou

(Ten thousand yuan)

Source: Data obtained from the National Bureau of Statistics of China and the CEIC Database.

Tianjin City: Guizhou Province4.7 times

Figure II-1-3-24 China’s GDP per capita by region (2012)

Beijing 85,400 yuan

Beijing 87,500 yuan

Tianjin 93,200 yuan

< 20,00020,000 – < 30,00030,000 – < 40,00040,000 – < 60,00060,000 – < 80,000≥8

China totalApprox. 38,400 yuan

Notes: Map shows a summary.Source: National Bureau of Statistics of China, CEIC Database.

Guizhou 19,700 yuan

225

Figure II-1-3-25 Trends in income per capita in China’s urban and rural areas

0

5

10

15

20

25

30

0

5,000

10,000

15,000

20,000

25,000

30,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Annual income (urban)

Annual income (rural)

Growth rate (urban)

Growth rate (rural)

Notes: Figures for urban areas show disposable income per capita, while those for rural areas show net income per capita. Growth rates are on an actual basis, adjusted for prices.Source: China Statistical Yearbook (National Bureau of Statistics of China), press releases.

(Yuan) (%)

Growth rate (urban)

Growth rate (rural)

Annual income (urban)

Annual income (rural)

(Year)

3. Structural problems and challenges As shown above, the various conditions that have supported China’s high growth are starting to

change, and distortions of growth are becoming apparent. China’s economic growth rate has declined from more than 10% to the 7-8% range. Under these circumstances, there is awareness of the need for structural reform essential for China to maintain economic growth in the future.

In particular, in relation to problems such as excess production capacity, which is an adverse side effect of a 4-trillion-yuan economic package108, plans to promote structural reforms in a wide range of fields were announced at the third Plenary Session of the Central Committee of the Communist Party of China109 (third PSCCCPC) last year and the National People’s Congress110 (NPC) this year. However, there are many challenges that must be overcome before the implementation of the reforms, 108 The 4-trillion-yuan economic package was equivalent to around 12% of China’s GDP in 2009 and was

larger in amount than the annual revenues of the central government of China, which stood at 3.6 trillion

yuan. The 4-trillion-yen economic package was implemented over two years, 2009 and 2010, and local

governments were also required to bear expenditures. The implementation of the massive fiscal

expenditures resulted in an economic recovery but also created problems. 109 The third Plenary Session of the 18th Central Committee of the Communist Party of China. This was

the third plenary session of the Central Committee since the 18th National Congress of the Communist

Party of China (2012) at which the current leadership team was elected. As the national congress of the

Communist Party of China is held every five years, a plenary session of the Central Committee works as

the party’s highest decision-making body in the interim period. 110 The National People’s Congress is equivalent to the Diet of Japan and is convened around March each year.

226

so a careful watch needs to be kept on future developments. Although these issues are closely related to each other, we look at them separately along broad

themes for convenience’s sake while making references to relevant matters as necessary.

(1) Excess production capacity As a result of excess production equipment capacity relative to demand, inventories are increasing,

prices are falling, and capacity utilization rates are dropping. China has remained unable to exit the production adjustment phase because production tends to expand rapidly at a small sign of a demand recovery. While this problem has existed for some time, it has deepened after the completion of the 4-trillion-yuan economic package. The problem has become particularly notable in such sectors as steel, cement and glass. Among the background factors are problems relating to an investment-led economic growth model and state-owned enterprises (SOEs).

A look at changes in contributions to China’s real GDP growth rate by demand component shows that gross capital formation has played a significant role in China’s growth in the 2000s (Figure II-1-3-26). In 2008, when the global economic crisis occurred, the GDP growth rate fell steeply, and in 2009, net exports made considerable negative contributions to the growth rate. However, the government of China limited the slowdown of the growth rate by considerably expanding capital formation through the 4-trillion-yuan economic package. While the economic package itself mainly comprised public works projects, capital investments were made by the manufacturing industry, which supplied necessary equipment (Figure II-1-3-27). As a result, following the completion of the economic package, the problem of excess production capacity has emerged.

As for the trends in inventories and prices, both inventories and producer prices maintained high growth until 2010, when the economic package was in effect. However, the growth started to slow down from late 2011. In particular, producer prices recorded negative year-on-year growth for around two years from 2012 (Figures II-1-3-28 and II-1-3-29). Consequently, the capacity utilization rate has remained at a low level (Table II-1-3-30). A comparison of long-term production trends between China and major countries shows that China’s expansion of production of steel has been outstanding (Figure II-1-3-31).

Among the background factors of the tendency toward excess production capacity are local governments’ stance of placing priority on economic growth and the fact that SOEs find it easy to make low-efficiency investments. Macro-economic factors to increase investment easily include low share of labor income and high saving propensity.

In this situation, the central government has announced a policy toward resolving excess production capacity. For example, regarding five designated sectors – steel, cement, aluminum, sheet glass and shipbuilding ― the government of China announced in October 2013 a policy of prohibiting an expansion of production, promoting the disposal of obsolete production equipment and industrial realignments, expanding exports and improving technological capability. For the steel sector, the government set the goal of reducing production capacity by 80 million tons. When implementing the policy, doing coordination work with local governments concerned about a slowdown of their regional economies will be a challenge.

227

Figure II-1-3-26 Trends in contribution to China’s GDP growth rate

-5

0

5

10

15

20

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Net exports

Gross capital formation

Final consumption

GDP

Source: National Bureau of Statistics of China, CEIC Database.

(%)


Net exports fell into the negative range, with capital formation making up the shortfall.


Final consumption

Net exports

(Year)

Figure II-1-3-27 Trends in contribution to China’s growth rate of fixed asset investment by industry

-5

0

5

10

15

20

25

30

35

2008 2009 2010 2011 2012 2013

Other

Real estate

Road

Rail

Electricity, gas & water supply

Manufacturing

Primary industry

Fixed asset investment

Notes: Figures for fixed asset investment exclude household investment in rural areas.Source: National Bureau of Statistics of China, CEIC Database.

(%)

Manufacturing

Real estateRoad

Electricity, gas & water supply

Rail

(Year)

228

Figure II-1-3-28 Trends in growth rate of inventories of major products in China (compared with the same period of the previous year)

-30

-20

-10

0

10

20

30

40

50

60

1 5 11 2 8 1 5 11 2 4 6 8 10 12 2 4 6 8 10 12 2 4 6 8 10 12 3

2008 2009 2010 2011 2012 2013 2014

TotalChemicals and raw materialsCeramics, soil & stoneSteelGeneral machineryElectrical machineryComputers and communications equipmentMotor vehicles


(%)

Chemicals and raw materials

Steel

Motor vehicles

Inventory contraction/adjustment

Total

Figure II-1-3-29 Trends in rate of producer price increases in China (compared with the same period of the previous year)

-30

-20

-10

0

10

20

30

40

1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3

2008 2009 2010 2011 2012 2013 2014

Total

Chemicals and raw materials

Ceramics, soil & stone

Steel

General machinery

Electrical machinery

Computers and communications equipment

Motor vehicles

Notes: Up to 2011, figures for motor vehicles include transportation equipment, while figures from 2012 onward include only motor vehicles.Source: National Bureau of Statistics of China, CEIC Database.

(%)

Steel Chemicals and raw materials

Ongoing negative growth compared with the previous year.

Total

229

Table II-1-3-30 China’s capacity utilization rate

(%)Steel Cement Aluminum Flat glass Ships72.0 73.3 71.9 73.1 75.0

Source: Guiding Opinion on Resolving the Problem of SeriousExcess Production Capacity (October 2014) (State Council).

Figure II-1-3-31 Trends in the volume of steel and motor vehicle production in major countries

0

100

200

300

400

500

600

700

800

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

(Crude steel)

China

Japan

ROK

the U.S.

Germany

Source: CEIC Database, National Bureau of Statistics of China, World Steel Association.

(Million tons)

China: 5.6 times(Annual average rate: 15.5%)

(Year)

0

5

10

15

20

25

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

(Motor vehicles)

China

Japan

ROK

the U.S.

Germany

Source: CEIC Database, National Bureau of Statistics of China, MarkLines Database.

(Million)

China: 5.9 times(Annual average rate: 19.5%)

(Year)

230

(2) Shift from the investment-led growth model Excess investment is related to China’s investment-led growth model. As was mentioned earlier,

gross capital formation has played an important role in China’s economic growth in the 2000s, and economic measures taken at the time of recession included investments. A look at changes in the shares of investments and consumption in China’s GDP shows that the share of investments continued to rise throughout the 2000s, while the share of private consumption continued to decline. The share of investments in China’s GDP is much higher than the peak shares of investments in the GDP of Japan and ROK during the periods of high economic growth (Figure II-1-3-32).

Macro-economic factors behind the investment-led growth include the tendencies of funds being used for investment, rather than for consumption. For example, the domestic savings rate in China has been rising, and the high saving rate is underpinning investments through indirect finance (Figure II-1-3-33)111. As a background factor of the high saving rate, it has been pointed out that because social security systems have not been adequately developed, consumption is curbed and money is saved due to concerns over living security in old age.

The high saving rate is also related to labor’s low share of income in China. Labor’s share of income in China dropped nearly 10 percentage points in the 2000s, by the time of the global economic crisis (from 2000 to 2007). Although it recovered after dropping further in 2008, labor’s share of income in China has recently been in the 40-50% range, lower than the 60-70% range of labor’s share of income in major Western countries (Figure II-1-3-34).

The government has set forth a policy of shifting from investment-led growth to a growth well balanced between investment, consumption and export. However, the shift will involve the promotion of a market mechanism that encourages efficient investment behavior, an increase in and redistribution of income that leads to an expansion of consumption, and the development social security systems. It is necessary to tackle a broad range of challenges, including coordination with local governments and vested interest groups and funding.

111However, the savings rate may decline in the future due to the aging of society.

231

Figure II-1-3-32 Trends in China’s GDP component ratio

-20

-10

0

10

20

30

40

50

60

70

80

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Private consumption

Government consumption


Net exports

(%)



Private consumption

Net exports

Government consumption

47.8

2.8

13.5

36.0

Share of GDP accounted for by capital formationPeak Year

Japan 36.4% 1973ROK 38.0% 1991Taiwan 30.9% 1980Source: National Bureau of Statistics of China, CabinetOffice of Japan, Bank of Korea, TaiwaneseDirectorate-General of Budget, Accounting andStatistics, CEIC Database. Figure II-1-3-33 Trends in China’s domestic savings and investment as a proportion of GDP

30

35

40

45

50

55

60

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Savings rate Investment rate

(%)

Source: World Development Indicators (World Bank), CEIC Database.

Savings rate

Investment rate

Savings rate peak52.7%

50.8%

47.8%

232

Figure II-1-3-34 Trends in China’s labor share

0

10

20

30

40

50

60

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

(%)

Labor share (2012)China 43.9Japan 60.6

the U.S. 63.7UK 70.5

Germany 68.5France 69.0

Notes: 1. Figures for China have been calculated by addingtogether the data for employee income as a proportion of GDP ineach of China’s 31 provinces and municipalities.2. In the figures for major countries, the Japanese and U.S.figures are for 2011.Source: National Bureau of Statistics of China, CEIC Database,the OECD. (3) Problems related to SOEs

In China, reforms such as privatization of SOEs have been carried out during the process of the shift to a market economy. Although the number of SOEs and their share in terms of total assets have declined as a result, the decline has moderated since the mid-2000s (Figure II-1-3-35). In particular, it is said that most of the orders related to the 4-trillion-yuan economic package were received by SOEs, and the situation was called “the state advances, the private sector retreats.”

SOEs have continued to have monopoly or oligopoly in specific industrial sectors. For example, in the industrial and mining industry, SOEs hold large shares in the extraction of natural resources, including coal, oil and natural gas, as well as electricity, gas, waterworks, steel and nonferrous metals (Figure II-1-3-36). In other industries, SOEs have dominant shares in finance, transportation, communications, etc.

One problem with SOEs is their low efficiency. For example, a look at the return on assets by company type shows that the return for SOEs has stayed below the return for private companies, and

233

since the global economic crisis, the gap between the two types has been widening further (Figure II-1-3-37). As was mentioned earlier, among the background factors of excess production capacity is the fact that SOEs find it easy to make low-efficiency investments.

The government’s policy is promoting the development of private companies while upholding the independence of SOEs. It has been decided at the third PSCCCPC that: SOEs will be separated from politics; their reforms will be promoted, including the opening of some businesses to the private sector and information disclosure; their ratio of contributions to public finance will be raised to 30%; and potential entry barriers will be abolished to allow in private companies. However, a careful watch needs to be kept on the implementation of these measures.

Figure II-1-3-35 Trends in shares of all corporate assets in China’s mining and manufacturing industry

0

10

20

30

40

50

60

70

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

State-owned enterprises

Private enterprises

Foreign enterprises

(%)

Notes: The mining and manufacturing industry includes mining, manufacturing, and the supply of electricity, gas and water.Source: National Bureau of Statistics of China, CEIC Database.


Private enterprises

Foreign enterprises

(Year)

234

Figure II-1-3-36 Shares of corporate business income in China’s mining and manufacturing industry (2012)

0

10

20

30

40

50

60

70

80

90

100

TobaccoM

ining (petroleum &

natural gas)ElectricityW

ater supplyPetrochem

icalsM

ining (coal)G

asN

on-ferrousSteelM

ining (non-ferrous)R

ailways, ships &

aircraftM

otor vehiclesR

epairsA

ll industry typesB

everagesSpecial m

achineryC

hemicals and raw

materials

Mining (iron)

Artw

orksD

rugsM

ining (non-metals)

General m

achineryPrecision m

achineryPrintC

eramics, soil &

stoneElectrical m

achineryPaper m

anufactureInform

ation & com

munication equipm

entM

etal productsR

ecyclingSynthetic fibersFoodFoodR

ubber & plastics

Educational, cultural & recreational supplies

TextilesW

oodFurnitureA

pparelLeather

Foreign

Private

State-owned

Notes: Revenue from principal operations. Proportion of the total accounted for by state-owned, private, and foreign enterprises.Source: China Statistical Yearbook (National Bureau of Statistics of China).

(%)

Figure II-1-3-37 Trends in return on total assets in China’s mining and manufacturing industry

0

2

4

6

8

10

12

14

16

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012


Private enterprises

Foreign enterprises

Notes: 1. The mining and manufacturing industry includes mining, manufacturing, and the supply of electricity, gas and water.2. The return on total assets has been calculated as the total profit of state-owned, private, and foreign enterprises / total assets.Source: National Bureau of Statistics of China, CEIC Database.

(%)


Private enterprises

Foreign enterprises

(Year)

235

(4) Sophistication of industries At a time when China’s working-age population is set to decline, it is a critical challenge to

increase productivity and create high value added while advancing the industrial structure. As for China’s industrial structure, the secondary industry (industrial sector) and the tertiary industry (services sector) have continued to expand their shares of GDP, while the primary industry (agricultural sector) still has a large share in terms of the number of workers (Figure II-1-3-38). As a result, the per-capita production value remains low in the primary industry. Regarding industries’ shares of GDP, the secondary industry has accounted for around half of GDP, underpinning China’s economic growth, and the tertiary industry has steadily increased its share of GDP, surpassing the secondary industry for the first time in 2013. Although the tertiary industry’s share of GDP is still low in China compared with advanced countries, a shift to service businesses is gradually proceeding in China as well. As the tertiary industry has high employment capacity, its share in terms of the number of workers has stayed higher than the secondary industry since the mid-1990s. Among specific sectors of the tertiary industry, a broad range of sectors, from public services, education, and health and social services to finance, real estate and business services, have seen an increase in jobs (Table II-1-3-39)112. The government has set forth a policy of improving agriculture and promoting service businesses with high employment capacity (under the 12th Five-Year Plan, the goal is to raise the services industry’s share of GDP to 47% by 2015; the share was 46.1% in 2013).

Research and development (R&D) activities also play an important role in improving industrial productivity and creating high value added. As R&D activities are rapidly expanding, both the amount of R&D expenditures and the ratio of R&D expenditures to GDP have been increasing. A comparison of the ratio of R&D expenditures to GDP with major countries shows that although China lags behind Japan and the United States, it is already ahead of the United Kingdom (Figure II-1-3-40).

As a result, the number of patent (invention) applications has been increasing (Figure II-1-3-41). According to data published by the World Intellectual Property Organization, China surpassed Germany in terms of the number of international patent applications in 2013, becoming No. 3 in the world (Figure II-1-3-42). By company, among the top 10 in terms of international patent applications were three Japanese companies, including No. 1, and two Chinese ones, No. 2 and No. 3 (Figure II-1-3-43). As shown above, there are companies actively engaging in technology development and aiming to obtain patents.

112 Because of data constraints, the number of workers by business sector was estimated from the number of workers in urban regions in recent years.

236

Figure II-1-3-38 Trends in China’s industrial structure

0

100

200

300

400

500

600

700

800

900

1000

0

10

20

30

40

50

60

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

(GDP, number in employment)

Notes: 2013 statistics for the number of people in employment have not been published.Source: National Bureau of Statistics of China, Chinese Ministry of Human Resources and Social Security, CEIC Database.

(Trillion yuan) (Million people)

GDP (left axis) Number in employment (right axis)

Primary industry

Secondary industry

Tertiary industry

Primary industry

Secondary industry

Tertiary industry

(Year)

0

10

20

30

40

50

60

70

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

(Share)(%)

Notes: 2013 statistics for the number of people in employment have not been published.Source: National Bureau of Statistics of China, Chinese Ministry of Human Resources and Social Security, CEIC Database.

GDP Number in employment

Primary industry

Secondary industry

Tertiary industry

Primary industrySecondary industry

Tertiary industry

(Year)

237

Table II-1-3-39 Employed persons by industry in China’s urban areas

(Ten thousand people, %)

2003 2012 Increase innumber of people

Growth rate(Annual average)

All industry 10,970 15,236 4,267 3.7Primary 485 339 ▲ 146 ▲ 3.9

Agriculture, forestry & fisheries 485 339 ▲ 146 ▲ 3.9Secondary 4,600 7,248 2,648 5.2

Manufacturing 2,981 4,262 1,282 4.1Construction 834 2,010 1,177 10.3Mining 488 631 143 2.9Electricity, gas & water supply 298 345 47 1.6

Tertiary 5,885 7,650 1,764 3.0Public service 1,171 1,542 371 3.1Education 1,443 1,653 211 1.5Public health & social services 486 719 234 4.5Wholesale & retail 628 712 84 1.4Transport & postal 637 668 31 0.5Finance 353 528 175 4.6Research & development 222 331 109 4.5Services to businesses 184 292 109 5.3Real estate 120 274 154 9.6Accommodation & food services 172 265 93 4.9Irrigation, environment & public facility management 173 244 71 3.9Information & communications 117 223 106 7.4Culture, sport & entertainment 128 138 10 0.8Services to individuals 53 62 9 1.8

Notes:1. Consistent statistics began to be published in 2003.2. Listed in descending order of the number of employed persons in 2012.Source: China Statistical Yearbook (National Bureau of Statistics of China).

(Excluding private enterprises and self-employed individuals)

(Ten thousand people, %)

2008 2012Increase innumber of

people

Growth rate(Annualaverage)

All industry 8,733 13,200 4,467 10.9Secondary

Manufacturing 1,901 2,358 457 5.5Construction 384 600 216 11.8

TertiaryWholesale & retail 3,540 5,407 1,867 11.2Services to businesses 495 923 429 16.9Accommodation & food services 596 838 243 8.9Services to individuals 533 807 274 10.9Transport & postal 296 574 278 18.0

　(Private enterprises and self-employed individuals)

Notes:1. Comprehensive figures for all categories of business are not available, so totals for individual industries do not add up to the total for all industry.2. Consistent statistics began to be published in 2008.3. Listed in descending order of the number of employed persons in 2012.Source: China Statistical Yearbook (National Bureau of Statistics of China).

238

Figure II-1-3-40 Trends in China’s research and development expenditure

0.0

0.5

1.0

1.5

2.0

2.5

3.0

0

250

500

750

1,000

1,250

1,500

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Research and development expenditure Research and development expenditure / GDP (right axis)

(Billion yuan) (%)

Source: National Bureau of Statistics of China, CEIC Database, Main Science and Technology Indicators (OECD).

2.09%

Research and development expenditureTarget in the 12th Five-Year PlanResearch and development expenditure as a share of GDP: 2.2%(2015)

Research and development expenditure / GDP (right axis)

Research and development expenditure

1.98%

Major countries (2012)Japan 3.3%the U.S. 2.8%UK 1.7%Germany 2.9%France 2.3%ROK 4.4%

(Year)

Figure II-1-3-41 Trends in the number of patents, etc. in China

0

500

1,000

1,500

2,000

2,500

2000200120022003200420052006200720082009201020112012 2000200120022003200420052006200720082009201020112012

Designs

Utility models

Patents (inventions)

Total

(Thousand)

Notes: Number of patents, etc. applied for from within China.Source: China Statistical Yearbook (National Bureau of Statistics of China).

(Number of applications) (Number granted)

(Year)

239

Figure II-1-3-42 Top 10 countries by number of international patent applications

0

10

20

30

40

50

60

70

the U.S. Japan China Germany ROK France UK Switzerland Netherlands Sweden Other

2012

2013

(Thousand)

Notes: Top 10 countries by number of international applications under the Patent Cooperation Treaty. Figures for 2013 are estimates.Source: WIPO website.

Figure II-1-3-43 Nationalities of the top 10 companies by number of international patent applications

Nationality Number of companies Industry typeJapan 3 Electrical machinery (1st, 6th), motor vehicles (8th)the U.S. 2 Electrical machinery (4th, 5th)China 2 Electrical machinery (2nd, 3rd)Germany 1 Motor vehicles (7th)Sweden 1 Electrical machinery (9th)Netherlands 1 Electrical machinery (10th)

Notes: Top 10 companies by number of international applications under the Patent Cooperation Treaty.Source: WIPO website.

(5) Urbanization

Urbanization is presumed to contribute to the sophistication of the industrial structure. On the production front, urbanization leads to a shift of labor force from the primary industry with low productivity to the secondary and tertiary industries, which have relatively higher productivity. On the demand front, urbanization is presumed to promote economic growth by inducing investments in housing and urban infrastructure, including transportation networks, as well as demand for consumer goods such as household appliances and various services, including entertainment, healthcare and education. In China, urbanization proceeded as the population in urban regions continued to grow throughout the 2000s and the population in rural regions continued to decline at the same time (Figure II-1-3-44). Recently, the urbanization rate has exceeded 50%.

The government aims to increase the urbanization rate to 60% by 2020 and to 65-70% by 2030. To that end, it is necessary to reform the family registry system so as to eliminate discriminatory

240

treatment of people based on whether they are registered in urban and rural regions, improve the living environment: including public services and housing, reform the land management system so as to acquire land at appropriate prices and tackle fiscal problems of local governments.

Figure II-1-3-44 Trends in China’s urbanization

0

10

20

30

40

50

60

0

200

400

600

800

1,000

1,200

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Urban population

Rural population

Urbanization rate (right axis)

(Million people)


(%)

2011Urban population exceeds the

rural population

Urbanization rate (right axis)2012: 52.6%

(Year)

(6) Deregulation and market opening

There still remain strict regulations on private companies and foreign companies, including restrictions on entry into specific sectors, such as service businesses. The government has set forth a policy of gradually implementing deregulation. In particular, in the China (Shanghai) Pilot Free-Trade Zone, liberalization of yuan conversion for capital account transactions and deregulation concerning entry into services such as finance and distributions (shift to a negative-list system) were carried out on a pilot trial basis, and the government intends to consider extending the deregulation initiative nationwide based on the results in the pilot free trade zone (Table II-1-3-45). Although the deregulation initiative may provide an opportunity for new entry and business expansion, the current negative list concerning investment remains little changed from the previous one, so a careful watch needs to be kept on future developments.

241

Table II-1-3-45 Overview of the China (Shanghai) Pilot Free Trade Zone

(i) Date of launch: September 2013.

Source: Materials published by JETRO, etc.

(iii) Purpose: To use the zone as a testing ground for reforms and efforts to open up to worldmarkets, and to consider rolling these measures out nationwide on the basis of the results of thistrial.

(ii) Areas covered: Shanghai’s Waigaoqiao Free Trade Zone, Waigaoqiao Free Trade LogisticsPark, Yangshan Free Trade Port Area, and Pudong Airport Comprehensive Free Trade Zone.

(iv) Policies expected to be implemented ahead of other areas:It is envisaged that the following measures will be implemented; the specific details are expectedto be disclosed in due course.- Prior examination and approval of foreign investment will not be required in fields that are noton a negative list (shift to a notification-based system).- Sectors in the service industry will be opened up to world markets, including such fields asfinance, transportation, trade and commerce, professional services (legal practice, etc.), andculture.- The liberalization of the renminbi, the deregulation of interest rates, and cross-border trade inthe renminbi will be implemented on a trial basis.Etc.

(7) Social security systems

In China, SOEs were responsible for social security for employees in the era of the socialist planned economy. However, in line with the shift to a market economy, this arrangement was replaced by one under which the government manages pension, healthcare insurance and other systems. In recent years, the rate of enrollment with pension and healthcare insurance plans in urban cities has been rising, but nearly 40% of workers are still not enrolled with a pension plan and nearly 50% are not enrolled with a healthcare insurance plan (Figures II-1-3-46 and II-1-3-47). There are also problems such as that migrant workers living in urban regions cannot receive social security services because of the division of people registered in urban and rural regions under the system and that premiums already paid by workers are not portable when they move to other regions because there is not a nationwide universal system. Although the government has set forth a policy of improving social security systems through measures such as promoting enrollment with pension plans, reform of the family registration system and funding for social security continue to be challenges.

242

Figure II-1-3-46 Trends in the number of subscribers to China’s basic pension insurance for urban employees

0

10

20

30

40

50

60

70

80

90

0

50

100

150

200

250

300

350

400

450

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Subscribers (retirees)

Subscribers (active)

Employed persons

Proportion (active subscribers / employed persons) (right axis)

Source: China Statistical Yearbook (National Bureau of Statistics).

(Million people) (%)

Employed persons




(Year)

Figure II-1-3-47 Trends in the number of subscribers to China’s basic medical insurance for urban employees

0

10

20

30

40

50

60

70

80

90

0

50

100

150

200

250

300

350

400

450

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012



Employed persons



(Million people) (%)

Employed personsProportion (active subscribers / employed persons) (right axis)



(Year)

(8) Flexibilization and liberalization of the foreign exchange market

The yuan shifted to a managed floating system in July 2005. After returning to a dollar-peg system temporarily, the managed floating system was reinstated and progress was made in flexibilizing the yuan’s exchange rate, with the floating range gradually expanded from the initial range of plus or minus 0.3% (Figure II-1-3-48).

243

Figure II-1-3-48 Trends in the Chinese Yuan Renminbi Exchange Rate System

5.5

6.0

6.5

7.0

7.5

8.0

8.5 2005/01/04 2006/01/04 2007/01/04 2008/01/04 2009/01/04 2010/01/04 2011/01/04 2012/01/04 2013/01/04 2014/01/04

Source: China Foreign Exchange Trade System, CEIC Database.

($1 = yuan)

July 2008Goes back to effectively being pegged against the dollar, in response to the global financial crisis.

June 2010The renminbi returns to a flexible rate.

Strong yuan

Weak yuan

July 2005The renminbi switches to a managed float regime Fluctuation of ±0.3% permitted.

April 2012Margin of fluctuation increased from ±0.5% to ±1.0%

March 2014Margin of fluctuation increased from ±1.0% to ±2.0%

May 2007Margin of fluctuation increased from ±0.3% to ±0.5%

(9) Interest rate regulation and shadow banking

In China, banks’ interest rate levels have been subject to regulation. Since 2004, interest rate levels have been controlled through the setting of the floor for loan interest rates and the ceiling for deposit interest rates. This system, while assuring a certain interest margin for banks, often resulted in an effective negative interest rate, which refers to a state of the inflation rate exceeding the interest rate. This became a background factor for shadow banking, which will be explained later. Interest rate liberalization was gradually implemented, and the regulation on loan interest rates was abolished in June 2013. But deposit interest rates remain subject to regulation although their ceiling was raised (1.1 times as high as the standard interest rate) in June 2012 (Figure II-1-3-49).

However, interest rate liberalization will intensify competition among financial institutions, thereby raising the possibility that weak financial institutions will face management difficulties, so it is necessary to establish a system to prepare for failure of financial institutions.

Against the backdrop of the needs of lenders and borrowers created by the government’s regulation on deposit interest rates and banks’ lending stance of giving precedence to SOEs, funding activities not controlled by the authorities (shadow banking) have been expanding. While there is not a strict definition of shadow banking, it roughly refers to funding activities other than bank loans. Since 2009, the difference between the amount of aggregate financing to the real economy and the balance of outstanding bank loans has been widening rapidly (Figure II-1-3-50).

On one hand, shadow banking makes it possible to provide funds to small and medium-size companies that cannot take out bank loans, but on the other hand, it may cause confusion at the time of default or may undermine the effectiveness of the authorities’ monetary policy measures because it is not covered by the supervision of the government.

Although the government is trying to curb loans for real estate transactions and local governments’ infrastructure building projects as a countermeasure against such problems as real estate price

244

increases and local governments’ debts, funds are presumed to be flowing to these sectors through shadow banking.

Meanwhile, in the second half of 2013, the growth in the money supply and total societal finance slowed down, indicating an intention of the government to withdraw surplus funds (Figures II-1-3-51 and II-1-3-52). However, when the government tries to shrink the money supply in order to withdraw surplus funds, financial markets display instability, such as an excessive reaction of interest rates, so the government has to engage in a delicate balancing act (Figure II-1-3-53).

There are no precise statistics concerning the size of shadow banking, but the size is generally presumed to be equivalent to 40 to 60% of GDP.

Although the level of shadow banking activities in China is not necessarily high by international standards113, they have been rapidly growing and it is difficult to predict their effects because of a lack of transparency over their actual state.

The government has set forth a policy of requiring banks to report on wealth management products and placing shadow banking under its control. In the meantime, a default on a corporate bond was reported in March 2014. The government has indicated a stance of tolerating default in some cases depending on the specific circumstances of the cases and a policy of strengthening supervision and exercises control over shadow banking.

Under the current financial system, funds do not flow to small and medium-size enterprises smoothly. In addition to strengthening the control of shadow banking, it is necessary to facilitate financing for small and medium-size enterprises.

113 In a report titled “Global Shadow Banking Monitoring Report 2013” by the Financial Stability Board

(November 14, 2013), shadow banking is defined as credit intermediation involving entities and activities

(fully or partially) outside the regular banking system, or non-bank credit intermediation in short. The size

of shadow banking as a proportion of GDP is 165.9% in the United States, 354.4% in the United Kingdom,

72.4% in Germany, 96.2% in France and 64.4% in Japan. In China’s case, wealth management products

handled by banks are not included according to the definition of shadow banking as non-bank credit

intermediation, so China puts the size of shadow banking in its territory at 20% of GDP. Even if the size of

shadow banking is to be estimated at 40-60% of GDP, it is not necessarily high compared with in major

countries.

245

Figure II-1-3-49 Trends in China’s bank rate and regulation of interest rates

-2

0

2

4

6

8

10

12

1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1

2008 2009 2010 2011 2012 2013 2014Notes: One-year rateSource: People’s Bank of China, National Bureau of Statistics of China, CEIC Database.

(%)

Consumer prices

Deposit base rate

Lending base rate

June 2012Upper limit of the deposit interest rate1.0 times → 1.1 times the base rate

June 2012Lower limit of the lending rate0.9 times → 0.8 times the base rate

July 2012Lower limit of the lending rate0.8 times → 0.7 times the base rate

July 2013Lower limit of the lending rateRegulation abolished

Consumer prices > deposit interest rate↓

Effectively negative interest

*Interest rate regulation (2004)Lending rateUpper limit abolishedLower limit set at 0.9 times the base rateDeposit interest rateUpper limit is the base rateLower limit abolished

(Month, year)

Figure II-1-3-50 Estimate of China’s aggregate financing and bank loans (stock)

0

20

40

60

80

100

120

1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Aggregate financing to the real economy (AFRE) Bank loans

(Trillion yuan)

Notes: 1. For the sake of convenience, the stock of total social lending has been calculated as the cumulative total of total social lending (value of increase), figures for which have been published since 2002, added to bank loan balances as of December 2001.2. There are issues such as overlap between categories in these calculations, so the difference between the two values cannot be simply regarded as the scale of shadow banking.

Financing other than via bank loans (trust loans, entrusted loans , bond and equity financing, etc.)

2008 → 2013Aggregate financing to the real economy (AFRE) 2.9 times (annual rate 23%)Bank loans 2.4 times (annual rate 19%)Difference between the value of the two 4.4 times (annual rate 35%)

(Month, year)

246

Figure II-1-3-51 Growth rates of China’s money supply and Aggregate Financing to the Real Economy (AFRE)

-100

0

100

200

300

400

500

600

0

5

10

15

20

25

30

35

1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3

2008 2009 2010 2011 2012 2013 2014

Money supply

Aggregate financing to the Real Economy (AFRE) (right axis)

(%) (%)

Source: People’s Bank of China, CEIC Database.

June 2013As the growth in money supply declines, the rise in total social lending drops into minus figures.→ Rise in interbank interest rates

Rise slows from the latter half of 2013

(Month, year)

Figure II-1-3-52 Trends in China’s Aggregate Financing to the Real Economy (AFRE) (breakdown)

-300

-200

-100

0

100

200

300

400

-500

0

500

1000

1500

2000

2500

3000

1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3

2008 2009 2010 2011 2012 2013 2014

Trust loans

Entrusted loans

Equity financing

Bonds

Bank acceptances

Foreign-currency-denominated loans

Yuan-denominated loans

Growth rate of aggregate financing compared with the previous year (right axis)

Source: People’s Bank of China, CEIC Database.

(Billion yuan) (%)

247

Figure II-1-3-53 Trends in China’s interbank offered rate (SHIBOR)

0

2

4

6

8

10

12

14

16

18

20

Overnight rate

One-week rate

(%)

Source: CEIC Database.

The SHIBOR (overnight rate) rose sharply into the 13% range in June 2013.

The SHIBOR (One-week rate) rose sharply into the 9% in December 2013.

(10) Local government debts

Local governments, which provide public services directly relating to the people’s everyday lives, such as education and healthcare services, face a chronic fund shortage and are unable to cover expenditures with a fund transfer from the central government alone 114 (Figure II-1-3-54). In particular, their revenue shortage has become more serious than before as a result of the 4-trillion-yuan economic package115.

As local government themselves are not allowed to borrow funds or issue local government bonds, they have established local government financing vehicles as separate corporations, which raise funds through bank loans and debt issuance, and they have used the funds to implement public works and real estate development projects. There is the risk that the release of land holdings and real estate development implemented in this process may become a cause of a housing price rise, while a real estate price plunge may aggravate the problem of local government debts through the balance sheet of local government financing vehicles.

There was a lack of transparency over the actual status of debts related to local government financing vehicles. However, as concerns over local government financing vehicles grew, the National Audit Office of the People’s Republic of China (equivalent to the Board of Audit of Japan) published in the summer of 2011 survey results which showed that local government debts, including debts of local government financing vehicles, at the end of 2010 came to 10.7 trillion yuan (equivalent to

114 Since the introduction of the separate tax system in 1994 (tax system reform concerning national and local taxes), local governments have faced a chronic revenue shortage. 115 Of the expenditures of the 4-trillion-yuan economic package, the central government bore around 1.2 trillion yuan, with local governments, etc. required to come up with funds to cover the rest of the expenditures.

248

26.6% of GDP). Although the central government ordered local governments to consolidate local government financing vehicles and reduce debts, local government debts expanded from 10.7 trillion yuan at the end of 2010 to 17.9 trillion yuan at the end of June in 2013, which translates into an annualized growth of 20%, despite the central government’s efforts to curb the debts, according to the survey results published by the National Audit Office of the People’s Republic of China at the end of last year (Table II-1-3-55 and Figure II-1-3-56). As fund-raising methods have been diversified further, the actual status of debts has become difficult to see.

The government of China has announced a policy of expanding general transfer expenditures for local governments (equivalent to tax grants to local governments in Japan), adjusting the division of powers and expenditures between the central and local governments and allowing local government to issue bonds while monitoring fiscal discipline.

Figure II-1-3-54 Trends in China’s local government finances

48

50

52

54

56

58

60

62

64

0

2

4

6

8

10

12

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Government revenue

Government expenditure

Share (expenditure/revenue)

(Trillion yuan)


(%)

Government expenditure

Government revenue

Share (expenditure/revenue)

(Year)

Table II-1-3-55 China’s Government debt

(Trillion yuan, %)

Guaranteeresponsibility

Possiblerescue

responsibilityEnd of 2010 Local government 6.7 2.3 1.7 10.7 26.6

Central government 9.4 0.3 2.2 11.9 22.9Local government 9.6 2.5 3.8 15.9 30.6Total 19.1 2.8 5.9 27.8 53.5Central government 9.8 0.3 2.3 12.4 -Local government 10.9 2.7 4.3 17.9 -Total 20.7 2.9 6.7 30.3 -

End of June 2013

As share ofGDP

Contingent liabilitiesTotal debt responsibility

including contingent liabilitiesPayment

responsibilityPeriod Government

End of 2012

Notes: Figures for share of GDP are the value of total debt obligations including contingent liabilities as a share of the value of annual GDP. Source: An announcement by China’s National Audit Office.

249

Figure II-1-3-56 China’s local government debt obligations and financing methods

0

5

10

15

20

25

End of 2010 End of 2012 End of June 2013

(Balance)

Possible rescue responsibility

Guarantee responsibility

Payment responsibility

(Trillion yuan)

Source: An announcement by China’s National Audit Office.

6.7

1.72.3

15.9

10.7

9.6

2.5

3.8

10.9

2.7

4.3

17.9

Annual average growth rate: approx. 20%

0

5

10

15

20

End of 2010 End of June 2013

(Financing method)

Other

Trust financing

Accounts payable

BT

Bond issuance

Bank loans

(Trillion yuan)

0.91.5

1.8

10.1

1.50.8

8.5

2.2

1.4

10.7

17.9

4. Government’s response The government of China’s basic policy concerning structural problems was set forth at the third

PSCCCPC last year and the NPC this year.

(1) Third PSCCCPC In November 2013, the Communist Party of China deliberated and adopted the Decision of the

Central Committee of the Communist Party of China on Some Major Issues Concerning Comprehensively Deepening the Reform at the third PSCCCPC. It set forth the direction of reform ―

250

deepening the reform comprehensively in six fields including the economy (economy, politics, culture, society, the environment, and national defense/military). In the field of economy, while upholding public ownership as the primary system, the decision stated that the market plays the “decisive role” in allocating resources and emphasized the promotion of a shift to a market system in such specific fields as fiscal management, finance, state-owned enterprises and opening up (Table II-1-3-57).

Table II-1-3-57 Overview of the decision at the third plenum 1. General outline

(I) Comprehensive deepening of reforms China must comprehensively deepen reform. Reform of the economic system will be the main focus of reforms. The relationship between the market and the government will be put in order, ensuring that the market has a decisive function in resource allocation, and giving better rein to the function of government.

2. Details (1) Economy

(II) Basic economic system As well as maintaining the dominant position of the public economy with public ownership at the center, encourage the development of the non-public economy (private enterprises) as an important component part that ranks alongside the public economy. Keep state-owned enterprises separate from politics, promote the reform of state-owned enterprises by opening some operations up to the market and disclosing information, raise the proportion of income from state-owned capital turned over to public finance to 30% by 2020, eliminate unreasonable provisions affecting the non-public economy and hidden barriers to entry, etc.

(III) Completing a modern market system Implement unified market access systems based on negative lists, perfect mechanisms in which prices are mainly determined by markets, enhance the secondary market for rural construction land, perfect mechanisms for the formation of renminbi exchange marketization, accelerate the marketization of interest rates, and promote openness for capital flows, etc.

(IV) Transformation of government functions Abolish the government approval system for enterprise investment programs, reform assessment and appraisal systems for achievements (switching from economic growth to targets focused on the environment, safety and civil government), eliminate the examination and approval system, devolve responsibility to local governments, etc.

(V) Fiscal and tax system Establish a government debt management mechanism, focus on increasing general transfer payments from the center to the localities, further rationalize the allocation of income between the center and the localities, progressively establish an individual income tax system, accelerate real estate tax legislation, etc.

251

(VI) Integrated urban and rural development Endow farmers with property rights over their land, establish mechanisms for farmers to become urban residents, relax restrictions on farmers settling in towns and small cities (strictly control the size of the population in large cities), accept former residents of rural areas who have settled in cities into urban housing and social security systems, etc.

(VII) Building new, more open economic structures Move forward with the orderly opening up of finance, education, culture, healthcare and other service areas, establish the China (Shanghai) Pilot Free Trade Zone, accelerate negotiations on environmental protection, investment protection, government procurement, electronic commerce and other such new topics, move forward with the construction of the Silk Road economic belt and the Sea Silk Road, etc.

(2) Politics (VIII)-(X) Democratic socialist government system, China under the rule of law,

supervision of power Reforms of the judicial system, anti-corruption measures, etc.

(3) Culture (XI) Cultural system

Strengthen national cultural soft power (establish sound mechanisms for shaping public opinion, etc.)

(4) Society (XII) Social services

Income allocation structures (improve labor remuneration, expand the functions of tax in adjusting income), fairer and more sustainable social security systems (integrate old-age insurance systems and health insurance systems for urban and rural residents, consider raising the retirement age), relax the one-child policy, etc.

(XIII) Social governance Innovate social governance systems.

(5) Environment (XIV) Ecological civilization

Protection of water resources, compensation system, lifelong responsibility system, ecological and environmental protection systems, etc.

(6) Defense and the armed forces (XV) Defense and army reform

Build a modern military system. 3. CPC’s leadership

(XVI) CPC’s leadership Establish the Central Reform Leading Group.

(2) NPC

At a session of the NPC In March 2014, Premier Li Keqiang announced the major economic goals

Notes:1. Summary of key points, with a primary focus on reforms of the economic structure. 2. Numerals (I) to (XVI) are the numbering used in the original text of the decision. Other numbers have been added for the sake

of convenience. Source: The Decision on Major Issues Concerning Comprehensively Deepening Reforms, etc (Third Plenum).

252

for 2014 in the Report on the Work of the Government and a policy of maintaining a lower limit to ensure stable growth and employment and an upper limit to keep a cap on inflation and continuing to implement a proactive fiscal policy and a prudent monetary policy. (Table II-1-3-58). Describing the reform as bringing the greatest benefits, as a priority policy in 2014, Premier Li indicated the stance of actively pursuing reforms in a wide range of fields, including breaking the barrier of vested interests and ensuring that the market plays the decisive role in allocating resources (Table II-1-3-59).

As shown above, China has announced a policy of promoting structural reforms in a wide range of fields. When implementing the reforms, China is required to tackle many interrelated challenges, so a careful watch needs to be kept on future developments.

Table II-1-3-58 China’s main economic targets for 2014

2014Target Target Actual

GDP growth rate (real) Around 7.5% Around 7.5% 7.7%Consumer price index Around 3.5% Around 3.5% 2.6%Total fixed asset investment (nominal) 17.5% 18.0% 19.3%Total value of retail sales of consumer goods (nominal) 14.5% 14.5% 13.1%Total imports and exports Around 7.5% Around 8% 7.6%Budget deficit 1.35 trillion yuan 1.20 trillion yuan 1.20 trillion yuanMoney supply (M2) Around 13% Around 13% 13.6%Number of newly employed people in urban areas At least 10 million At least 9 million 13.1 millionUrban registered unemployment rate 4.6% or less 4.6% or less 4.1%

2013

Table II-1-3-59 Key structural reform activities in 2014 (from the Report on the Work of the Government delivered at the National People’s Congress) ○Administrative systems

Streamlining administration and delegating more power to lower-level governments. Deepening reform of the system of review and approval for investment projects, eliminating or streamlining procedures requiring such prior review and approval, ensuring autonomy of investment for enterprises, and making investment and entrepreneurship more convenient. Establishing a detailed list of matters requiring administrative review and approval and completely prohibiting the review and approval of matters other than those on this list.

○Public finance and taxation Implementing an open and transparent budget system. Adjusting authority and responsibility for expenditure between the central government and local governments, establishing a financing mechanism based on loans to local governments, incorporating local government debt into budget management, implementing a system of comprehensive government financial reports, and guarding against risks arising from debt.

○Finance Moving forward with the marketization of interest rates. Broadening the margin of fluctuation in the renminbi exchange rate and increasing the convertibility of the renminbi in the capital account. Establishing a deposit insurance system and developing mechanisms for

253

addressing financial institution risks. ○State-owned enterprises

Enhancing systems for managing state-owned assets and increasing the proportion of earnings transferred to the public finance budget. Formulating rules for the inclusion of non-state-owned capital in the investment projects of state-owned enterprises, and devising numerous investment projects aimed at injecting non-state-owned capital into the fields of finance, petroleum, electricity, railways, telecommunications, resource development, and other public utilities.

○Openness Promoting greater openness in the service industry, ensuring that Chinese companies and foreign companies receive equal treatment, and maintaining a market environment in which they can compete fairly. Developing and managing the China (Shanghai) Pilot Free Trade Zone. Promoting negotiations concerning the Agreement on Trade in Services, the Agreement on Government Procurement, and the Information Technology Agreement.

○Increasing domestic demand Emphasizing consumption above all in efforts to increase domestic demand. Enhancing the ability to consume by increasing people’s incomes. Increasing the consumption of services.

○Promoting urbanization Promoting orderly efforts to establish migrants from agriculture as urban residents. Promoting the reform of the hukou (residency registration) system and implementing a selective relocation policy that differentiates between the numbers accepted according to the scale of each city. Progressively granting permanent urban residence to former farmers who have been employed or involved in trade in urban areas for many years. Enabling the children of migrant workers in urban areas to attend school in their place of residence.

○Optimizing the economic structure and making it more advanced Promoting simultaneous enhancement and reduction in efforts to adjust the industrial structure. Enhancement policies will focus on developing the producer service industry as a priority. Reduction policies will adhere to the “survival of the fittest” approach through market competition, encouraging enterprises to merge or restructure. Strengthening environmental protection, energy consumption, and technological standards for industries with a serious excess production capacity problem, putting together various preferential measures, disposing of some existing production capacity, and strictly regulating new expansion.

○Medical care and public health Restructuring and unifying the basic medical insurance system for both urban and rural residents. Permitting a second child for couples, where either the husband or the wife is an only child.

○Social security Establishing a unified basic old age insurance system for both urban and rural residents.

254

○Environmental problems Devoting considerable energy to efforts to bolster environmental measures. Fitting desulfurization and denitrification equipment and dust collectors in coal-fired thermal power stations. Etc.

Notes: Summary of the Report on the Work of the Government, with a primary focus on matters concerning structural reforms. The order in which they are shown here follows the order in which they appear in the report. Source: Report on the Work of the Government delivered at the National People’s Congress.

255

Documents

Section 3 China in search of new growth models · 2018-11-21 · Section 3 China in search of new growth models. ... such as clothing, footwear and furniture but also with regard