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People's Republic of China

Remarks at China Development Forum: China’s economic growth and reform in the new Five-Year Plan

 

China Development Forum (Session 2)

Remarks by Angel Gurría,

Secretary-General, OECD

20 March 2016

Beijing, People's Republic of China

(As prepared for delivery)

 

 

Distinguished Guests, Ladies and Gentlemen:

 

I am delighted to be back at the China Development Forum. I would like to thank Lu Mai and the China Development Research Foundation for their invitation.

 

The OECD has been among the few privileged organisations accompanying China on its reform journey over the last 20 years. The strength of our relationship, built on trust, respect and mutually beneficial co‑operation, was praised by Premier Li Keqiang during his historic visit to the OECD last July.

 

As a Key Partner, China has helped shape the OECD’s response to global challenges, such as delivering inclusive, sustainable growth, creating jobs, fighting protectionism, encouraging green development and eradicating extreme poverty. And we have put all of our energy and expertise into supporting China’s economic and social development, most recently through our dialogue on the 13th Five-Year Plan.

 

The current context

 

We stand together at a critical juncture. Following three decades of extraordinary economic development, China is transitioning to a more stable and sustainable growth path – the “New Normal”.

 

Last month’s OECD Going for Growth report, which I launched with Minister Lou Jiwei in Shanghai, shows that China needs to look at new sources of growth to achieve its goal of doubling GDP per capita between 2010 and 2020. It must also respond to key short‑term risks, mostly related to the corporate sector, including:

  • A high level of corporate debt – estimated at 160% of GDP  – and high leverage, especially in industries plagued by overcapacity such as steel, cement, coal and real estate;
     
  • Falling corporate profits, which alongside falling producer prices, weigh heavily on investment; and
     
  • A potential surge in non-performing loans as a result of defaults on debt.

 

Capacity adjustment is a powerful tool to address these risk factors. Cutting excess capacity would help producer prices recover and allow production factors to move where they can be used more efficiently. This would restore corporate profitability, allowing firms to service their debt more easily and sparing banks from a wave of bad loans.

 

But this process will not be painless. Cutting capacity implies cutting employment. So it must be complemented by policies to develop human capital, especially skills, that equip Chinese workers to move quickly between jobs. But we can’t stop there. We need to create opportunities for employment in new growth sectors, step-up active labour market policies, and encourage SME and private sector expansion.

 

The 13th Five-Year Plan

 

China’s 13th Five-Year Plan has put forward a comprehensive blueprint to navigate the “New Normal” and maintain “a medium-high speed of growth”, focusing on inclusive growth that is also green, open and innovative.

 

While most indicators of income inequality in China have stabilised since the 1990s, they remain very high by international standards. Indeed, inequality between coastal and inland regions continues to rise. Inequalities are not only ethically, morally and politically challenging – the OECD’s work on the Future of Productivity shows that they also constrain productivity and harm growth! In this respect, the Five-Year Plan’s emphasis on inclusive growth is critical.

 

This is the first time in which green growth is explicitly mentioned as a key objective in a Five-Year Plan. The joint commitment made by China and the US to reduce carbon emissions was a crucial event. Industrial adjustment and more stringent environmental standards will be vital to achieving China’s stated goal of peaking emissions by 2030.

 

The OECD welcomes the Five-Year Plan’s emphasis on opening up the economy, necessary to avoid the middle-income trap. Administrative simplification, easing price controls, and delivering a level playing field result in a more market-based allocation of resources. China’s One Belt, One Road Strategy, coupled with a growing number of Chinese firms abroad, will benefit China and the global economy.

 

Trade will remain an important driver of growth, with China’s future role in global markets reflecting the value-added content of production. In a world of global value chains (GVCs), China is growing its value-added. For example, China grew its domestic share of global value added in exports of electrical and optical equipment from 3% in 1995 to 45% in 2011.

 

This will have global implications, but in particular for the regional economy, with rising wages in China creating incentives to shift labour-intensive production to lower income countries in Asia and elsewhere.

 

Finally, innovation – new products, services, methods and processes – and investment, both cornerstones of China’s G20 Presidency, will continue to play a major role in supporting China’s economic and social development. OECD research has found that the focus should be on improving the diffusion of innovation. Every country has firms close to the global frontier, but in general the diffusion process to the rest of the economy has slowed down.

 

In this respect, improvements to the innovation system, by establishing a public services platform to support innovation and fostering the utilisation of science and technology, are welcome elements of the Five-Year Plan.

 

Investment, mainly in infrastructure and technological upgrading will continue to underpin China’s development. The OECD has just released a policy brochure that examines China’s major investment policy challenges and explores how our instruments, our experience and our analytical tools can be mobilised to support reform.

 

Investment, of course, is not just about quantity. Quality also matters. China’s investment should become more productive, more responsible, more inclusive, so that everyone can contribute and benefit from it. This approach means a greater role for the market in allocating investment, in pursuit of attractive private sector returns. Simultaneously, China must channel more public investment to areas where social returns are high, such as education, health and social security.

 

Ladies and Gentlemen,

 

Through its 13th Five‑Year Plan, China has shown its willingness to drive a more inclusive, greener and sustainable future.

 

The OECD applauds this effort. We look forward to building on our two decades of partnership to continue delivering better policies for better lives in China.

 

Thank you.