China needs more reforms to sustain economic growth
BEIJING, Sept 17: China’s 25-year economic miracle is likely to be sustained for “some time” and its booming economy should grow by 9.0 per cent this year and 9.2 per cent in 2006, the OECD said in a new report published on Friday.
The longer-term sustainability of China’s economic growth, however, will depend on strengthening the private sector and deepening reforms in capital markets and the finance and banking sectors, the Paris-based Organization for Economic Cooperation and Development (OECD) said in its first “Economic Survey of China.”
“The pace of economic change in China has been extremely rapid since the start of economic reforms just over 25 years ago,” the 205-page report said.
“Economic growth has averaged 9.5 per cent over the past two decades and seems likely to continue at that pace for some time.”
China’s economic expansion “represents one of the most sustained and rapid economic transformations seen in the world economy in the past 50 years” but key changes must occur if the miracle is to continue, it warned.
“How long can the economy remain sustainable, of course, is a question of policy, but at the same time we are seeing some very strong trends in investment and education,” Val Koromzay, OECD director of country studies, told journalists.
“It could be three, four, five years, but definitely we are not going to see another 20 years of this kind of growth.”
China must deepen ongoing reforms as rapid urbanization brings hundreds of millions of farmers to the cities, as the income gap widens, as employment and social security pressures grow and as environmental deterioration becomes increasingly burdensome.
Besides predicting China’s economic growth in 2005 and 2006, the report said the current account balance would rise to 100 billion dollars this year and 101 billion in 2006 based on an export-driven economy largely run by private and foreign enterprises.
In 2004, the current account balance was 68.7 billion dollars.
With China’s private sector now the dominant player in many industries and a bigger creator of jobs than the state, the regulatory framework still does not meet the needs of private businesses, while poorly performing state-owned companies “are in dire need of restructuring,” it said.
To stimulate the growth of private enterprises, China must revise its corporate law, pass bankruptcy laws, implement constitutional property rights protections and improve the quality of its judicial and law enforcement systems, the report said.
“Further development of the capital markets will help to lower enterprise debt loads, reduce the exposure of the banking sector to commercial risks, facilitate restructuring and ownership change of enterprises, and improve market discipline over business behaviour,” it said.
It said Chinese stock markets continue to be hampered by government-imposed factors, including a preference to only list state-owned companies, non-commercial criteria for new listings and restrictions on the participation of financial institutions.
Continued banking and finance reforms were essential, especially improvements in corporate governance in banks, while greater exchange rate flexibility would also allow the government to better control inflationary pressures and investment flows.
“Overall, a policy of allowing greater flexibility in the exchange rate would allow the authorities to guard against the risk of any further increase in inflation in both product and asset markets,” it said.
It would also allow authorities “to more easily adapt monetary policy to domestic concerns and to allow market forces to determine bank interest rates to a greater extent.”
China’s July 2005 revaluation of the currency, together with the associated change in the exchange rate arrangements, was “a step in this direction,” it said, but more needed to be done.—AFP
