Policy Measures to Foster Growth in the PRC

COVID-19 and Economic Recovery Potential in the CAREC Region

Align Economic Policies with Long-Term Reform Needs

Reforms are essential for the PRC to move to a more sustainable growth path.

Like much of the world, the PRC economic performance is set to be further overshadowed by the coronavirus disease (COVID-19) pandemic in 2022. If the economy is to achieve gross domestic product growth of about 5% in 2022, it is crucial for the country to increase investment and to generate more robust household consumption―important drivers of growth and employment.

While reviving the housing market and higher infrastructure investment can help stabilize growth in the short term, efforts must be made to accelerate the shift to a green, consumption-based service economy in order to unleash new drivers of growth. This requires promoting services, strengthening the market economy, increasing domestic consumption, and reducing income inequality and regional disparities.

Simply pouring more money into infrastructure and lifting borrowing curbs on the real estate market is not a sustainable growth strategy, although some elements of that might help to stabilize growth in the shorter term. Additional investment in traditional infrastructure will have lower returns than in the past as this infrastructure is generally well developed already. The shift in focus toward investment in infrastructure that supports the digitalization of the economy reflects this concern.

The fine-tuning of housing markets restrictions should aim at combining social goals with policies stimulating economic growth. The recent exemption of low-cost rental projects from regulatory curbs is a good example in this direction, but more is needed to expand affordable housing, mostly in major cities. In these cities, property prices are high in relation to local disposable income. In first-tier cities, where prices have increased the most over the past decade, the younger generation in particular has found itself excluded from the property market.

Services should be given more prominence in economic planning and a similar status to manufacturing in terms of fiscal incentives, resources allocation, and openness. In addition, broader reforms to strengthen the market-based economy will be needed. Many state-owned enterprises maintain a strong market position due to limited competition, favorable access to credit, and implicit government guarantees. Increased competition will foster innovation and improve the efficiency of state-owned firms. Credit must be relocated more fairly and ensure access to finance for smaller firms, which can often provide flexible solutions in the services sector and are key to generate employment.

Increases in on-budget expenditure on health and education, where higher public spending is urgent. Increased social spending needs to be made permanent and well communicated to the public to reduce precautionary savings, which remain high, dragging consumption. In addition, structural policies supporting consumption, such as higher minimum wages, improving social security, and income redistribution toward low-income earners are key to sustain growth. More broadly, distributional aspects of economic policies should receive greater attention to reduce income inequality and regional disparities.

Focused public investment and welfare spending have reduced the urban–rural income gap since the onset of the global financial crisis. But income substitution schemes remain underdeveloped, and public expenditure on health and education is below that of other upper middle-income countries. Increased redistribution to lower-income households is a prerequisite for common prosperity. Higher taxation of the wealthy could facilitate income redistribution via higher social transfers. To this end, the personal income tax should be designed more progressive, complemented by the introduction of gift and inheritance taxes.

Last, reforms to central–local government fiscal relations must address the financial needs of local governments and promote regional equalization in the delivery of basic public services. With one of the highest levels of expenditure decentralization worldwide, local governments account for about 85% of total government fiscal expenditure in the PRC. At the same time, local governments saw their fiscal revenue decline in recent years, while public expenditure needs for an aging and wealthier society have been on the rise. Fiscal transfers from the central to local governments could not fill this gap, and reforms are needed to increase these transfers, especially to lagging regions. Tax revenue, both at the central and local level, needs to be strengthened by rolling out nationwide a recurrent property tax and broadening the personal income tax base.

No doubt, reforms promoting the shift of the economy toward services and improving its efficiency as well as to strengthen household consumption and step up redistribution will require major efforts. They are, however, essential for the PRC to move to a more sustainable growth path.

Author
Dominik Peschel

Dominik Peschel

Senior Economist, PRC Resident Mission, ADB

This Op-Ed is reproduced from China Daily.

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Four Capitals Essential for the PRC’s Future Development

The People’s Republic of China (PRC) rapidly transitioned over just 40 years from a low- to a middle-income country. While that has meant a better quality of life for the Chinese people, it has also caused serious environmental damage and harm to human health through pollution. If left unmanaged, these problems could limit or undermine future advances in living standards.

How can the PRC continue its economic growth while reducing that growth’s effects on its people and environment? By making wise investments in human, social, natural, and physical capital to enable a future of high-quality sustainable development.

Human capital

Such development will require substantial investment in sustainable infrastructure to support new and clean technologies. These could include electric and hydrogen vehicle technology and further developments in solar power and battery storage on electric grids. The new infrastructure and new technologies will require new skills. Thus, they will require investment in education, a key element of human capital. 

Artificial intelligence (AI) is likely to play a growing role in these technologies. AI can improve efficiency and allow new business models to be developed. But it will also reduce the need for low-skilled labor, which could result in lost jobs for some workers and lower wages for others. The PRC will need to invest in the necessary skills for AI and for re-skilling workers.

The health of the workforce will be important for it to be productive in the future. In the PRC each year, outdoor air pollution leads to about 1.2 million premature deaths. That one third of Chinese households use solid fuels, including coal, for heating and cooking causes an additional 600,000 deaths annually due to indoor pollution.

To solve these challenges, the PRC should offer its workforce:

  • training in the skills required to work in new, clean technologies to support a sustainable transition,
  • retraining for workers in industries replaced by these new technologies to ensure a just transition,
  • training in skills that are complementary to AI and that cannot be replaced by AI to boost productivity in an increasingly automated world, and
  • a better environment through radically reducing pollution to improve public health and well-being.

Education and skills are themselves crucial elements in wellbeing and the same is true of health, beyond their effect on productivity.

Social capital

The PRC’s dramatic economic advancement over the past four decades has significantly reduced the number of people living in absolute poverty. But relative poverty remains a problem, and rural areas are frequently poorer than urban ones. Health and education services are also lacking in rural areas.

In addition, replacing polluting industries with cleaner ones without helping communities through the change could lead to problems. Communities could lose their sense of self and the social ties that keep members bonded. Trust in government can be eroded if people do not see a sense of solidarity and mutual responsibility.

To support social capital, government should ensure:

  • strategies of reducing inequality, including through providing better education and health services to rural areas,
  • help for entrepreneurs to start businesses in areas where the core industry is being replaced,
  • relocation assistance to workers who would like to move through finance and relaxing the Hukou system, and
  • social safety nets to help people reenter the workforce or to assist those unable to.

Social cohesion and a sense of worth are goals in and of themselves beyond any influence on productivity.

Natural capital

Natural resources provide essential services, from water management and safe water in the case of watersheds to sequestering carbon dioxide in the case of forests. Better stewardship of resources would improve these services. For example, reducing industrial runoff would improve fisheries and make land used for growing food less polluted.

To enhance its natural capital, the PRC can develop climate-smart agricultural approaches to sustainably make farming more productive. The country could also create policies that encourage replacing fossil fuels with cleaner technologies to improve public health and the environment. For example, adding a $70 carbon price in the PRC could prevent nearly 4 million premature deaths from air pollution during 2017 to 2030.

Pursuing smart urbanization projects that are compact, connected, and coordinated could protect natural resources and make communities more resilient to climate change. These projects can help unlock the power of cities to deliver clean development and stimulate economic growth by improving access to jobs and housing.

Protecting and investing in natural capital increases biodiversity with many benefits, including recreational, medicinal, and agricultural.

Physical capital

Infrastructure projects support essentials of modern life, such as reliable power, heating and cooling, transportation, water, and sanitation. The PRC’s infrastructure efforts build a foundation for growth. The country is expected to need $30 trillion in infrastructure investment by 2040 according to the World Bank. That’s more than half of Asia’s total needs and a third of the world’s.

Approaching this need for infrastructure in thoughtful and sustainable ways can offer many benefits. Low-quality or old-fashioned infrastructure projects should not be supported; these can pose financial and economic risks and lock in decades of polluting development. Upgrading long outmoded industrial processes to clean, modernized production can dramatically increase efficiency and reduce waste.

The PRC has successfully invested in solar power and become the world’s largest producer of solar cells. Continued support of sustainable infrastructure such as the solar photovoltaic industry would help create a healthier, cleaner, and more sustainable economy. The PRC must also manage its physical capital well, to allow more efficient and clean technology to come through, for example via its electricity grids.

Achieving these investments

Sound government policies, including those that incentivize sustainable development will be needed. The PRC’s financial systems should be strengthened to allow for a range of effective public and private financing for sustainable projects. Successful change will make possible the PRC’s transition to a high-income country whose citizens live in harmony with both the natural environment and each other.

Reference

C. Hepburn and N. Stern. 2019. Driving Investments Toward Sustainable Economic Growth in the People’s Republic of China. ADB East Asia Working Papers. No. 16. Manila: Asian Development Bank.

Authors
Cameron Hepburn

Cameron Hepburn

Director of Economics of Sustainability Program, Oxford Martin School, Oxford University

Nicholas Stern

Nicholas Stern

IG Patel Professor of Economics and Government, London School of Economics

This blog is reproduced from East Asia Working Paper.

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