## 1chnea2022002 ## Source details **Canonical URL:** [1chnea2022002](https://www.imf.org/-/media/files/publications/cr/2022/english/1chnea2022002.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2022/english/1chnea2022002.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2022/english/1chnea2022002.pdf.json) --- ### Adequate social protection: scope, trends, and structural features - Social protection spending doubled during the 2010s to 8 percent of GDP. - Coverage expansions: - Basic medical insurance coverage expanded from less than 3 percent of the population in 2000 to more than 96 percent in 2020. - Since 2009 basic pension and medical insurance extended to rural and non-salaried urban residents; urban employee pension participation more than tripled over two decades. - System structure: - Social insurance: four funds — Endowment (Pension) Insurance, Medical Insurance, Unemployment Insurance, Worker Injury Insurance. - Pension and medical funds have separate plans for urban employees and for rural and non-salaried urban residents. - Social assistance center: minimum income guarantee program (dibao) with separate urban and rural components. - Operational fragmentation and decentralization: - Central government sets policies; municipalities/counties largely deliver services, manage finances, set contribution rates and benefits. - Risk pooling is limited; fragmentation undermines coverage, adequacy, and service delivery. - Implementation of the Social Insurance (Security) Law has been slow, contributing to underpayment of contributions and denial of benefits. - Labor mobility and hukou: - In 2020 China had about 286 million migrant workers: 170 million worked outside their home county and 116 million worked locally. - For migrants working locally, household registration restrictions within the province have been basically removed; migrants working outside home county have access to basic (rather than all) urban public services under a nationwide residency permit program. - Abolishing hukou would require urban governments to spend considerably more on basic public services for migrant populations. ### Financing and contribution compliance - Revenue sources: employer and employee contributions and government transfers (subsidies); employers and employees contribute to pension, medical, and unemployment funds; employers also contribute to work-related injury and maternity insurance. - Maternity insurance: merged with medical insurance in 2020; at end-2020, 236 million women with maternity insurance. - Contribution trends and compliance: - Since 2015 central guidelines lowered employer contribution rates; government estimates this reduced contributions from enterprises by nearly 1 percent of GDP. - Statutory employer contribution rate for urban employee pension plan is the target rate of 16 percent set by the central government. - Weak compliance: many enterprises underpay premiums or report lower wages; real contribution rates often much lower than statutory rates. - Government subsidies and fiscal stress: - Government subsidies for social insurance have grown to about 2 percent of GDP and cover ¼ of social insurance spending. ### Toward a unified national social protection system - Unification objectives and progress: - Social Security Fund Budget part of annual budget report to the National People’s Congress since 2013. - Pension risk pooling facility at central level introduced (Central Adjustment Fund, CAF). - March 2018: Central government designated State Tax Administration (STA) as sole authority for collecting social insurance contributions; target achieved and expected to improve compliance if local social insurance departments share payroll data. - Implementation obstacles: - Only seven out of 31 provincial-level governments have unified urban employee basic pension plans. - Obstacles: decentralized framework, weak information systems, differing local economic conditions, resistance from surplus local pools, technical and bureaucratic data-sharing issues. - Central Adjustment Fund (CAF) details: - Established in 2018; provinces transfer reserves based on employee numbers and average salaries. - Redistribution by MOHRSS and Ministry of Finance based on number of retirees in provinces. - In 2018 contribution rate was 3 percent; in 2020 provinces transferred about 4 percent of total income from local urban employee pension reserves to the CAF. - In 2020 seven provinces were net contributors; Guizhou, Tibet, Yunnan had net transfer balances of zero; 22 central and western provinces were net recipients. - CAF topped up the income of nine provinces by 5 percent or more in 2020. ### Pension system: structure, adequacy, and sustainability - Multi-tiered pension system: - Pillar I dominates with three public plans providing near universal coverage of those 16 years of age and older. - Pillar II: many very small occupational pensions. - Urban employee pension plan: contributory basic pension (Pay-as-You-Go) + mandatory defined-contribution individual accounts; government covers longevity risk. - Target replacement rate through both income sources: 50 – 60 percent for an individual with 35 years of contributions. - In 2019 benefit ratio (pensions in payment/ average wage) was 53 percent. - Resident (rural and non-salaried urban) pension: - Voluntary program merged in 2014; includes a non-contributory basic social pension funded by central government for central and western provinces and jointly with local governments for eastern provinces. - Government target replacement rate for the resident program: 15-30 percent. - Civil service plan (being merged into urban employee scheme) is relatively generous. - Based on 2015 data, 62 percent of the pensioner population (rural residents) receives the same share of all pension benefits paid as civil servants, who compose 2 percent of pensioners. - Sustainability risk and recommended reforms: - Without reform, urban employee pension expense would almost triple from 5 percent of GDP in 2019 to 14 percent of GDP in 2050. - Recommended measures: - Increase and unify gradually the retirement age at 65 and link future adjustments to changes in life expectancy. - Publish the benefit indexation formula; suggest an indexation linking benefits to consumer prices and a portion of change in real wages, e.g., 2/3 of real wage change. - Prohibit the “buy in” option that allows people with fewer than 15 years of contributions to pay a lump sum to earn full pension rights. - Longevity context: - Regular retirement age: 60 for men and professional women; 50 for non-professional women noted as particularly low. - Based on UN projections, life expectancy for a 60-year-old male will be more than double in 2050 than it was in 1955. - Under current rules, females in 2050 will be able to draw a full pension for more than a third of their lives. - Resident pension adequacy: - In 2020 monthly average pension benefit payment was 170 yuan, below the absolute rural poverty line of RMB 192 per month. - Regional inequality: average monthly benefits for pensioners in Shanghai was 7.4 times the national average in 2018. - Fiscal cost estimate: if average resident monthly social pension had been set at the poverty line in 2020, it would have cost an extra RMB 45 billion (0.05 percent of GDP) — an almost 14 percent increase in social pension income of the average resident pensioner. ### Medical insurance: coverage, gaps, and proposals - Health spending and financing: - China spent about 6.7 percent of GDP on healthcare in 2019. - Out-of-pocket share fell from 60 percent of health costs to about 30 percent over two decades. - Subsidy per person rose from RMB 200 in 2011 to RMB 580 in 2021. - In 2019 government subsidies (RMB 0.6 trillion) were about a third of total government health expenditures. - Insurance structure and reforms: - Urban employees: contributory social medical insurance + mandatory individual accounts; provinces allow voluntary participation for self-employed. - Rural and urban residents: separate medical plan with no minimum qualifying period. - Recent reforms: central government bulk purchases reduced average drug prices by more than 50 percent for basic medical insurance participants; individual accounts expanded to cover basic expenses of other household family members. - Coverage and benefit caps: - Basic medical insurance benefits capped at 600 percent local average wages. - State plans mainly cover services in public hospitals and common diseases; uncovered emergency healthcare or chronic illnesses expose individuals to significant costs. - Poorer provinces have limited resources to finance health spending. - Recommendation: - Consider establishing a national supplementary medical insurance plan to allow individuals to purchase coverage for uncovered medical expenses at reasonable rates; subsidize purchase for poorer individuals. ### Unemployment insurance: scope, design, and reform needs - Coverage and participation: - Coverage restricted to workers in urban firms and urban public institutes; several hundred million farm workers and nonagricultural rural workers are not covered. - Less than half of urban employees participate; only a fifth of migrant workers are part of the system. - Unemployment benefits reached [20] percent of the registered unemployed urban population. - Design features: - Contributions: employers and employees contribute; base subject to floor (60 percent) and ceiling (300 percent) of average local salary. - Eligibility: minimum contribution period 12 months; benefit duration 12 to 24 months depending on contribution length; other conditions include involuntary unemployment, no old-age benefits, registration at employment-service agency, and active job search. - Benefit base: generally between the minimum living allowance and the local minimum wage; unemployment insurance fund pays medical insurance contributions during benefit period. - Reserves: provincial-level fund balances, no national pooling. - Adequacy example: - Beijing minimum wage RMB 2,200/month; benefit rate 70–90 percent of minimum wage depending on contribution length; at 70 percent benefit ≈ RMB 1,540/month — about a fifth the average private wage. - Reforms underway and recommended: - 2020 MoHRSS national platform for applying unemployment benefits; greater coordination central-provincial; promote transfer of unemployment insurance between urban and rural localities; simplify application procedures. - Recommendations: - Move contribution collection to STA and mandate information sharing. - Develop centralized risk pooling for benefits. - Provide subsidies to poorer provinces for IT. - Extend coverage to contractors and self-employed. - Align contribution and benefit bases to increase participation incentives. ### Social assistance (dibao) and child allowance proposals - Dibao program design: - Ministry of Civil Affairs sets general guidelines; county-level governments implement. - Eligibility: per capita household income below local minimum living guarantee standard and meeting property status test. - Local governments set living standards; monthly allowance = calculated basic living standard − household income. - Example: local living standard RMB 1,200 per person/month; three-person household with monthly income RMB 3,000 receives RMB 600/month. - Dibao implicitly provides child support: new child lowers per capita income, raising dibao payment. - Other assistance: - Small targeted programs: emergency, housing, education, unemployment, medical assistance, price subsidies. - Recent inclusion: 253,000 unsupported children added to a designated social security system with monthly subsistence allowance of 1,140 yuan per child. - Adequacy and budget: - Total transfers to households in lowest quintile amount to less than 30 percent of pre-transfer income. - Spending on social assistance is less than 1 percent of GDP. - Number of dibao participants: 44 million; increasing benefits would likely have limited budget impact but significant support for participants. - Policy proposals: - Adjust local percentage rates upward to better align living standards with local consumption expenditure per capita. - Consider extending unemployment assistance to “gig” workers temporarily. - Rules-based automatic transfers: link automatic activation of spending/tax measures to macro triggers (e.g., rise in unemployment); IMF WEO illustration: a 0.5 percentage point rise in unemployment above natural rate generates transfers equivalent to about 0.7 percent of GDP. - Child allowance: propose periodic child/family allowance to complement three-child policy; benchmark spending: about 0.4 percent of GDP in low- and middle-income countries vs 1.7 percent for high-income countries. - Digital delivery: pilot e-CNY digital wallets to distribute assistance directly to low-income people’s “hard” digital wallets; Shenzhen pilot suggests feasibility. ### Social protection, precautionary savings, and Third Pillar pensions - Finding: incomplete coverage and benefit uncertainty induce households to self-insure by accumulating precautionary savings; China exhibits one of the highest household savings rates globally. - Evidence: - Empirical studies find pension payments to rural residents positively impact consumption expenditure. - Within Asia, declines in aggregate household savings in Japan and Korea driven by lower savings across all income deciles after improved social safety nets. - Third Pillar objectives and initiatives: - Purpose: voluntary individual fully funded pension accounts to complement social security and support domestic capital market development; could reduce aggregate household savings rate. - Initiatives: - 2018 pilot of tax-deferred pension product (results less than expected). - June 2021 CBIRC one-year pilot of voluntary individual account pension program. - MoHRSS plans to promote personal pension system; authorities establishing a national pension company to manage qualified commercial investment products under Third Pillar. - Design considerations: - Exclusive account system, financial incentives, wide range of qualified investment products, governance standards, public education, risk management, and derivative markets for hedging longevity and interest rate risk. - Tax/subsidy options: matching subsidy capped may be effective given low-income earners often do not pay income taxes. - Caution: funded systems not panaceas — longevity increases or low returns could cause shortfalls. ### Social protection: conclusions and priorities - Core claim: a unified, rules-based social protection system supports quality growth, shields vulnerable households, and generates public support for growth-enhancing reforms. - Priority reforms (selected highlights from Annex I): - Accelerate implementation of 2011 Social Insurance Law; pool local insurance reserves by type at provincial then national level. - Develop IT for information sharing and subsidize poorer regions. - Move contribution collection to tax authorities to improve compliance. - Remove obstacles to residency permits for migrant workers; bring gig workers into social insurance. - Raise and unify retirement ages, publish benefit indexation formula, adjust indexation to moderate increases while preserving purchasing power, abolish buy-in option. - Raise resident pensions to at least absolute poverty line where below it. - Develop a comprehensive Third Pillar with exclusive accounts, incentives, qualified products, and education campaign. - Consider raising cap on reimbursed medical costs and establish national supplementary medical insurance plan with subsidies for poorer individuals. - Align unemployment benefits for migrant workers with urban employee benefits and consider waiving/shortening minimum contribution periods. - Develop targeted child benefit program and expand digital delivery (e-CNY pilots). ### Social protection and consumption: empirical links - Prefecture-level cross-sectional analysis (296 municipalities): - Social security spending: a 1-percent increase in social security spending per capita associated with a 0.05—0.08 percent increase in household consumption expenditure per capita. - Example at the mean: a 100-RMB increase in annual social security spending per capita (about 6 percent of average per capita social security spending in 2019) associated with ~90 RMB increase in annual urban consumption per capita. - Health spending: a 1-percent increase in health spending per capita associated with a 0.1—0.2 percent rise in rural consumption per capita. - Example at the mean: a 100-RMB increase in annual health spending per capita (about 9 percent of average health spending per capita in 2019) associated with ~185 RMB increase in annual rural consumption per capita. - Policy implication: targeted social spending—social security boosts urban consumption; health spending boosts rural consumption—can reduce precautionary savings motives. ### Housing, household savings, and indebtedness - Household savings during pandemic: - Household savings rate remained elevated at 35 percent in 2021Q2; pre-pandemic level was 30 percent. - Annual growth rate differential between household consumption expenditure per capita and disposable income per capita widened to -6.3 percent in 2020. - Channels linking housing and savings: - Down payment effect, mortgage effect, wealth effect; net impact depends on relative strengths. - Empirical findings (CFPS panel regressions; Table 3): - Sample sizes: Observations (urban) 18,469; Observations (rural) 17,960. - Coefficients (urban / rural): - total income: 18.889*** (urban); 21.824*** (rural) - mortgage debt to income ratio: 0.208* (urban); 0.287* (rural) - non housing debt to income ratio: 0.323** (urban); 0.035 (rural) - net housing asset to income ratio: -0.022** (urban); -0.054*** (rural) - saving to income ratio: -0.114 (urban); -0.443*** (rural) - R2: 0.118 (urban); 0.171 (rural) - F Statistic: 253.853*** (df = 5; 9528) urban; 393.048*** (df = 5; 9531) rural - Findings: - Net housing assets have significant negative association with savings rate (housing wealth effect) for both urban and rural households. - Mortgage (debt) effect dominates wealth effect for both urban and rural households. - Non-housing assets show significant wealth effect for rural households only; for urban households non-housing wealth reduces savings rate and dominates non-housing debt effect. - Prefecture-level house price and consumption regressions (selected coefficients): - Urban disposable income coefficients around 0.85–0.88 for 2015–2019; social security spending coefficients 0.051***–0.072*; house price to income ratio coefficients 0.026***–0.034***. - Rural disposable income coefficients around 0.75–0.80 for 2015–2019; social security spending coefficients 0.044–0.123***; house price to income ratio small and sometimes insignificant. - Policy implications: - Strengthen social protection and reduce income inequality to lower elevated household savings rate. - Macroprudential measures targeting housing-related debt (limits on debt-service-to-income and loan-to-value ratios) to reduce mortgage effect on savings. - Increase social transfers to poor households and improve central risk-sharing mechanisms to free resources for redistribution. ### Local Government Financing Vehicles (LGFVs): scale, links, and risks - Measurement and scale: - Bottom-up measure: LGFV debt reached 39 percent of GDP in 2020, up from 34 percent in 2018. - Total LGFV assets reached 120 percent of GDP in 2020 after five years of 15 percent annual growth. - Total liabilities about 75 percent of GDP; interest-bearing debt about two-thirds of liabilities. - Asset composition (2020 vs 2015): - Infrastructure and physical assets: 48 percent of LGFV assets (down from 52 percent). - Financial assets: 48 percent (up from 42 percent). - Intangible assets: 4 percent. - Key balance-sheet items: - Receivables (largely arrears from local governments): at least 18 percent of GDP. - Inventories (largely land and real estate): equivalent to 30 percent of GDP. - LGFV equity and debt exposures to other enterprises: at least 12 percent of GDP. - Non-interest-bearing liabilities: equivalent to 26 percent of GDP. - Interconnectedness: - LGFVs have investments in almost 3,400 firms and linkages with another 1,600 firms — ~5,000 firms in total, including over 1,000 private firms, 58 banks, 112 securities/insurers/trusts, and at least 660 other LGFVs. - LGFV-linked SOEs account for 48 percent of SOEs in the database and 62 percent of SOE assets; LGFV-linked POEs account for 14 percent of POEs and 32 percent of their assets. - Financial vulnerabilities: - Debt-at-risk (debt not backed by earnings sufficient to cover interest) ≈ 37 percent of GDP. - Reported equity buffers ≈ 38 percent of assets or 45 percent of GDP (may be overstated). - Continuous deferral of income and large inventories weaken actual cash flows; high dependence on new financing. - LGFVs with negative operating cash flows (≈ three quarters of LGFV debt) used at least RMB 10 trillion of net new financing on operating spending and financial investments over last three years — roughly 20 to 30 percent of new flow of total social financing for nonfinancial firms. - Macrofinancial transmission risks: - Risky LGFV debt amounting to 20.1 trillion RMB as of 2020 = 44 percent of total LGFV debt (in the sample). - Even a 5 percent LGFV default rate ≈ roughly 75 percent increase in banking system NPLs. - Operating cash flow shortfall if credit constrained: 23 trillion RMB (unless asset sales or fiscal support). - If new credit growth restricted to 0%: Investment spending could decline by RMB 5.4 trillion (unless financed by fiscal support or asset sales). - Policy recommendations: - Accelerate restructuring of non-viable LGFVs with improved legal frameworks and contain leverage. - Phase out implicit guarantees carefully, coordinate to avoid macro-financial feedback loops. - Strengthen corporate restructuring and insolvency frameworks for orderly deleveraging and exit; improve specialization of judges and insolvency administrators. - Introduce comprehensive bank restructuring approach: stronger common equity buffers, legal resolution framework, potential temporary fiscally backed centralized resolution fund. - Legal and institutional fiscal reforms: align central revenues with provincial spending, centralize some responsibilities, public debt management legal framework, improved reporting, stronger accountability, and enhanced fiscal risk-sharing between provinces. ### Policy uncertainty, market access, and trade/investment commitments - Market access and negative list approach: - Reform commitments increasingly govern market access by negative list rather than ownership; manufacturing expected to open faster; services opening likely to gain traction after CAI ratification. - IPR developments: - Four regional IP courts since 2014; 24 IP tribunals since 2017; IP tribunal in Supreme People’s Court in 2019. - Median damages and case outcomes noted; damages to foreign patent holders about three times domestic holders in some studies. - March 1, 2021 11th Amendment to Criminal Law increased criminal penalties for IP crime to a maximum of 10 years. - Trade agreements and commitments: - US-China Phase I, RCEP, CAI contain IPR, services, procurement, competition, and SOE-related commitments with varying enforceability and timelines. - RCEP: mandates non-expanding negative list within 6 years and at least 65 percent of service sectors fully open to members; some chapters excluded from dispute settlement (e.g., e-commerce, competition, government procurement). - CPTPP accession (prospective) would likely require further commitments: enhanced IPR protection, services liberalization, government procurement transparency, SOE commercial behavior aligned with commercial considerations, and climate/labor commitments. - Competition policy and SOE reform: - RCEP and potential CAI demand higher transparency and non-discriminatory commercial behavior from SOEs; reforms could promote competitive neutrality. - Government procurement: - Proposed 2021 revision to Government Procurement Law could improve transparency and align procedures closer to GPA; differences remain (e.g., 20-day minimum tender vs 40-day in GPA). ### e-CNY (digital RMB): pilots, design, benefits, and risks - Pilot rollout and scale: - Initially tested in four locations since end-2019 (Shenzhen, Suzhou, Xiong’an, Chengdu); expanded since November 2020 to more than ten cities/regions including rural areas and Hong Kong SAR cross-border test. - As of end-June 2021, e-CNY applied in over 1.32 million scenarios (utility payment, catering, transport, shopping, government services). - Design and features: - e-CNY is digital RMB substitute for cash (M0) in a two-tier system: PBC issues/disposes e-CNY; authorized operators provide account opening/exchange services within PBC-managed quota. - Wallet structure: matrix by ID requirement, holder type, carrier (software/hardware), authorization; first-level wallet does not require ID but needs mobile phone number typically linked to real ID. - “Managed anonymity”: small transactions largely anonymous; large transactions traceable for AML/CFT. - Domestic benefits and risks: - Potential benefits: lower payment service costs, diversify payment instruments, enhance financial inclusion (hardware wallets), improve fiscal support efficiency. - Risks: data privacy and cybersecurity; bank run risk and competition with bank deposits (PBC announced zero interest rate on e-CNY and imposed transaction/balance limits); financial integrity/AML/CFT concerns depending on design. - PBC mitigation: multi-layer security system, internal firewall, compliance with Data Security Law and Personal Information Protection Law; planned AML/CFT guidelines; zero interest and wallet limits to reduce deposit flight risk. - Cross-border use: - Technical readiness for cross-border use; PBC-HKMA MOU to technically test e-CNY use in Hong Kong SAR with mandatory conversion into HKD accounts as a key measure. - mCBDC Bridge project explores wholesale CBDC DLT-based cross-border payment-versus-payment transactions with principles: no disruption to other monetary authorities, compliance with local regulations, interoperability. - Cross-border risks: currency substitution, facilitation of illicit flows, elevated data privacy/security concerns; e-CNY alone unlikely to substantially advance RMB internationalization given capital account restrictions and fundamentals. - Longer-term implications: - Potential fragmentation of payment data across PSPs, changes in fintech business models, need for prudent and transparent regulation on PBC’s use of payment data. ### Business dynamism and productivity: empirical facts and reform priorities - Five empirical facts documenting declining business dynamism: - Fact 1: share of firms under 10 years fell from around 70 percent in 2003-04 to around 30 percent in 2017-18. - Fact 2: life-cycle growth of young firms relative to older incumbents weakened between 2011-2018 vs 2003-2010. - Fact 3: younger and smaller firms are more capital-constrained; in 2017-18 these firms have much higher capital productivity than older firms. - Fact 4: capital allocation responsiveness declined (elasticity of capital growth to initial capital productivity fell from 0.096 in 2004-2007 to 0.059 in 2016-2018). - Fact 5: persistent productivity gaps between SOEs and private firms (average revenue productivity gap around 4-5 percent), largely due to lower SOE capital productivity. - Regional heterogeneity and SOE intensity: - Higher provincial SOE intensity associated with weaker revenue, capital, and TFPQ growth for young firms relative to older firms (Revenue Growth coefficient: SOE Intensity -0.007** (0.00352); Observations 394; R2 0.237). - 2013-2018 period shows provinces with medium/high SOE intensity exhibit significantly lower capital responsiveness (ln(ARPK) interactions negative and significant). - Reform priorities: - Pro-market reforms: remove barriers to entry, open non-strategic sectors, remove regional regulatory barriers, adopt transparent/predictable antitrust framework treating SOEs and private firms equally. - SOE reforms: reduce SOE intensity, improve SOE governance, and foster competitive neutrality to boost private-sector dynamism and productivity. *Source: PEOPLE’S REPUBLIC OF CHINA — INTERNATIONAL MONETARY FUND (excerpt).* ### Introduction __________________________________________________________________________ 3 ### ADEQUATE SOCIAL PROTECTION FOR ALL ### Introduction - China has experienced remarkable economic growth that has lifted hundreds of millions out of poverty and contributed to longer lives. - A financially and socially sustainable social protection system can reduce economic uncertainty for workers and households and provide diversified savings opportunities to help achieve the authorities' aim of reaching high income status in the next decade. - Social protection spending doubled during the 2010s to 8 percent of GDP. - Despite rapid expansion, the social protection system remains incomplete, and households save massively for “rainy days” and retirement, generating one of the highest household savings rates in the world. ### Demographic Trends - Urbanization and aging: - In 1990, the rural share of the population was greater than 70 percent; today the urban population has grown to about 63 percent of the population. - China’s population is aging earlier in its development relative to other G20 countries; falling birth rates and rising life expectancy drive the trend. - The average size of households has a third fewer people than in 1990. - Multigenerational family support systems have weakened with rapid urbanization and below replacement level birth rates, contributing to rapid aging. ### Social Protection System: Structure, Developments, and Challenges - System components: - Social insurance consists of four funds: Endowment (Pension) Insurance, Medical Insurance, Unemployment Insurance, and Worker Injury Insurance. - The pension and medical insurance funds each have separate plans for urban employees and for rural and non-salaried urban residents. - Social assistance consists primarily of a minimum income guarantee program (dibao), with separate urban and rural components. - Coverage expansion: - Since 2009 authorities have extended basic pension and medical insurance to rural and non-salaried urban residents. - The number of participants in the urban employee pension program more than tripled over the last two decades. - Coverage of basic medical insurance expanded from less than 3 percent of the population in 2000 to more than 96 percent in 2020. - Despite a doubling of expenditures, China’s social protection spending is low relative to G20 peers in 2018. - Operational decentralization and fragmentation: - Central government sets nationwide policies and regulations; municipalities or counties are largely responsible for public service delivery, managing social security finances, and setting contribution rates and benefits. - Risk pooling is very limited; fragmentation undermines coverage, adequacy, and service delivery. - Slow implementation of the Social Insurance (Security) Law has contributed to underpayment of contributions and workers being denied social benefits. - Labor mobility and hukou: - In 2020, China had about 286 million migrant workers, of which 170 million worked outside their home county and 116 million worked locally. - For those working locally, household registration restrictions on participating in the social insurance system within the province have been basically removed. - For migrants working outside home county, a nationwide residency permit program grants access to basic (rather than all) urban public services; some megacities still require urban hukou to be insured. - Abolishing hukou would require urban governments to spend considerably more on basic public services for migrant populations. ### Financing Social Protection - Revenue sources: - Employer and employee contributions and government transfers (subsidies) are the main sources of funding for social insurance. - Both employers and employees contribute to pension, medical, and unemployment insurance funds; employers also contribute to work-related injury and maternity insurance. - Maternity insurance merged with medical insurance in 2020; at end-2020, 236 million women with maternity insurance. - Contribution trends and compliance: - Since 2015, the central authorities have lowered guidelines on employer contribution rates, which the government estimates has reduced contributions from enterprises by nearly 1 percent of GDP. - China’s statutory employer contribution rate for the urban employee pension plan is the target rate of 16 percent set by the central government. - Weak compliance: many enterprises fail to fully pay social insurance premiums; employers and employees may agree to report wages lower than actually paid; in many areas the real contribution rate has been much lower than the statutory rate. - Government subsidies and fiscal stress: - To cover funding gaps and meet growing expenses, government subsidies for social insurance have grown to about 2 percent of GDP and cover ¼ of social insurance spending. ### Toward a National Social Protection System - Unification objectives and steps: - Authorities seek greater visibility of overall social security system finances and the introduction of risk pooling. - The Social Security Fund Budget became part of the annual budget report to the National People’s Congress in 2013. - A pension risk pooling facility at the central government level has been introduced (see Box 1). - In March 2018 the Central government announced that the State Tax Administration (STA) should be the sole authority for collecting social insurance contributions; this target has since been achieved and is expected to improve contribution compliance provided local social insurance departments share payroll data. - Implementation pace and obstacles: - Implementation of provincial-level overall pension planning has been slow: only seven out of 31 provincial-level governments have unified urban employee basic pension plans within their jurisdictions. - Obstacles include the highly decentralized framework, weak information systems, differing local economic conditions, and resistance from county and municipal insurance pools with surplus funds reluctant to share reserves. - Technical and bureaucratic difficulties impede sharing contribution and benefit information; some provinces hosting many migrant workers resist exporting portions of contributions paid by local employers to other provinces. ### Urban Employee Pension Risk Pooling (Box 1) - Central Adjustment Fund (CAF): - Established in 2018 to pool risk among provincial-level urban employee basic pension insurance pools. - Provinces contribute to the CAF by transferring money from their own pension reserves, based on number of employees and average salaries. - The MOHRSS and the Ministry of Finance redistribute CAF funds to provincial pension funds based on the number of retirees in their areas. - Contribution and redistribution: - In 2020, provinces transferred about 4 percent of the total income from local urban employee pension reserves to the CAF. - The contribution rate was 3 percent in 2018. - In 2020 seven provinces were net contributors; three provinces had net transfer balances of zero (Guizhou, Tibet, Yunnan); the remaining 22 provinces in central and western regions were net recipients. - The CAF topped up the income of nine provinces by 5 percent or more in 2020. *Source: IMF Country Report No. 22/22 — “Adequate Social Protection for All,” Introduction chapter.* ### 16. Pension, medical, and unemployment insurance programs offer the most promise for ### 1chnea2022002 - 16. Pension, medical, and unemployment insurance programs offer the most promise for increasing the coverage and adequacy of the social protection system. ### Creating Sustainable and Adequate Pension Programs - China has a multi-tiered (Pillar) pension system. - Pillar I dominates the pension system, with three public plans, which provide near universal coverage of those 16 years of age and older. - The second pillar is made of many very small occupational pensions. - The Pillar I urban employee pension plan has two components: a contributory basic pension and mandatory defined-contribution individual accounts. The basic pension operates on a Pay-as-You-Go basis. - A participant in the urban employee pension plan receives a basic pension and an annuity payment from the balance in the individual account at retirement. The government covers the longevity risk. - Target replacement rate through the two income sources: 50 – 60 percent for an individual with 35 years of contributions. - In 2019, the benefit ratio (pensions in payment/ average wage) was 53 percent. - The voluntary rural and non-salaried urban residents pension program (merged in 2014) provides social pensions to the non-employed and labor force outside the formal sector; it is residual in eligibility and includes a non-contributory basic social pension funded by the central government for the central and western provinces and jointly with local governments for the eastern provinces. - Government target replacement rate for the resident program: 15-30 percent. - The separate civil service plan (available to civil servants and public institution employees) is being merged with the urban employee pension scheme; the plan is relatively generous. - Based on 2015 data, 62 percent of the Chinese pensioner population (rural residents) gets the same share of all pension benefits paid as civil servants, who compose 2 percent of pensioners. ### Reinforce Sustainability of Urban Employee Pension Plan - Without reform, urban employee pension expense would almost triple over the next three decades from 5 percent of GDP in 2019 to 14 percent of GDP in 2050. - Policy package suggestions and complementarities: - Improved contribution collections would boost social insurance revenue. - Long-term savings options through a “Third Pillar” could make parametric changes more palatable to future retirees. - Retirement age context: - The regular retirement age is 60 for men and professional women; retirement age of 50 for non-professional women is noted as particularly low. - Based on UN population projections, life expectancy for a 60-year-old male will be more than double in 2050 than it was in 1955. - Under current retirement rules, females in 2050 will be able to draw a full pension for more than a third of their lives. - Recommended reforms: - Increase and unify gradually the retirement age at 65 and link future adjustments to changes in life expectancy. - Publish the benefit indexation formula; current system roughly indexed to a mix of wages and prices. Suggest an indexation formula that links benefits to changes in consumer prices and a portion of the change in real wages, say 2/3, to allow for pension purchasing power increases while yielding pension expense savings. Note: purchasing power of pensioners that have received the average pension has increased by 60 percent over the last seven years. - Prohibit the “buy in” option that allows people with fewer than 15 years of contributions to pay a lump sum to earn the right to a full pension; concerns include creating long-term liabilities and opportunities for abuse (e.g., richer counties moving non-working residents into the urban employee pension system and absorbing surplus balances). ### Improve Adequacy and Fairness of the Resident Pension Plan - The basic resident pension plan is not substantially effective in protecting rural older residents. - In 2020, the monthly average pension benefit payment was 170 yuan, which is below the absolute rural poverty line of RMB 192 per month set by the central government. - Regional inequality example: average monthly benefits for pensioners in Shanghai was 7.4 times as high as the national average in 2018. - Fiscal cost estimate: If the average resident monthly social pension had been set at the poverty line in 2020, it would have cost an extra RMB 45 billion (0.05 percent of GDP). - This would represent an almost 14 percent increase in the social pension income of the average resident pensioner. - Targeting increases to pensioners with pensions below the poverty line could reduce social pension inequality between urban and rural residents. ### Boost Medical Insurance Benefits - China spent about 6.7 percent of GDP on healthcare in 2019. - Over the last two decades the share of out-of-pocket payments by individuals has fallen from 60 percent of health costs to about 30 percent. - The government has almost tripled the subsidy per person to RMB 580 in 2021 from RMB 200 in 2011. - In 2019, government subsidies (RMB 0.6 trillion) were about a third of total government health expenditures. - Medical insurance structure: - Contributory plan for urban employees consists of social medical insurance and mandatory individual accounts for employees; most provinces allow voluntary participation for self-employed persons. - Separate rural and urban residents medical plan provides basic medical insurance coverage to rural and non-salaried urban residents not covered by employee plans. - For both plans there is no minimum qualifying period for benefit eligibility. - Recent reforms: - Central government reduced average price of drugs for participants in basic medical insurance by more than 50 percent through bulk purchases. - Use of individual accounts widened to cover basic medical expenses of other household family members in addition to the insured individual. - Authorities plan to explore use of individual accounts for paying family members’ contributions to basic medical insurance for rural and urban non-working residents. - Coverage and benefit gaps: - Basic medical insurance benefits are capped at 600 percent local average wages. - State insurance plans mainly cover services in public hospitals and common diseases rather than universal coverage of all healthcare costs. - Basic medical insurance leaves workers and residents exposed to medical costs that exceed covered services and costs from uncovered emergency healthcare or chronic illnesses. - Poorer provinces have limited resources to finance health spending. - Recommendation: - Consider establishing a national supplementary medical insurance plan that allows individuals to purchase coverage for uncovered medical expenses at reasonable rates to achieve more efficient distribution of medical risks. ### Overhaul Coverage and Benefit Adequacy of Unemployment Insurance - Unemployment insurance coverage and participation is low; coverage is restricted to workers in urban firms and urban public institutes. Several hundred million farm workers and nonagricultural workers living in rural areas are not covered. - Less than half of urban employees participate. Only a fifth of migrant workers are part of the system. - Unemployment benefits only reached [20] percent of the registered unemployed urban population. - Design features and parameters: - Contributions: Employers and employees contribute; base is the average local salary subject to a floor (60 percent) and ceiling (300 percent). - Eligibility: Minimum contribution period for unemployment benefits is 12 months. Depending on contribution length, benefits can be received from 12 months to 24 months. Additional eligibility conditions: involuntary unemployment, not receiving old-age benefits, registered at and regularly reporting to a local employment-service agency, and actively seeking employment. - Benefit rate and base: Benefit rate based on length of contribution period. Benefit base generally between the minimum living allowance and the local minimum wage. The unemployment insurance fund pays medical insurance contributions for the insured during the benefit period. - Reserves: Provincial governments maintain their own fund balances (no national pooling). - Adequacy examples: - Differences between local minimum wages and local average wages yield unemployment benefits well below typical worker pay. - In Beijing, benefit rate ranges from 70 to 90 percent of the minimum wage depending on contribution length; Beijing minimum wage is RMB 2,200/month. Assuming a 70 percent rate, typical benefits would be RMB 1,540/month or a fifth the average private wage. Migrant workers receive an even lower lump sum benefit. - Reforms underway: - Authorities plan greater coordination between central and provincial authorities, promotion of transfer of unemployment insurance between urban and rural localities, and simplification of benefit application procedures. - In 2020, MoHRSS opened a national platform for applying for unemployment insurance benefits serving as a hub for subnational platforms; applicants can apply in person, online, or via mobile phone and only have to present personal identification. Review of eligibility based on local government internal data. - Further recommended reforms: - Move contribution collection to STA (as with basic pension contributions) and mandate requisite information sharing to improve compliance. - Develop a centralized risk pooling system from which benefits could be paid. - Provide subsidies to poorer provinces to improve information technology. - Extend coverage to contractors and other self-employed individuals to induce greater risk taking and enterprise creation. - Align the bases for calculation of contributions and benefits to increase incentives for urban employees and migrants to participate. ### Social Assistance: Offering Better Support to Vulnerable Households - China’s social assistance programs cover almost all households in the lowest quintile of the income distribution, but adequacy is limited. - Total transfers to households in the lowest quintile amount to less than 30 percent of their pre-transfer income. - Spending on social assistance is less than 1 percent of GDP. - What is missing: a program to provide direct support to households with children. - Local governments determine benefits (subject to central guidance) and are responsible for service delivery. *Source: IMF staff summary of chapter content.* ### 36. The minimum income program (dibao) is the largest social assistance program. The ### 1chnea2022002 - 36. The minimum income program (dibao) is the largest social assistance program. ### Dibao program design and operation - The Ministry of Civil Affairs establishes general guidelines for the dibao program; implementation is primarily by county level governments. - Eligibility: families whose per capita income of family members living together is below the local minimum living guarantee standard and meets the local minimum living guarantee family property status. - Local governments set local living standards according to local conditions; the calculation method differs across cities and counties. - Most common calculation: basic living standard = locally determined percentage rate × local consumption expenditure per capita in past 12 months. - Monthly allowance = difference between the household’s income and calculated basic living standard. - Example: if the local living standard is RMB 1,200 per person per month, a three-person household with a monthly household income of RMB 3,000 would receive a monthly allowance of RMB 600 (RMB 1200*3 - 3000 = 600). - Footnote: The dibao program implicitly provides child support payments. When a new child enters the family the per capita income of the family will fall generating a greater monthly dibao payment to the family. ### Other social assistance programs - Programs tend to be small and targeted and include emergency, housing, education, unemployment, and medical assistance and price subsidies. - Price subsidies are available to those receiving unemployment insurance benefits or assistance; there is no national unified standard for price subsidies. - The subsidy amount is determined according to the local urban and rural subsistence allowance standard and the basic cost of living price index (SCPI) for low-income urban residents. - Recent targeted inclusion: China recently included 253,000 unsupported children in a designated social security system with a monthly subsistence allowance of 1,140 yuan ($176) per child, the same amount provided to orphans (ILO 2021). ### Adequacy and coverage: findings and suggested adjustments - Finding: Adequacy and coverage of social assistance programs could be improved. - Suggestion: Adjust the local percentage rate upwards so the local living standard better aligns with local consumption expenditure per capita. - Budgetary note: Given the relatively small and declining number of participants in the dibao program (44 million), increased assistance payments would likely have a limited impact on the budget but provide significant additional support to participants. - Suggestion: Consider extending unemployment assistance to “gig” workers who are laid off at least until a more permanent solution is found to provide greater economic security. ### Rules-based automatic transfers and countercyclical income insurance - Proposal: Rules-based fiscal stimulus that links automatic activation of spending and tax measures to a macroeconomic trigger (e.g., rise in the unemployment rate). - Rationale: Such a rule would shape household and business expectations, promise a robust countercyclical response, and act as income insurance to targeted populations. - April 2020 WEO illustration: a one-half percentage point rise in the unemployment rate above its natural rate generates fiscal transfers targeted to liquidity-constrained households equivalent to about 0.7 percent of GDP (IMF 2020b). ### Child allowance proposal - Proposal: A child assistance (allowance) program to complement the three-child policy, easing financial strain and reducing child poverty. - International context: Almost 110 countries have a periodic child or family allowance anchored in national legislation (ODI/UNICEF 2020). - Spending benchmark: Spending on child benefit packages averages about 0.4 percent of GDP in low- and middle-income countries, compared with 1.7 percent of GDP for high-income countries (ODI/UNICEF 2020). ### Digital delivery: e-CNY pilots and assistance delivery - Observation: Central government transfers to low-income individuals currently pass through three layers of government before reaching beneficiaries’ bank accounts. - Reform: Central authorities have begun bypassing provincial-level governments to allocate more central transfer payments directly to lower-tier governments. - Pilot proposal: Use e-CNY digital wallets to distribute assistance directly to low-income people’s “hard” digital wallets (a hard wallet is akin to a credit card, meaning the participant does not have to have a mobile phone). - Evidence: A pilot study in Shenzhen suggests feasibility (SIP 5). ### Social protection, savings, and the Third Pillar pension - Finding: Lack of adequate coverage and uncertainty about local social protection systems likely induce households to self-insure by accumulating precautionary savings. - Evidence: Within Asia, declines in aggregate household savings in Japan and Korea were driven by lower savings across all income deciles, with a larger drop for low-income households reflecting improved social safety nets (Zhang 2018). - China-specific evidence: Empirical studies find a positive impact of pension payments to rural residents on their consumption expenditure (Zhao and Li 2018; Zheng and Zhong 2016). - Purpose of a Third Pillar: Generate voluntary, individual, pension investment accounts (fully funded) to complement, not replace, social security pensions and support domestic capital market development. - Cross-country practice: Several emerging markets have established or are planning Third Pillar schemes (Brazil, Chile, Poland, Turkey; Russia planning) (Heinz 2019). - Potential benefits: Reduce aggregate household savings rate by diversifying individual savings portfolios; attractive to “gig” economy workers lacking long-term labor contracts. ### Third Pillar initiatives and design considerations - Past and planned initiatives: - Pilot in 2018 of a tax-deferred pension product; results were less than expected. - June 2021: China Banking and Insurance Regulatory Commission (CBIRC) introduced a one-year pilot of a voluntary individual account pension program (CBIRC 2021). - MoHRSS plans to promote establishment of the personal pension system (the third pillar pension system). - Authorities are establishing a national pension company to manage qualified commercial investment products under a Third Pillar pension system. - Development challenges: An over-arching structure must be selected (special government agency, regulated commercial firms, or incorporated into existing second pillar), and coordination across ministries, regulators, and firms is critical. - Important features: exclusive account system, financial incentives, wide range of qualified investment products, incentive policies, distribution channels, investment policies, risk management, public education, and development of derivatives markets to hedge interest rate and longevity risk. - Tax and subsidy design: Countries use tax deferral, tax-free earnings, or subsidies; given most low-income earners do not pay income taxes, a matching subsidy from the government that is capped may be more effective. - Governance: Government should develop a list of “Qualified” 3rd pillar investment products and standards, including duration, purpose, and early redemption penalties. - Need: A robust educational campaign is necessary. - Caution: Funded systems are not panaceas; increases in longevity or lower than expected investment returns could cause funding shortfalls. ### Conclusions: role of social protection in growth and priorities - Core claim: A unified, rules-based social protection system can support quality growth, shield vulnerable households and workers from economic shocks, and generate public support for growth-enhancing structural reforms. - Effects: Good coverage, adequate benefits, and automatic benefit provision would help rebalance the economy by reducing household precautionary savings and supporting consumption of consumer goods and services. - Priority reforms: - Resident pension and unemployment insurance reforms with greater unification, including risk pooling. - For rural and non-salaried urban residents, improve benefit adequacy. - Improve unemployment insurance coverage and benefit adequacy for all workers. - Higher medical insurance benefits and low-cost opportunities to insure against uncovered medical costs. - Introduce a child allowance program. - Reforms to put the urban employee pension program on a more sustainable footing. - Create a well-structured and integrated third pension pillar to ease pressures on basic pensions and support capital market development. - Financing: Social protection must be sustainably financed. Reforms that improve adequacy and equity will foster trust and willingness to finance through contributions. General tax revenues from more progressive taxes, base broadening, and expenditure reprioritization will be important. Reprioritization can also come from within the social protection system (e.g., savings from urban employee pension reforms). ### Annex I — Recommended reforms (selected highlights) - Social insurance system: Create a unified system to improve coverage, adequacy, and service - 1 Accelerate implementation of 2011 Social Insurance Law that envisages a unified system. - 1a Pool all local insurance reserves by type of insurance (pension, medical, unemployment, injury) at the provincial level then the national level. - 1b Develop necessary information technology to improve information sharing capabilities and provide subsidies to poorer regions to support IT development. - 1c Improve contribution compliance by moving all contribution collection responsibility to local tax authorities and ensure they have the required information to assess compliance. - 2 Remove obstacles to obtaining residency permits in location of employment for migrant workers or further downplay household registration system (Hukou) strictures. - 3 Consider measures to bring ‘gig’ economy (flexible) workers into social insurance system (e.g., change employment status). - Urban employee pension: Reinforce sustainability - 1 Raise and unify retirement ages and link future increases to changes in life expectancy at the retirement age. - 2 Publish formula used to calculate annual changes in pension benefits. - 3 Consider adjusting benefits indexation to moderate increases but preserve purchasing power. - 4 Strictly enforce abolishment of buy-in option. - Resident pension: Improve adequacy and fairness - 1 Raise pensions to at least the absolute poverty line in localities where the pension is below it. - Third pension pillar: Provide long-term savings opportunity for retirement - 1 Develop comprehensive and integrated approach to create private voluntary pension plan regulated by the government and managed by private firms (Third Pillar). - 1a Consider establishing exclusive account system, financial incentives, and a wide range of qualified investment products. - 1b Include an education campaign to ensure that all individuals receive a fair deal, in terms of low fees, adequate investments, and proper service. - Medical insurance: Boost benefit adequacy - 1 Consider raising cap on reimbursed medical costs. - 2 Establish a national supplementary medical insurance plan for individuals to purchase coverage for uncovered medical expenses at reasonable rates. Subsidize purchase for poorer individuals. - 3 Allow use of individual medical account savings to pay for family member contributions to basic medical insurance under residents program. - Unemployment insurance: Overhaul coverage and benefit adequacy - 1 Align the bases for calculation of contributions and benefits. - 2 Equate migrant worker benefits with urban employee benefits. - 3 Consider permanently waiving or shortening minimum contribution period. - Social assistance: Expand coverage and improve adequacy and delivery of benefits - 1 Develop a targeted child benefit (allowance) program, drawing on experience of other countries. - 2 Increase minimum income guarantee program benefits (dibao) perhaps by aligning benefit more closely with local consumption expenditure per capita. - 3 Link activation of transfers to households to an economic trigger (e.g. the unemployment rate). - 4 Expand use of digital technology to improve assistance delivery, building off successful pilot of e-CNY digital wallets in Shenzhen. *Source: PEOPLE’S REPUBLIC OF CHINA — INTERNATIONAL MONETARY FUND (excerpt).* ### Introduction ### Introduction ### Overview: consumption and savings during the pandemic - Private consumption as a share of real GDP declined significantly in 2020 and recovered more slowly than other GDP components. - The decline in China’s private consumption share in 2020 (in percentage points of GDP) was larger than in most other major economies and remained well below the emerging market average. - The household savings rate was already well above major emerging market economies before the pandemic and increased further during 2020. - Households’ marginal propensity to consume (MPC) estimated from prefecture-level data dropped to multi-year lows in 2020, particularly for rural households. - The annual growth rate differential between household consumption expenditure per capita and disposable income per capita widened to -6.3 percent in 2020. - Household savings rate remained elevated at 35 percent in 2021Q2—well above its pre-pandemic level of 30 percent. ### Distributional patterns of savings and inequality - Savings rates vary significantly across income levels and between urban and rural households. - Prefecture-level data indicate savings rates increase with income levels; savings rates rose substantially in 2020 for all income groups, with high-income households seeing a more prominent increase. - Urban household savings rates are significantly higher than rural household rates. - The difference between urban and rural households’ disposable income per capita nearly tripled from 11 thousand RMB in 2009 to 27 thousand RMB in 2020 (though the ratio between them has declined). - Income inequality dynamics: - The decline in overall income inequality before the pandemic was likely driven by lower within-rural household inequality. - The income gap between urban households’ top and lowest income groups widened significantly over the past two decades. - The Gini coefficient for 2020 has yet to be published. - Increased income inequality can raise the aggregate savings rate via a composition effect because higher-income groups tend to save more. ### Potential macro and micro drivers of high household savings - Literature-highlighted drivers: - Demographic factors linked to the one-child policy (lower spending on children, less inter-generational support). - Precautionary savings due to lagged social protection transformation and falling job security during market transition. - Low returns on household deposits (empirical evidence scant). - Housing prices and housing ownership (mixed evidence; positive impact on urban income inequality). - Zhang and others (2018) conclude demographic changes and lagged social protection/job security contributed most, with rising house prices and income inequality also relevant. - This paper uses prefecture-level macro data and household-level micro data to analyze drivers, with emphasis on short-term factors amplified by the pandemic: weaknesses in social protection coverage and adequacy; rising household debt; household assets (particularly housing ownership); and income inequality. - Contribution: household micro data allow separate estimation of debt and wealth effects on the household savings rate. ### Social protection system and consumption - Despite policy efforts after the GFC, government spending in social security and health as a share of GDP remained broadly unchanged until the pandemic, with a minor rebound in 2020. - The social protection system remains incomplete and lacks adequate coverage and benefits; pension benefits remain low for rural households and healthcare access remains an issue for migrant workers. - Empirical findings (cross-sectional analysis across all 296 prefectural municipalities monitored by the NBS) show a significant positive relationship between social spending and urban and rural consumption. - Social security spending: - A 1-percent increase in social security spending per capita is associated with a 0.05—0.08 percent increase in household consumption expenditure per capita. - Example assessment at the mean: a 100-RMB increase in annual social security spending per capita (about 6 percent of the average social security spending per capita in 2019) is associated with an increase in annual urban consumption per capita of about 90 RMB. - Health spending: - A 1-percent increase in health spending per capita is associated with a 0.1—0.2 percent rise in rural consumption per capita (notably during 2018–19). - Example assessment at the mean: a 100-RMB increase in annual health spending per capita (about 9 percent of the average health spending per capita in 2019) is associated with an increase in annual rural consumption per capita of about 185 RMB on average. - Policy implication: differentiated targeting of social spending—social security enhancements have stronger associations with urban consumption, while health spending is more strongly associated with rural consumption—suggests targeted policy focus to reduce precautionary savings motives. ### Household indebtedness and savings - The literature finds short-term/medium-term effects of debt on growth differ; household debt can increase consumption in the short run but reduce it in the long run, with negative long-run effects intensifying when household debt-to-GDP exceeds certain thresholds. - More than half of Chinese household debt is housing-related. - Recent empirical studies for China find that rapid household debt growth since 2015 may have started to have a negative net impact on consumption growth and could reduce the income elasticity of consumption via higher debt service burdens. - Empirical analysis using CFPS longitudinal household data (panel regressions) finds: - Debt-to-income (DTI) ratios linked to mortgages and non-housing debt have positive associations with the savings rate for both urban and rural households. - Associations are statistically significant except for non-housing debt and the rural savings rate (likely due to limited rural access to consumption credit and hence lower non-housing debt service burdens). ### Implications for recovery and policy priorities - Continued high household savings risks reversing rebalancing toward private consumption-driven growth and could create upward pressure on the current account. - Rising income inequality is likely harmful for the pace and sustainability of growth through reduced equality of opportunity and curtailed investments in education by the poor and lower middle classes. - Reducing the high household savings rate and income inequality is important to achieve balanced and inclusive growth. - The chapter provides policy recommendations (detailed later in the chapter) focused on: - Strengthening coverage and adequacy of social protection (targeted social security and health spending to boost consumption and reduce precautionary savings). - Monitoring and managing household indebtedness and its distributional effects. - Addressing housing-market and asset-related channels and income inequality to support a more consumption-driven recovery. *Source: 1chnea2022002 - Introduction (IMF).* ### 15. Housing ownership could affect household savings behavior through various channels. ### 15. Housing ownership could affect household savings behavior through various channels. ### Channels linking housing ownership and household savings - Down payment effect: a tenant planning to buy a house would save more; rising housing prices strengthen this incentive. - Mortgage effect: homeowners need to save more to pay mortgages; analyzed above in the estimated debt impact. - Wealth effect: rising house prices make homeowners feel wealthier, inducing higher consumption and reduced savings. - Overall impact: net effect on savings depends on the relative strength of the down payment, mortgage, and wealth effects. - Non-housing assets: equities or other risky financial assets can have a debt effect (if funded by borrowing) and a wealth effect on consumption and savings. ### Empirical findings: housing ownership and savings (panel regressions, CFPS and prefecture-level) - Net housing assets (gross housing assets minus mortgages): - Have a significant negative association with the savings rate for both urban and rural households, indicating a significant housing wealth effect. - Magnitude: the wealth effect is much smaller than the debt effect for both urban and rural households, implying a more dominant mortgage effect on the savings rate than the wealth effect. - Non-housing assets: - Have a significant wealth effect for rural households only. - For urban households, the non-housing wealth effect (which reduces the savings rate) appears to dominate the non-housing debt effect (which increases the savings rate), likely reflecting urban households’ easier access to credit and higher non-housing debt service burdens. - For rural households with less access to non-housing credit, the non-housing wealth effect is more prominent. Key statistics from CFPS household-level regressions (Table 3: Dependent variable = Savings rate) - Sample sizes: - Observations (urban) 18,469 - Observations (rural) 17,960 - Coefficients (urban / rural) with significance: - total income: 18.889*** (urban); 21.824*** (rural) - mortgage debt to income ratio: 0.208* (urban); 0.287* (rural) - non housing debt to income ratio: 0.323** (urban); 0.035 (rural) - net housing asset to income ratio: -0.022** (urban); -0.054*** (rural) - saving to income ratio: -0.114 (urban); -0.443*** (rural) - R2: 0.118 (urban); 0.171 (rural) - F Statistic: 253.853*** (df = 5; 9528) for urban; 393.048*** (df = 5; 9531) for rural Key statistics from prefecture-level regressions: house price and consumption (selected) - Urban households (Table 1, Dependent = Log(Consumption)): - Disposable income coefficients: 0.858*** (2015); 0.875*** (2016); 0.874*** (2017); 0.860*** (2018); 0.852*** (2019) - Social security spending coefficients: 0.055*** (2015); 0.072* (2016); 0.060*** (2017); 0.066*** (2018); 0.051*** (2019) - House price to income ratio coefficients: 0.034*** (2015); 0.033*** (2016); 0.032*** (2017); 0.026*** (2018); 0.029*** (2019) - Observations: 223 (2015); 219 (2016); 225 (2017); 211 (2018); 185 (2019) - R2: 0.845 (2015); 0.827 (2016); 0.819 (2017); 0.851 (2018); 0.864 (2019) - Rural households (Table 2, Dependent = Log(Consumption)): - Disposable income coefficients: 0.790*** (2015); 0.801*** (2016); 0.793*** (2017); 0.793*** (2018); 0.749*** (2019) - Social security spending coefficients: 0.123*** (2015); 0.092*** (2016); 0.080*** (2017); 0.044 (2018); -0.008 (2019) - House price to income ratio coefficients: 0.012 (2015); 0.005 (2016); 0.005 (2017); 0.010* (2018); 0.008 (2019) - Observations: 202 (2015); 198 (2016); 207 (2017); 191 (2018); 172 (2019) - R2: 0.835 (2015); 0.831 (2016); 0.832 (2017); 0.830 (2018); 0.836 (2019) ### Income inequality and links to savings and housing - Savings inequality: - Prefecture-level data show household savings rate tends to increase with income levels (Figure 1). - Chinese household savings rates are higher than most countries at every income decile; the difference is particularly large for the poor. - Example: savings rate for the bottom 15 percentiles of Chinese urban households was about 11 percent in 2012 (estimates based on Chinese National Bureau of Statistics data). - In many other countries the savings rates for the bottom 10–20 percentiles are negative due to substantial social transfers supporting basic consumption (Zhang and others, 2018). - Income sources and inequality (CFPS, 2018): - Higher inequality in non-wage income sources, particularly housing-related income, contributed to overall income inequality. - Significant variation in within-province wage inequalities shown by wide distribution of the Lorenz curve across provinces relative to the national average. - Association with house price misalignment: - National Gini coefficient (available until 2019) shows a positive relationship with house price misalignment. - Positive association between housing prices and the Gini coefficient of urban household income: higher-income households benefit more from house price growth through housing-related income. ### Policy implications and recommendations - Strengthen social protection and reduce income inequality to help lower China’s elevated household savings rate: - Increase government spending on social security and health: - Higher social security and health spending is associated with higher household consumption and lower precautionary savings, especially if targeted on health spending in rural areas and on social security spending in urban areas. - Unemployment and social assistance reform could boost household economic security through better coordination between central and local governments, promotion of transfers of insurance and benefits between urban and rural areas, and a more generous minimum income guarantee program and non-contributory basic pension for rural and non-salaried urban residents (SIP 1). - Continued Hukou reform can help ensure migrant workers have the same access to the social safety net as urban workers (Lam and Wingender, 2015). - Spending on education does not appear to have a direct impact on household savings but would help reduce income inequality in the future by providing equal education access to the poor (Zhang and others, 2018). - Improve macroprudential policy framework and toolkit to contain household debt and reduce house price misalignment: - The larger mortgage effect on the savings rate than the wealth effect suggests macroprudential policies targeted at reducing housing-related debt can help lower the savings rate and address house price misalignment. - International experience indicates demand-side macroprudential measures—limits on debt-service-to-income ratios and loan-to-value ratios—are effective in mitigating negative effects of household debt on consumption and GDP growth (Han and others, 2019). - In particular, limits on debt-service-to-income ratio could be lowered and extended to fully cover household loans from non-bank financial institutions. - Reducing house price misalignment could help improve income inequality since higher-income households typically benefit more from house price growth. - Increase social transfers to poor households and improve efficiency of social transfers via better risk-sharing: - Further increasing social assistance spending would help reduce income inequality and low-income households’ savings rates, contributing to a lower national savings rate. - Increasing efficiency of central government transfers by introducing an automatic and non-regressive fiscal risk sharing mechanism could achieve higher fiscal risk-sharing and similar redistribution effects at lower costs, freeing resources for social transfers to the poor (IMF, 2021). ### Data and empirical strategy (summary) - Prefecture-level data: - Source: revamped household survey for 296 prefecture-level municipalities during 2015-19 (NBS). - Key variables: urban and rural disposable income, house price, government spending in social security and employment, government spending in health, government spending in education. - Method: cross-section regressions year by year for 2015-19, separate for urban and rural households; consumption equation uses log(consumption) regressed on log(disposable income), log(government spending in social security), log(government spending in health), log(government spending in education), and HPI (house price-to-disposable income ratio). - Household-level data: - Source: China Family Panel Studies (CFPS) waves 2012–2018 (every two years). - Sample cleaning: households with zero or negative reported income or expenditures dropped; estimated savings rate samples restricted to values between -100 percent and 100 percent. - Dependent variable: household savings rate defined as residual of disposable income less consumption as a share of disposable income. - Method: fixed effects panel regressions of savings rate on log(disposable income), lagged mortgage-to-income ratio (DTI_mortgage), lagged non-housing debt-to-income ratio (DTI_non-housing), net housing asset-to-income ratio (ATI_housing), and saving-to-income ratio (ATI_saving), for urban and rural households respectively. *Source: 1chnea2022002 - 15. Housing ownership could affect household savings behavior through various channels.* ### Introduction ### Introduction ### Role, history, and policy context - Local government financing vehicles (LGFVs) have been used for decades to finance public infrastructure and provide countercyclical investment during downturns. - Widespread use stems in large part from fiscal reforms in 1994 that decreased local governments’ share of tax revenues, and prohibitions on direct local government borrowing that were lifted only in 2015. - Key policy and regulatory milestones: - 2013: National Audit Office (NAO) audit of LGFV debt; followed by legal amendments that prohibited local governments from borrowing via LGFVs and a plan to refinance NAO-identified public liabilities into sub-sovereign bonds issued directly by provincial governments. - Debt-swap program shifted some 14 trillion RMB in LGFV debt to the official public balance sheet. - 2014: Regulations passed that prohibit local governments from borrowing through LGFVs or assuming liability for repayment of LGFV debts. - 2018: Authorities forbade local government guarantees for LGFV debts and introduced measures to make local government officials responsible for debt accumulation on their watch. - Early 2021: Authorities tightened channels for new LGFV borrowing for the most indebted local governments (except refinancing of existing debt) through administrative and prudential measures, including tighter controls on working capital loans. ### Data and measurement approach - IMF measurement approaches: - Historically used a top-down approach based on NAO’s 2013 audit. - Beginning in 2020, switched to a bottom-up approach using firm-level financial statements of bond issuers classified as LGFVs by NAFMII. - By the bottom-up measure, LGFV debt reached 39 percent of GDP in 2020, up from 34 percent in 2018. - Database and sample: - Sample of over 14,000 Chinese nonfinancial firms with financial statements from S&P Capital IQ, including: - 2200 identified as non-LGFV SOEs, - 8300 privately-owned entities (POEs), - roughly 1500 firms with other ownership designations. - Database incorporates Capital IQ information on investment transactions and relationships. - The dataset includes about 2200 LGFVs (noting the likely exclusion of some 7000 smaller LGFVs that may not have issued bonds). ### Size, composition, and growth of LGFV balance sheets - Aggregate balance-sheet magnitudes and growth: - Total LGFV assets reached 120 percent of GDP in 2020, after five years of 15 percent annual growth. - Total liabilities reached about 75 percent of GDP, after growing 16 percent, with interest-bearing debt about two-thirds of that. - Asset composition (2020 vs 2015): - Infrastructure and other physical assets (including inventories): 48 percent of LGFV assets, down from 52 percent in 2015. - Financial assets (accounts receivable, investments in securities, cash, loans, company equity, and other unspecified tangible assets): 48 percent of LGFV assets, up from 42 percent in 2015. - Intangible assets: 4 percent of LGFV assets. - Key balance-sheet line items: - Receivables (largely arrears from local governments): at least 18 percent of GDP and the fastest growing portion of LGFV balance sheets. - Inventories (largely land and real estate): equivalent to 30 percent of GDP, or over a quarter of LGFV balance sheets. - Estimated LGFV equity and debt exposures to other enterprises (excluding deposits and cash-like securities): at least 12 percent of GDP (and likely higher). - Non-interest bearing liabilities (largely accounts payable): equivalent to 26 percent of GDP. ### Interconnectedness with the corporate and financial sectors - Investment and ownership linkages: - LGFVs have direct or indirect investments in almost 3400 firms, and are linked via a common parent investor with another 1600 firms — collectively roughly 5000 firms. - The roughly 5000 firms include over 1000 private firms, 58 banks, 112 securities companies/insurers/trust companies, and at least 660 other LGFVs. - Of the 5000 firms with LGFV investment linkages, 2585 are nonfinancial, non-LGFV firms captured in the 14,000-firm database. - Share of sample represented: - LGFV-linked SOEs account for 48 percent of all SOEs within the database and 62 percent of their SOE assets. - LGFV-linked POEs account for about 14 percent of all POEs within the sample and 32 percent of their assets. - LGFVs also receive claims from other firms: - Nearly 1000 other firms and funds have direct or indirect claims on LGFVs, although only 123 are captured in the financial-statement database. ### Financial vulnerabilities and systemic risk - Debt-at-risk and leverage metrics: - Stock of LGFV debt-at-risk (debt not backed by earnings sufficient to cover interest payments): equivalent to about 37 percent of GDP. - Reported equity buffers: equivalent to 38 percent of assets or 45 percent of GDP (but may be overstated due to arrears and inventory accumulation). - Cash-flow fragility: - LGFVs’ continuous deferral of income and large spending on inventories in excess of sales mean actual cash flows are considerably weaker than reported incomes, heightening dependence on new financing. - LGFVs’ accounts receivable and inventories have grown relative to realized income, indicating valuation risks. - Contagion channels: - LGFVs’ investments in and linkages with banks, securities firms, insurers, trust companies, private firms, and other LGFVs increase the likelihood that financial stress at LGFVs would spread to other firms, asset markets, and the broader economy. - Rating agencies note LGFVs are active providers of credit guarantees to local firms, creating additional contingent liabilities likely amounting to trillions of RMB. ### Implications for productivity and credit efficiency - Support for firm-level investment: - The 2643 nonfinancial, non-LGFV firms with investment links to LGFVs tend to undertake more investment relative to their income and carry more debt relative to their income (controlling for year and sector effects). - This pattern holds for LGFV-linked private firms. - Capital productivity and potential misallocation: - LGFV-linked firms tend to have lower capital productivity, proxied by revenue per unit of fixed assets (controlling for year and sector effects), compared to unaffiliated firms. - At the sector level, LGFV-linked firms in capital goods, materials, semiconductors, and technology sectors appear to have lower capital productivity. - While correlations do not establish causality, these findings point to LGFVs’ role in propagating the prevalence of inefficient firms and a possible contribution to the broader slowdown in aggregate manufacturing productivity growth. ### Use of financing and fiscal trade-offs - Sources and uses of cash: - Aggregated cash flow statements show that 80 to 90 percent of LGFV spending is funded by infusions of new external financing each year, primarily debt. - Less than half of that spending has been used for capital expenditure in public investments like infrastructure. - The remainder is used for operating costs (interest payments, inventory accumulation such as land and real estate, employee payrolls) and investments in financial assets (company equity and lending). - Magnitude of refinancing of operating spending: - LGFVs with negative operating cash flows — a segment accounting for about three quarters of LGFV debt — have used at least RMB 10 trillion of net new financing on operating spending and financial investments over the last three years. - This RMB 10 trillion is equivalent to an average of roughly 20 to 30 percent of the new flow of total social financing for nonfinancial firms. - Fiscal and welfare trade-offs: - Debt-financed spending on operating costs and financial investments generates interest-bearing debt in exchange for spending without long-term benefits for growth or productivity; ideally such spending should be covered by recurring taxes or operating revenues. - In 2019, LGFV outlays on operational expenditure and financial investments amounted to nearly 50 percent of local government spending on education and social safety nets. - Redirecting spending toward education and social safety nets could yield relatively large returns for human capital, especially where such spending is relatively low. ### Urgency of reform and areas for policy focus - The combination of large and growing balance sheets, substantial receivables and inventories, extensive investment linkages, and high dependence on new financing underscores the urgency of comprehensive restructuring and reform. - Key reform objectives implied by the analysis: - Contain growth in LGFV debt and limit channels for nonproductive borrowing. - Improve transparency and formal legal distinction between LGFVs and other state-owned enterprises to enable better measurement and oversight. - Shift fiscal and financing practices to reduce debt-financing of operating expenditures and financially speculative investments, and to prioritize spending with higher long-term productivity and social returns. - Address contingent liabilities arising from credit guarantees and interlinkages with the financial sector to limit systemic spillovers. *Source: Introduction, 1chnea2022002 - Introduction (IMF).* ### 17. Policy uncertainty around the ### 1chnea2022002 - 17. Policy uncertainty around the ### LGFV market access and investor perceptions - LGFVs rely on perceived financial support of parent local governments to obtain credit; this perceived support is increasingly uncertain for some LGFVs. - In provinces where official local government debt has risen rapidly relative to both provincial GDP and local government revenues, investors have become concerned about the government’s capacity or willingness to backstop weak firms, reflected in widening credit spreads for local LGFVs. - Central authorities have taken steps to limit new borrowing at certain heavily indebted LGFVs and pushed provincial governments to address excess indebtedness through cost-cutting, asset sales, or other uses of local public sector resources. ### Macrofinancial risks and transmission channels - LGFVs have limited income and intrinsically weak cash flows, making them reliant on external financing for investment activities and operating cash flow deficits. - If LGFVs’ access to credit becomes significantly constrained, macrofinancial stability could be affected through multiple channels: - LGFVs’ weakening role as local investor and guarantor: - Tighter credit conditions would limit LGFVs’ capacity to undertake new infrastructure projects and to facilitate investment by other local firms. - LGFV market access troubles may reduce availability of credit for other firms, especially LGFV-affiliated firms; in provinces with unfavorable LGFV credit pricing, growth in LGFV debt has slowed, as has growth in total private debt. - Credit losses and spillovers through banks: - Many LGFVs lack the ability to generate sufficient earnings to cover interest expense for three consecutive years; such risky debt amounted to about 20.1 trillion RMB as of 2020, or 44 percent of total LGFV debt (in the sample). - Even a small LGFV default rate of 5 percent would be equivalent to a roughly 75 percent increase in banking system NPLs. - Impact likely concentrated on smaller local banks with weaker buffers and higher exposure to LGFVs with limited state support, potentially constraining credit provision to local firms. - Regional risk re-pricing: - Following SOE defaults in late 2020, corporate credit conditions tightened for some borrowers, more so in provinces with relatively weak public finances and/or recent local SOE defaults. - Further repayment difficulties of local SOEs and LGFVs could prompt investors to re-evaluate local governments’ willingness and capacity to support local firms, potentially leading to significant restrictions in access to credit for firms in the region. - Fiscal and macroeconomic feedback loops: - Constrained LGFV financing would force LGFVs to scale back investment, hurting economic growth. - A drop in fiscal revenues from economic slowdown and any fiscal support to LGFVs would strain local governments’ fiscal resources, reducing their capacity to backstop local firms and further tightening credit conditions—creating negative local feedback loops. - Many provinces could see a sharp increase in their public debt should contingent liabilities associated with weak LGFVs materialize, putting significant stress on local governments’ finances. ### Quantitative estimates and key figures - Operating cash flow shortfall if LGFVs’ access to credit is constrained: 23 trillion RMB (unless they sell assets and/or receive fiscal support). - Example scenario elements presented: - Cash drawdowns of up to RMB 0.5 trillion could be used to fund operating cash flow deficits... - ...leaving an Operating Cash Flow Shortfall of RMB 2.3 trillion... to be funded by fiscal support or asset sales. - RMB 2.3 trillion = ~23% of Local Government Tax Revenues. - If new credit growth restricted to 0%: Investment spending would decline by RMB 5.4 trillion (unless financed by fiscal support or asset sales). - Risky LGFV debt amounting to 20.1 trillion RMB as of 2020 = 44 percent of total LGFV debt (in the sample). - Small LGFV default rate of 5 percent ≈ roughly 75 percent increase in banking system NPLs. ### Conclusions and policy recommendations - Policies that focus primarily on limiting further LGFV debt growth may not be credible or sustainable given the potential for macrofinancial instability; restrictions on new financing may create negative macrofinancial and fiscal feedback loops and regional systemic stability risks. - Authorities should accelerate comprehensive restructuring of financially non-viable LGFVs using improved legal frameworks in addition to continued efforts to contain leverage. - Complementary actions to safeguard financial stability should include: - Phasing out implicit guarantees: - Phasing-out implicit guarantees is key to reduce excessive debt accumulation by LGFVs, but must be handled carefully with coordinated efforts to avoid unintended adverse macro-financial feedback loops between corporates, banks, and local governments, especially in regions with weak public finances. - Strengthening corporate restructuring and insolvency frameworks: - An effective, market-based framework should facilitate orderly deleveraging, restructuring, and exit of non-viable LGFVs. - Framework should incorporate all restructuring and insolvency options, be conducive to loss recognition and burden sharing through out-of-court, hybrid restructuring and the general corporate insolvency regime. - Improve insolvency procedures and coordination with other restructuring options; support specialization of judges and insolvency administrators. - Introduction of a comprehensive bank restructuring approach: - Banks need significantly stronger loss absorption capacity in the form of common equity buffers to cope with potential LGFV losses. - Some weaker banks may need resolution and closure, requiring a legal resolution framework in line with international standards to enforce recognition of losses, sale/transfer of assets, execution of bail-in, and preservation of critical bank functions. - A temporary fiscally backed centralized resolution fund could complement deposit insurance once a resolution regime is in place, contingent on mechanisms to recover losses from industry over time. - Legal and institutional fiscal reforms and intergovernmental risk sharing: - Reforms to reduce local governments’ need to borrow long term by aligning central government revenue with provincial spending and centralizing some responsibilities in education and healthcare previously shouldered by provincial governments. - Introduce a sound public debt management legal framework requiring strong central financial oversight via administrative controls for local borrowing. - Improve reporting systems for timely and reliable data on local government debt and extra-budgetary activities. - Strengthen accountability mechanisms, especially audits and proportional sanctions for non-compliance. - Enhance fiscal risk sharing between financially weaker and stronger provinces (for example, through conditional central government transfers) to address unsustainable public finances and mitigate macrofinancial feedback loops in weaker provinces. *PEOPLE’S REPUBLIC OF CHINA — INTERNATIONAL MONETARY FUND* ### 5. An extensive literature documents how business dynamism matters for aggregate ### 5. An extensive literature documents how business dynamism matters for aggregate productivity ### Key empirical findings on China’s declining business dynamism - Overview: Five empirical facts document a decline in China’s business dynamism: (1) the share of young firms has declined; (2) life-cycle growth of young firms relative to older incumbents has become more feeble; (3) younger and smaller firms are more capital constrained than older and larger firms; (4) the economy’s ability to allocate capital has worsened over time; (5) large and persistent productivity gaps exist between SOEs and private firms. - Fact 1 — Decline in young firms’ share: - The share of firms under 10 years old fell from around 70 percent in 2003-04 to around 30 percent in 2017-18. - This low share in recent years persists when including firms below the RMB 5mn revenue threshold (expanding the sample from around 200,000 firms to 700,000 firms). - Similar low revenue shares for young firms are found using Orbis data on services sector firms. - Fact 2 — Life-cycle growth of young firms weakened: - Average 3-year firm revenue growth by age group (relative to 16 years +) split into 2003-2010 and 2011-2018 shows that firms under the age of 10 grow substantially less (relative to older firms) in 2011-2018 than in 2003-2010. - Controlling for initial firm size makes growth rates for startups (firms age 1-2) in 2011-2018 significantly lower than in 2003-2010. - Evidence indicates productivity growth of young firms relative to older firms is much weaker — young firms are investing relatively less in process efficiency and quality improvements than in the previous decade. - Fact 3 — Younger and smaller firms are more capital-constrained: - In 2017-18, younger and smaller firms have much higher capital productivity (revenue per unit of capital) than older and larger firms. - These differences suggest large potential gains from capital reallocation; financial frictions are likely an important barrier to firm growth today. - Fact 4 — Worsening capital allocation over time: - Dispersion in total asset growth declined from 0.126 in 2003-2007 to 0.083 in 2013-2018. - Elasticity of capital growth to initial capital productivity declined from 0.096 in 2004-2007 to 0.059 in 2016-2018. - The decline in responsiveness is particularly marked among the youngest and oldest firms, consistent with older and less productive firms being better able to access finance at the expense of younger and more productive ones. - Fact 5 — Persistent SOE vs POE productivity gaps: - SOEs have consistently had lower revenue productivity than private firms, with an average gap of around 4-5 percent. - These gaps are almost exclusively explained by SOEs’ lower capital productivity. - For services (2013-2018), gaps are somewhat smaller but still statistically and economically significant. ### Regional heterogeneity and the role of SOE intensity - Motivation: Investigate whether regional/state presence (measured by SOE intensity—the asset share of SOEs in Orbis) is associated with lower private-sector dynamism. - Young firms’ growth and local SOE intensity: - Regressing 3-year average growth rates of young firms (age < 5) relative to old firms (16+) on initial SOE intensity (controlling for year and sector or province fixed effects) shows: - Higher provincial SOE intensity is associated with weaker revenue growth, capital growth and TFPQ growth for young firms relative to older firms. - Text Table (coefficients; standard errors in parentheses): - Revenue Growth: SOE Intensity -0.007** (0.00352); Observations 394; R2 0.237 - Capital Growth: SOE Intensity -0.006** (0.00302); Observations 394; R2 0.269 - TFPQ Growth: SOE Intensity -0.0035** (0.00157); Observations 394; R2 0.264 - Capital responsiveness and provincial SOE intensity over time: - Regressions of firm-level capital growth on ln(ARPK) (average product of capital) with interactions for provincial SOE-intensity terciles show: - 2003-2007: ln(ARPK) 0.096*** (0.0015) - 2013-2018: ln(ARPK) 0.070*** (0.0020) - ln(ARPK) x Medium SOE Intensity: 2003-2007 -0.002 (0.0019); 2013-2018 -0.040*** (0.003) - ln(ARPK) x High SOE Intensity: 2003-2007 0.003 (0.0019); 2013-2018 -0.035*** (0.0028) - Observations: 2003-2007 = 628,666; 2013-2018 = 318,616 - R-squared: 2003-2007 = 0.06; 2013-2018 = 0.049 - Interpretation: No significant link in 2003-2007, but in 2013-2018 provinces with medium and high SOE intensity exhibit significantly lower capital responsiveness — suggesting worse allocation of capital to high-productivity private firms in high-SOE-intensity regions. - Mechanisms and implications: - Local regulatory barriers or political economy factors may lead young firms in high-SOE-intensity provinces to underinvest in productivity and market expansion. - Local banking and financial systems may be less efficient at allocating capital where they are incentivized to lend to SOEs, worsening allocation among private firms. ### Reform priorities and policy implications - Broad reform direction: - Pro-market reforms could boost productivity growth by promoting competition and improving factor allocation. - Suggested reforms: remove barriers to entry (including further opening up non-strategic sectors to domestic and foreign firms), remove regional regulatory barriers, implement a transparent and predictable anti-trust framework treating SOEs and private firms equally, and strengthen corporate restructuring and insolvency frameworks to facilitate market-based exit (including of SOEs) while ensuring financial stability. - SOE reform specifics: - SOE reform could boost productivity directly through resource reallocation and indirectly by stimulating business dynamism. - Reductions in SOE intensity (as in the 2000s) could spur young firms’ investments in productivity improvements and market expansion by loosening explicit and implicit barriers that favor SOEs in product and factor markets. *Source: 1chnea2022002 — Chapter 5, PEOPLE’S REPUBLIC OF CHINA, INTERNATIONAL MONETARY FUND* ### References ### 1chnea2022002 - References ### References (selected) - Akcigit, U., and S. Ates. 2019a. “Ten Facts on Declining Business Dynamism and Lessons from Endogenous Growth Theory.” NBER Working Paper 25755, National Bureau of Economic Research, Cambridge, MA. - Akcigit, U., and S. Ates. 2019b. “What Happened to U.S. Business Dynamism?” NBER Working Paper 25756, National Bureau of Economic Research, Cambridge, MA. - Akcigit, U., W. Chen, F. J. Díez, R. Duval, P. Engler, J. Fan, C. Maggi, M. M. Tavares, D. Schwarz, I. Shibata, and C. Villegas-Sánchez. 2021. “Rising Corporate Market Power: Emerging Policy Issues.” IMF Staff Discussion Note No. 2021/001. - Alon, Berger, Dent and Pugsley. 2018. “Older and Slower: The Startup Deficit’s Lasting Impact on Productivity Growth.” Journal of Monetary Economics, Volume 93, Pages 68-85. - Bai, Liu and Tian. 2018. “Do Financial Frictions Explain Chinese Firms’ Saving and Misallocation?” NBER Working Paper 24436, National Bureau of Economic Research, Cambridge, MA. - Berkowitz, D., H. Ma and S. Nishioka. 2017. “Recasting the Iron Rice Bowl: The Reform of China’s State-Owned Enterprises.“ The Review of Economics and Statistics, Vol. 99, Issue 4, Pages 735-747. - Brandt, L. and K. Lim. 2020. “Accounting for Chinese Exports.“ Unpublished. - Brandt, L., G. Kambourov and K. Storesletten. 2020. “Barriers to Entry and Regional Economic Growth in China.“ CEPR Discussion Paper No. DP14965. - Brandt, L., J. Van Biesebroeck and Y. Zhang. 2012. “Creative accounting or creative destruction? Firm-level productivity growth in Chinese manufacturing.” Journal of Development Economics, Vol. 97(2), Pages 339-351. - Brandt, L. J. Van Biesebroeck, L. Wang and Y. Zhang. 2017. “WTO Accession and Performance of Chinese Manufacturing Firms.“ American Economic Review, Vol. 107, No. 9. - Cerdeiro, D. and C. Ruane. TBD. IMF Working Paper No. XXXX. - Eslava, Pinzon and Haltiwanger. 2019. “Job creation in Colombia vs the U.S.: “up or out dynamics” meets “the life cycle of plants”.” NBER Working Paper 25550, National Bureau of Economic Research, Cambridge, MA. - Garcia-Macia, D., C.-T. Hsieh and P. Klenow. 2019.“How Destructive is Innovation?“ Econometrica, Vol. 87(5), Pages 1507-1541. - Haltiwanger, J., R. S. Jarmin and J. Miranda. 2013. “Who Creates Jobs? Small versus Large versus Young.“ The Review of Economics and Statistics, Vol 95(2), Pages 347-361. - Hsieh, C.-T. and P. Klenow. 2009. "Misallocation and Manufacturing TFP in China and India." Quarterly Journal of Economics, Vol. 124, Pages 1403-1448. - Jurzyk, E. and C. Ruane. 2021. “Resource Misallocation Among Listed Firms in China: The Evolving Role of State-Owned Enterprises.” IMF Working Paper No. 2021/075. - Pugsley, B. and A. Sahin. 2019. "Grown-up Business Cycles." The Review of Financial Studies, Volume 32(3), Pages 1102-1147. - Tombe, T. and X. Zhu. 2019.” Trade, Migration, and Productivity: A Quantitative Analysis of China.” American Economic Review, Volume 109, No. 5, Pages 1843-1872. ### Recent developments in the e-CNY pilot program (A) - Expansion of pilots - Previously tested in four locations since end-2019: Shenzhen, Suzhou, Xiong’an, and Chengdu; planned for foreigner-use scenarios in the 2022 Beijing Winter Olympics. - Since November 2020, pilot tests expanded to more than ten cities and regions, including rural areas and Hong Kong SAR (cross-border test). - The pilot program covers a wide range of regions, aligning with coordinated regional development strategies and preparing for a nationwide rollout. - Application scenarios and scale - As of end-June 2021, e-CNY has been applied in over 1.32 million scenarios, covering utility payment, catering service, transportation, shopping, and government services (PBC, 2021a). - Devices with e-CNY payment functions are being deployed in Olympics venues for planned foreigner-use scenarios. - PBC White Paper: objectives and design - Objectives: meet public demand for digital cash, support financial inclusion, facilitate fair competition, increase efficiency and safety of retail payment services; explore cross-border payment improvements via collaboration. - Key design/features: - e-CNY is the digital version of the RMB, characterized chiefly as a substitute for cash in circulation (M0) but not M2, and will coexist with the physical RMB. - Two-tiered system: PBC issues and disposes e-CNY (first tier); authorized operators (commercial banks, payment service providers, telecom operators) provide account opening and exchange services within PBC-managed quota (second tier). - Legal tender status to be instituted by the revised draft Law of the PBC (revised draft for comments). - Transferable without bank accounts; supports higher anonymity relative to private digital payments that rely on bank accounts and KYC procedures. - Supports off-line transactions and has “settlement upon payment” feature. - Wallet structure: - Matrix classification by ID requirement (wallets with different transaction and balance limits), type of holder (personal or corporate), carrier (software or hardware wallets), authorization (parent or sub-wallets). - First-level wallet does not require ID information but requires a valid mobile phone number typically linked to a real ID in China. - Hardware wallet options: IC cards, mobile phones, wearable objects (e.g., badges and clothes with payment functions). - Data privacy and security: - “Managed anonymity”: small transactions largely anonymous; large ones traceable for AML/CFT. - ID data collected by e-CNY is less than other electronic payments and will not be shared with other government agents. - Preliminary multi-layer security system, use of frontier technologies (e.g., decentralized identity service), and an internal “firewall” inside PBC to separate e-CNY information. ### Key macrofinancial benefits and risks in domestic use (B) - Potential benefits - Lower payment service costs: - e-CNY is a new interoperable means of payment, free of charge to users by the PBC or second-tier operators, usable in digital payment platforms including banks’ e-CNY apps. - Could diversify payment instruments and reduce market dominance by a few market players (Alipay and Tenpay had over 90 percent combined market share in 2020). - Enhance financial inclusion and fiscal support efficiency: - Marginal domestic inclusion benefits likely relatively less given advanced private digital payments, but e-CNY could help reach unbanked populations in rural and remote areas (hardware wallets for those without smart mobile phones). - Example: pilot cities distributed fiscal subsidies to local financial institutions and guarantee firms via corporate e-CNY wallets as pandemic support rewards. - Potential risks and operational challenges - Data privacy and cybersecurity risks: - Risks include: i) security of CBDC wallets against cyberattacks; ii) prevention of fake wallets; iii) secure collection, storage and usage of private data; iv) cybersecurity of second-tier operators (smaller banks, nonbank institutions); v) business continuity against weather-related disruptions from climate change. - Significant operational risks particularly for large-scale or nationwide issuance. - Bank run risk and competition with bank deposits: - CBDCs positioned as the most secure digital payment instrument could attract savings away from commercial bank deposits, increasing central bank balance sheet and crowding out deposits at commercial banks. - Potential impacts: increased cost of funds for banks, adverse effects on monetary policy effectiveness and financial stability (Andalfatto, 2020; Fernandez-Villarverde and others, 2020). - Central bank reinvestment role could change as it receives massive inflows (Auer and Böhme, 2021). - Financial integrity and AML/CFT concerns: - Outcomes depend on design: strict transaction limits can strengthen integrity; full anonymity with large-value transactions could undermine integrity relative to cash and current non-cash systems (IMF, 2018). - PBC mitigation measures and remaining needs - Data security and governance: - PBC has established a multi-layer security system and an internal “firewall”; e-CNY to comply with the Data Security Law (DSL) and Personal Information Protection Law (PIPL). - Telecom operators not allowed to share user identity data from e-CNY apps to third parties including the PBC; sharing for higher-KYC wallets requires individual permission. - Recommendation: establish a prudent and transparent regulatory and data governance framework aligned with DSL and PIPL; test and strengthen cybersecurity capacity of smaller banks via ongoing pilots. - Measures to reduce bank run risk: - PBC announced zero interest rate on e-CNY and imposed limits on transaction and balance amounts for e-CNY wallets to increase frictions for conversion from bank deposits. - Note: run risk cannot be completely ruled out; frictions need balance between reducing run risk and enhancing payment competition (Carstens, 2021). - Financial integrity steps: - Conduct money laundering/terrorist financing risk assessments for domestic and cross-border uses; implement risk-sensitive mitigation measures and risk-based supervision of e-CNY operating institutions. - Planned AML/CFT guidelines for e-CNY operating institutions noted as welcome. - Longer-term implications for fintech and data - e-CNY may separate payment functions from lending business, creating uncertainty over sharing of user data between payment and lending arms. - Possible fragmentation of payment “big data” across PSPs could reduce usefulness for credit risk analysis, accelerating fintech business model changes. - Commercial banks may regain payment-market relevance and use collected payment data to enhance credit risk assessments (Huang and others, 2020). - Importance of prudent and transparent regulations for PBC’s usage of e-CNY payment data. ### Cross-border use: benefits and risks (C) - Potential cross-border benefits - Further cuts in transaction costs for remittances and cross-border payments by flattening correspondent banking structures and shortening payment chains (BIS, 2020; IMF, 2020b). - Example statistic: average total cost of a US$200 bank-based cross-border remittance is over 10 percent of the remittance value based on a sample of 112 countries (BIS, 2020). - Easier access for households and corporates to a wider range of cross-border financial services leveraging transaction-generated big data. - Cross-border risks and policy challenges - Currency substitution and internationalization effects: - CBDCs could quantitatively reinforce incentives for currency substitution and international use, potentially raising pressures that worsen vulnerabilities from currency mismatches and reduce local monetary policy effectiveness (IMF, 2020b). - Facilitation of illicit flows and enforcement challenges: - Cross-border CBDCs could facilitate illicit flows and complicate enforcement of exchange restrictions and capital flow measures without appropriate safeguards. - Elevated data privacy and security concerns: - Harder to monitor and coordinate regulatory responses across borders; higher data privacy and security risks in cross-border transactions. - Need for multilateral collaboration: - Multilateral collaboration to agree on design principles is key to addressing central bank concerns regarding currency substitution risk, capital flow volatility, and contagion risk (BIS and others, 2021). *International Monetary Fund — PEOPLE’S REPUBLIC OF CHINA chapter (References and e-CNY sections).* ### 9. Similar to many other central banks, the PBC has been actively exploring the cross- ### 9. Similar to many other central banks, the PBC has been actively exploring the cross-border use of CBDCs ### e-CNY cross-border test - The e-CNY is mainly used for domestic retail payments at this stage but "is technically ready for cross-border use as well" (PBC, 2021a). - The PBC signed an MOU with the Hong Kong Monetary Authority (HKMA) to technically test the use of the e-CNY in Hong Kong SAR through PBC-designated banks. - The technical test reportedly includes: - Exploring ways to minimize potential disruptions to the Hong Kong dollar (e.g., currency substitution risk). - Achieving interoperability with the Faster Payment System in Hong Kong SAR, a local payment system that connects banks and digital wallet operators. - A key measure in the Hong Kong SAR test is mandatory conversion between the e-CNY and Hong Kong dollar (HKD): e-CNY payments from a Mainland Chinese e-CNY wallet are automatically converted into HKD in the Hong Kong SAR receiver’s HKD account. - The Hong Kong SAR authorities decide whether local individuals or corporates can open e-CNY wallets; absence of local restrictions could allow Hong Kong SAR merchants to open and hold e-CNY wallets, potentially weakening the mandatory conversion’s effectiveness. - Possible enforcement tools cited include checking IP addresses to enforce the use of HKD. - China’s capital account restrictions and capital flow management measures could pose technical and policy challenges for the e-CNY’s cross-border use given "China’s largely closed capital account." ### mCBDC Bridge project (wholesale CBDC research) - The PBC is researching cross-border use of wholesale CBDCs with other central banks and the BIS in the mCBDC Bridge project. - The project explores the capabilities of distributed ledger technology (DLT) and CBDC to facilitate real-time cross-border foreign exchange payment-versus-payment transactions in a multi-jurisdictional real-time context. - The project is developing a DLT-based cross-border corridor network prototype to: - Support multiple currencies. - Interface with new or traditional domestic payment systems. - Alleviate pain points in cross-border fund transfers (e.g., inefficiencies, high cost and complex regulatory compliance). - Evaluate the feasibility of CBDCs for cross-border fund transfers, international trade settlement, and capital market transactions. - The project adopted three general principles: - (i) no disruption to other monetary authorities or international monetary system, - (ii) compliance with local regulations, - (iii) interoperability between different CBDC systems as well as between CBDC and traditional payment systems. - Although the e-CNY is currently positioned as a retail CBDC, it uses a hybrid model, which "is flexible and adaptable to any technology (including the DLT)," and hence can be adapted to wholesale use in the mCBDC Bridge project. - Historical note: the project was first initiated bilaterally by the HKMA and the Bank of Thailand under the name Inthanon-LionRock, and was renamed to m-CBDC Bridge when the PBC, the central bank of UAE, and the BIS joined. ### Principles, policy measures, and risks for cross-border e-CNY use - The PBC has committed to complying with the three general principles to minimize potential currency substitution risk; these are high-level objectives and implementation is being studied and tested, including in the Hong Kong SAR pilot. - Implementation considerations and measures described: - Mandatory conversion of incoming e-CNY into HKD accounts in Hong Kong SAR. - Local authorities’ control over wallet access for local individuals and corporates. - Enforcement measures such as IP address checks if local wallet-opening is unrestricted. - Risks and challenges identified: - Currency substitution risk (potential disruptions to the Hong Kong dollar). - Technical and policy challenges from China’s capital account restrictions and capital flow management measures. - The degree to which mandatory conversion or local restrictions can be enforced if local entities can hold e-CNY wallets. ### Impact on RMB internationalization - Assessment: "The e-CNY alone is unlikely to significantly push forward the RMB internationalization." - Rationale and findings: - CBDCs could quantitatively reinforce incentives behind currency substitution and currency internationalization, but are unlikely to qualitatively change the economic forces that lead to the international use of currencies (IMF, 2020b). - The e-CNY could help RMB internationalization by lowering transaction costs, but its digital form alone is "unlikely to have a substantial impact." - Global demand for a country’s currency depends mainly on its economic fundamentals as well as financial market depth and openness. - The RMB or e-CNY is still not freely convertible under the capital account, limiting internationalization effects. *Source: 1chnea2022002 - 9. Similar to many other central banks, the PBC has been actively exploring the cross-* ### 11. China’s reform commitments have the potential to improve market access not only for ### China’s reform commitments have the potential to improve market access not only for ### Market access and negative list approach - Reform commitments under recent agreements increasingly govern market access by the negative list rather than business ownership. - Pace of reform is expected to be rapid in manufacturing sectors which have fewer restrictions in the negative list. - Services sector opening is likely to gain traction after the CAI is ratified given that the standstill and ratchet mechanism has already been agreed upon in the recently upgraded FTA between China and New Zealand. ### Intellectual Property Right (IPR) Protection — institutional developments and outcomes - Institutional developments: - Four dedicated IP regional courts have been established since 2014. - 24 IP tribunals have been established since 2017. - An IP tribunal in the Supreme People’s Court was created in 2019. - Case outcomes and penalties: - Despite relatively high win rates for rights holders, penalties awarded remained low compared to legal costs. - Bian (2018) found: - Median damages awarded: USD4885.99. - Plaintiffs average win rate: 80 percent (compared to 66 percent in Germany and 60 percent in the US). - Permanent injunctions were automatically granted in 94 percent of the cases. - Foreign patent holders were more likely to win and receive permanent injunctions; damages awarded to foreign patent holders were about three times those to domestic patent holders. - Midsouth University IP center (2008–2013 averages): - Average damage awarded for copyright violations: RMB15,000 (USD 2277). - Average damage awarded for trademark violations: RMB326,000 (USD 49500). - Anjie Law Firm (2019) on 88 patent infringement cases (2016–2018) with damages over RMB 1 million: - Highest damage awarded: RMB 80.5million (USD12.7 million). - Median rose from RMB 1.03 million (USD 154,000) in 2016 to RMB 2.0 million (USD 300,000) in 2018. - Following the enactment of the 11th “Amendment to the Criminal Law” on March 1, 2021: - Criminal penalties for IP crime increased to a maximum of 10 years. - Amendment added a new article somewhat similar to the US’ Economic Espionage Act, according to Aaron Wininger (2021). ### IPR-related commitments in trade and investment agreements - US-China Phase I Agreement (Chapter 1, Intellectual Property): - Requires China to publish a detailed ‘Action Plan’ for strengthening IPR protection. - Commits China to increase IP enforcement actions in areas such as counterfeit goods and pharmaceuticals, protection of trade and business secrets, and regularly publish data on the impact of those actions. - China also agreed to raise penalties for IP theft. - RCEP (Chapter 11, Intellectual Property): - Focuses on IPR of cross border goods; detailed protection for copyright, trademark, patents, geographical indications, and genetic resources. - Streamlined and aligned enforcement procedures by authorizing customs in cross border trade and courts in civil judicial procedures when rights holders file complaints. - CAI (Section II, Article 3, Performance Requirements): - Prohibits disclosure of confidential information. - Specifically protects foreign investors from involuntary technology transfer and disclosure of confidential business information, including to regulatory bodies and local authorities. ### Assessment of IPR progress and remaining gaps - Recent legislative and regulatory revisions (including amendments to criminal law and patent law) and increased data disclosure address many Phase I concerns. - If implemented, commitments could lead to more efficient, less costly resolution of IPR disputes and higher penalties in court rulings. - Remaining issues: - High cost of litigation and still low monetary compensations suggest large room for improvement. - Need for simplification of domestic IPR arbitration and litigation processes and market-based evaluation of damages to equalize protection implied by recent agreements. ### Services trade — current practice and commitments - Current practice: - Cross border services providers still mostly follow a case-by-case approach. - Shanghai FTZ piloted a negative list for services trade in 2018. - Hainan Free Trade Port (FTP) introduced China’s first formal negative list in services trade and lowered the number of restricted service sectors from 159 in the Shanghai FTZ to 70. - A national negative list for services trade has yet to be published. - Commitments: - RCEP (Chapter 8, Trade in Services): - Mandates adopting a non-expanding negative list practice within 6 years. - At least 65 percent of service sectors will be fully open to members of the RCEP. - Includes fewer restrictions, lower entry and licensing requirements, and increased shareholdings in several services sectors (significant implications for education, financial and cultural services). - Upgraded China-New Zealand FTA (Chapter 9, Trade in Services): - Maintains white list approach though with access expanded in some areas. - Mandates standstill and ratchet mechanism via MFN treatment. - Commits to commence negotiation of a negative list based services framework within two years of entry into force (likely shorter than the six-year RCEP limit). ### Government procurement — transparency and reform trajectory - Historical negotiation: - China began WTO GPA accession negotiations in 2007 and submitted six revised offers; latest submission in 2019 included 26 provincial level authorities, permanent thresholds corresponding to those used by most parties, more SOEs and services sectors, and an offer on defense procurement. - Commitments in agreements: - RCEP (Chapter 16, Government Procurement): - Requires higher transparency through publishing laws and regulations on government procurement. - Disputes under Government Procurement chapter are not covered by the RCEP Dispute Settlement Mechanism. - Foresees opportunity for more extensive revisions every five years once China completes its GPA accession. - Upgraded China-New Zealand FTA (Chapter 20, Government Procurement): - Commits to laws and policies to conduct procurement with integrity and to prevent corruption. - Built-in agreement to enter market access negotiations with New Zealand once China completes its WTO GPA accession or negotiates market access on government procurement with another country. - Domestic reform proposals: - Proposed major revision to Government Procurement Law (GPL) in 2021 (first major revision since 2003). - October 2021 instruction to local governments to correct discrimination of foreign companies as supplier candidates. - Proposed GPL provisions: - Evaluation on lowest price or comprehensive scoring consistent with “most advantageous tender” rule in the GPA. - Requires suppliers to have the ability to undertake procurement; conditions to exclude suppliers (e.g., tax evasion) consistent with GPA practices. - Improves clarity and transparency on conditions, procedures, and dispute settlement. - Noted differences: proposed 20-day minimum tendering period versus 40-day requirement in the GPA. - Overall, revised GPL has potential to bring China’s procurement system closer to conforming with the GPA. ### Climate and labor commitments - China pledged: - To peak carbon emission by 2030. - To achieve carbon neutrality by 2060. - CAI (Chapter IV, Investment and Sustainable Development): - Includes binding and enforceable provisions on environment and labor standards that largely reaffirm voluntary commitments made in WTO, ILO and Paris Accord. - China committed to effectively implement the ILO’s Conventions it has ratified. - Assessment: - Binding climate and environment commitments in CAI are likely to complement domestic climate policies in the transition to a greener economy. - Implementation of climate strategy remains at early stages. ### Competition policy and State-Owned-Enterprises (SOEs) - Reform potential: - High potential to reform SOE sector and ensure competitive neutrality between SOEs and private firms, including access to credit and markets. - SOEs may benefit from possible undisclosed subsidies in various forms. - Commitments: - RCEP (Chapter 13, Competition): - Includes obligations to adopt or maintain competition laws and to establish independent competition authorities. - Includes provisions on higher transparency and enforcement of competition laws. - CAI (Section III, Regulatory Framework): - Agrees in principle to improve transparency on subsidies, standard setting and licensing. - Requires all business entities, including SOEs, to behave in accordance with commercial considerations and not to discriminate in purchases and sales. - Commits to provide, upon request, specific information to assess whether behavior of a specific business, including SOE, complies with agreed obligations (Section III Article 4). - Upgraded China-New Zealand FTA (Chapter 21, Competition Policy): - Commits to principles of transparency, non-discrimination, and procedural fairness in competition law enforcement. - Assessment: - Mandated higher transparency and commercial-consideration obligations mark a step toward clearer division of SOE commercial and non-commercial responsibilities and may foster competitive neutrality. - DRC (2020) study recommended additional domestic reforms to reduce external pressures: raise transparency for SOEs, absorb regulatory shock through continued deepening of reform, and lower objections to commercial consideration principles for some SOEs with commercial responsibilities. ### Dispute settlement mechanisms — scope and limits - RCEP: - Employs a standard state-state dispute settlement system. - Excludes e-commerce, competition and government procurement related disputes from the dispute resolution mechanism. - Chapter 10 (Investment) Article 18: requires discussion of investor-state dispute settlement mechanism to commence no later than two years after entry into force, and discussion shall last for no more than three years. - CAI: - Implements a robust state-state dispute settlement system. - Foresees an institutional framework for monitoring implementation of commitments, including regular political oversight, an ad hoc fast engagement mechanism for serious and urgent issues, and regular dialogue with involvement of key stakeholders such as businesses and civil societies. - Overall limitation: - Not all commitments are enforceable through dispute settlement mechanisms set out in the respective agreements. ### Qualitative impact assessment — key outcomes and gaps - Potential positive outcomes: - Significant liberalization of investment and promotion of equal market access: - Binding commitments in RCEP and potential CAI, together with non-expanding negative list and standstill and ratchet mechanisms, promise more transparent and predictable domestic policies on market access and dispute settlement procedures. - Current negative list met, to some extent, RCEP requirements but falls short of potential CAI requirements. - Evolution of negative list over past 5 years reflects gradual transition to a more open market. - Opening up of services trade likely to accelerate: - RCEP and Upgraded China-New Zealand FTA include notable commitments to open services trade. - Introduction of Hainan FTP negative list in 2021 is an encouraging step; a national negative list could shrink in size over time if momentum continues. - IPR protection may be strengthened: - Revisions in regulations, simplified enforcement and higher penalties observed. - Increased cases of higher damages point to progress, but high litigation costs and still low compensations indicate need for further improvement. - Simplification and market-based damage evaluation would better align domestic IPR protection with commitments. - Mandated higher transparency for competition policy and SOE commercial behavior: - RCEP and potential CAI demand higher transparency and non-discriminatory commercial behavior by SOEs. - Could lead to reforms clarifying SOE commercial vs non-commercial responsibilities and foster competitive neutrality. - Remaining gaps and caveats: - Some chapters (e.g., e-commerce, competition, government procurement) are excluded from RCEP dispute settlement, limiting enforceability. - Domestic reforms and procedural simplifications are needed to realize fully the benefits of commitments, especially in IPR enforcement and procurement. - Implementation and ratification timelines (for example CAI ratification) will affect when services opening and other commitments gain traction. *Source: 1chnea2022002 - 11. China’s reform commitments have the potential to improve market access not only for (PDF chapter).* ### 30. Similar to the RCEP, the CPTPP belongs to a new generation of free trade agreements ### 30. Similar to the RCEP, the CPTPP belongs to a new generation of free trade agreements ### Scope and likely accession commitments - CPTPP regulates trade in goods and services and also encompasses requirements related to market access and fair competition. - China’s possible accession could involve additional commitments: - a standstill and ratchet mechanism for the non-expanding negative list for both manufacturing and services. - negotiation of market access (e.g., investment negative lists) with existing CPTPP members that could lead to further lower entry barriers for foreign investors. - China’s commerce ministry (MOFCOM, 2021) indicated that “China will commit to allowing unprecedented level of access to its markets to join the CPTPP.” ### Key areas requiring alignment or reform - IPR protection: - CPTPP Chapter 18 (Intellectual Property) requires protection and enforcement of IPR across almost all areas. - Joining would likely require broadening China’s intellectual property protection (for example, non-traditional trademarks in Article 18.18, including sound and scent marks). - Some Chinese IPR protection standards fall behind CPTPP levels, such as damage compensation for copyright and trademark infringements. - Laws and regulations (including copyright law and patent law) would likely need alignment with the CPTPP and enforcement regimes strengthened. - Services trade: - CPTPP Chapter 10 (Cross Border Trade in Services) requires higher protection, predictability, and transparency. - The CPTPP includes obligations to secure a level playing field for foreign financial institutions and dispute resolution provisions tailored to financial services. - China's cross-border service trade is less open than the average level of CPTPP members; the number of restricted service sectors in China is higher than that of CPTPP members. - Accession would likely require further service trade opening, including in finance, telecommunications, and transportation. - Government procurement: - CPTPP Chapter 15 (Government Procurement) outlines more stringent obligations than existing agreements signed by China: national treatment of foreign suppliers, transparency of rules and procedures, impartiality among participants, and accountability via domestic review procedures. - The CPTPP’s procurement procedural provisions largely repeat WTO GPA provisions with minor modifications. - CPTPP accession could accelerate progress toward GPA-like requirements and facilitate a more open, transparent, and fair government procurement process. - SOE and competition policy: - CPTPP Chapter 17 (State-owned Enterprises and Designated Monopolies) requires SOEs to act in accordance with commercial considerations except when providing a public service, and to buy and sell goods and services in a non-discriminatory manner. - The CPTPP prohibits a member country from causing harm to another member through non-commercial assistance provided to SOEs. - Certain SOE information disclosure is required to encourage good corporate governance. - Potential accession would likely require additional SOE reforms in China, for example ensuring transactions between state-owned banks and SOEs conform to competitive neutrality and eliminating anti-competitive subsidies to SOEs. - Many of these reforms are consistent with China’s stated reform agenda (Zhang, 2020). - Climate and labor: - CPTPP contains a binding commitment to ILO labor standards in Chapter 19 (Labor) and on climate in Chapter 20 (Environment). - Environmental rules cover trade in endangered species and protection of the ozone layer—areas where China has not yet established relevant laws. - Accession would likely require revisions to China’s labor law and labor legal system to incorporate additional international labor standards. ### Other notable CPTPP features (not analyzed in detail here) - The CPTPP Transparency and Anti-corruption Chapter promotes transparency in lawmaking and government decisions; its transparency requirements are much more stringent than under RCEP. - The CPTPP encourages free cross-border data flow and prohibits disclosure of source code and data localization requirements. (Note: the paper did not cover digital and data policy in detail; China applied for joining the Digital Economy Partnership Agreement (DEPA) on November 1, 2021.) ### Conclusions and implications - Chinese authorities have made meaningful commitments in recent trade and investment agreements on further opening the domestic market. Based on China’s WTO accession experience, such commitments could help achieve significant progress in market access, IPR protection, and services liberalization. - Because the CPTPP entails more stringent requirements along multiple dimensions, potential accession would provide further opportunity for reforms aligned with China’s stated reform agenda. - By joining new-generation regional agreements—the RCEP and potentially the CPTPP—China can play a positive role in shaping future international trade and investment negotiations and the evolution of multilateral trade rules in the context of WTO reform discussions. - Scholarly work suggests CPTPP could serve as a “source of inspiration” for new WTO agreements, including on SOEs and technology transfer (Mavroidis and Sapir, 2021). *Source: 1chnea2022002 - 30. Similar to the RCEP, the CPTPP belongs to a new generation of free trade agreements* --- _Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1chnea2022002.pdf_