China Development Forum 2017, Session II: Deepening Supply-Side Structural Reforms - Takehiko Nakao

Speech | 19 March 2017

Speech by ADB President Takehiko Nakao at the China Development Forum 2017 (China and the World: Economic Transformation through Structural Reforms) on 19 March 2017 in Beijing, People's Republic of China

I. Introduction

Mr. He Lifeng (何立峰), Chairman of the National Development and Reform Commission,

Mr. Zhang Junkuo (张军扩), Vice President of the Development Research Center of the State Council,

Ms. Kristalina Georgieva, Chief Executive Officer of the World Bank,

Distinguished Colleagues,

I am very pleased to participate in the China Development Forum 2017. This is my 4th year to participate in this distinguished Forum as the President of ADB.

Over the last four years, I have been privileged to observe China’s transformation efforts very closely. Today, I would like to discuss China’s key challenges in its socio-economic transformation, including the issue of supply side reforms, and how its development partners such as ADB can assist.

II. China in transition

The Chinese economy continues its transition to the growth model driven more by consumption rather than investment, and services rather than manufacturing. GDP growth in 2016 was 6.7%, continuing the trend of gradual moderation to the new normal. Consistent with this development, the current account surplus has been substantially reduced from its peak of above 10% of GDP in 2007 to roughly 2% last year. These are all welcome developments. 

Yet, there are many emerging and remaining challenges to achieve sustainable growth. China faces shifts in underlying factors such as: shrinking working age population, rising wages, and what we call “convergence” of narrowing gap in income and technology with advanced economies. China is also now paying greater attention to environmental and social issues. At the same time, there are more immediate issues such as excess capacity and debt overhang, which may be a legacy of very strong investment efforts in the aftermath of the global financial crisis.

I fully support the recommendations made by China’s Central Economic Work Conference last December to intensify the efforts to cut down industrial overcapacity, bring down housing inventory and tackle asset bubbles and over-leveraging. I welcome that the recently concluded National People’s Congress approved a number of necessary key policy measures to address these issues.

Setting these more immediate issues aside, I wish to highlight five key areas where fundamental reforms are needed.  Actually some of the reforms are making steady progress.

The first is to promote inclusive growth. The increasing urban-rural divide is a key challenge. Ongoing hukou reform will not only facilitate labor mobility to areas with better jobs, but also allow more equal access among the population to social services, particularly education and healthcare. The ultimate goal should be that all Chinese citizens access social services regardless of their place of residence or their hukou status.

The second is to accelerate fiscal reform. Some of the recent tax reforms are noteworthy. Value added tax has now replaced business taxes in all service sectors, broadening the tax base, and reducing the tax burden from cascading. Taxes on polluting businesses and luxury goods have been increased. The Environment Tax Law was approved in December last year. The government is now considering a reduction in corporate tax and fees to support businesses. The introduction of property and inheritance taxes should be pursued to raise revenues and enhance equality.  

The third is to facilitate market reforms to foster competition. I believe that in order to rejuvenate and sustain economic growth, the market should play a decisive role in the economy. Together with other countries, China should continue to make utmost efforts to promote open trade and investment regimes. Policies to ensure the level playing field for foreign and domestic entities remain essential. Reforms of the State Owned Enterprises are also important.

The fourth is to promote innovation and productivity. Making administrative procedures easy and ensuring financing access for startup companies will harness the dynamism of the private sector. Strengthening higher education and vocational training in the areas of science and technology and protecting intellectual property will also provide bases for innovation. I recently read an encouraging report by a Japanese university professor about Chinese entrepreneurship. According to the report, in Shenzhen, a cluster or kind of ecosystem of numerous innovative small companies, venture capitalists, consultants and intermediaries is emerging. This ecosystem connects different players, new products and ideas, like in Silicon Valley.

Fifth, protecting its environment and progressing with climate change mitigation is a national objective. In accordance with the commitment made at the COP21 meeting in Paris to peak out CO2 emissions by 2030, China has adopted a pilot initiative to make 87 selected cities peak out their CO2 emissions many years ahead of 2030. China is also accelerating the termination of obsolete, highly polluting industrial capacity. Giving financially viable clean energy options to poor rural households is needed so that they rely less on coal for cooking and heating.

III. China’s reform efforts and ADB support

Now, I would like to discuss some of ADB’s activities to support China in addressing its challenges.

In line with the 13th Five Year Plan adopted last year for the 2016-2020 period, ADB formulated its new Country Partnership Strategy for China. Under the new strategy, we have identified four key areas for our support: (i) managing climate change and the environment, (ii) promoting regional cooperation and integration with neighboring countries, (iii) supporting inclusive economic growth, and (iv) supporting institutional and governance reform. ADB will increase the volume of its lending support to China, taking advantage of our increased lending capacity coming from the optimal use of our balance sheet.

First, in the area of climate change and environment, ADB signed an MOU with the Ministry for Environmental Protection and another MOU with NDRC (National Development and Reform Commission) in 2014. One of the salient examples following these MOUs is a multi-year program to address air pollution in the Beijing-Tianjin-Hebei, or “Jingjinji” area. In 2015 our first policy-based loan to China in the amount of $300 million strengthened the regulatory framework in Hebei Province. Last year, a new $500 million loan was extended to help small and medium enterprises invest in cleaner production facilities that meet the higher standard set by the strengthened Environmental Protection Law.

In the Yangtze River Economic Belt, ADB plans to provide assistance totaling $2 billion during the 13th Five Year period, for environmental rehabilitation and industrial transformation along the river. This assistance will help improve both the river’s ecological health and the peoples’ lives along the river.

Second, in the area of regional cooperation, in 2016, we approved a new loan for the Guangxi Zhuang Autonomous Region to support greater commercial relations  with neighboring Viet Nam’s Lang Son province. This project will benefit small and medium sized enterprises through SME finance, cross-border economic zones, capacity building, and trade facilitation.

Third, to support inclusive growth, the aging society and the rural-urban divide are two main areas of ADB’s work with the government. On the issue of rapidly aging society, ADB approved a project in Hubei Province to pilot the public-private partnership approach to provide elderly care. On the rural-urban divide, we are supporting urban development projects, in which a number of small cities and townships make their public services available to residents in nearby rural areas.

Fourth, in supporting institutional and governance reform, ADB has been providing technical assistance in the area of public finance reform, particularly focusing on the central-local fiscal relationship and public-private partnership. Since the country's first PPP projects, ADB has supported private sector participation in clean energy, water supply, and waste treatment, just to name a few. We have also supported the reform of State Owned Enterprises by strengthening corporate governance, including financial reporting, and upgraded environmental management systems.

IV. China-ADB partnership to the next level

Let me briefly discuss the new partnership between China and ADB.

China joined ADB in 1986. ADB has provided substantial assistance of $36 billion in lending during the course of China’s rapid development in the last 30 years. ADB is eager to develop further the strong partnership to the next level.

First is the knowledge cooperation. ADB and China have accumulated a lot of knowledge through implementing projects together.  Last year, I was pleased to witness in Shanghai how ADB’s earlier projects for the Yangpu and Nanpu Bridges and the Suzhou Creek cleanup have been greatly appreciated. Shanghai officials still appreciate these projects because they left important experiences and lessons to design and implement projects. Such experiences and lessons from our partnership are a valuable resource for other ADB developing member countries and we are happy to collaborate with China in sharing them.

Second, China is becoming an important financial contributor to ADB. China pledged to more than double its contribution to the Asian Development Fund, ADB’s concessional window, in its last replenishment. We are also thankful for China’s additional contribution to an ADB-managed trust fund for poverty reduction and regional cooperation which China established in 2005.

Third, China and ADB are becoming more important partners for regional cooperation. ADB’s long-standing regional cooperation programs such as Central Asia Regional Economic Cooperation and Greater Mekong Subregion can cooperate with China’s One Belt One Road Initiative.

Let me add that ADB is collaborating very closely with the Asian Infrastructure Investment Bank (AIIB) and the New Development Bank. We can work together to strengthen finance for development in Asia. In fact, ADB already cofinanced two projects with AIIB in 2016. President Jin of AIIB and I met 9 times in the last two years to discuss various issues common to us.

V. Concluding remarks

Ladies and gentlemen,

As China’s importance in the region and the world increases, so does the importance of ADB’s partnership with China.

To end this speech, I would like to refer to a very beautiful poem on the Yangtze River by Zhang Ruoxu (張若虚) from the early Tang (唐) Dynasty entitled, River on a Spring Night (春江花月夜). The poem portraits an image of a peaceful, quiet Yangtze River with flowers on a spring night under the full moon.

The Yangtze River will evolve with the country. Our work on the Yangtze River mentioned earlier symbolizes our hope for the future of China. China should realize its vision for the ecological civilization, and inclusive and sustainable development.

Thank you.

春江花月夜 張若虚
(首四行)

春江潮水連海平,
海上明月共潮生。
灩灩隨波千萬里,
何處春江無月明。