China’s Achievements over the Past 40 Years and Challenges in the New Era - Takehiko Nakao | Asian Development Bank

China’s Achievements over the Past 40 Years and Challenges in the New Era - Takehiko Nakao

Speech | 25 March 2018

Speech by ADB President Takehiko Nakao at the China Development Forum 2018 on 25 March 2018 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,

Distinguished colleagues,

Ladies and gentlemen:

Good morning to you all. This is the fifth time that I have had the honor to participate in this distinguished Forum as President of ADB. The China Development Forum is especially memorable this year as it marks the 40th anniversary of China’s start of reforms and opening up (改革開放).

China joined ADB in 1986, in the early years of the country’s economic transformation. ADB is proud that we have contributed to China’s remarkable development. And we will continue to be China’s important development partner through our lending program and knowledge work in key areas like climate change, the environment, and regional cooperation.    

II. China's achievements over the past 40 years

China's achievements over the past 40 years have been phenomenal. The country’s rapid economic growth has driven per capita income from one of the poorest in the world to the level of an upper-middle income country. China is now the second largest economy globally and is approaching high-income country status.

Poverty levels in China have fallen significantly. While 250 million people in the rural area lived below the national poverty line in 1978, the figure fell to 30 million at the end of 2017. China is advancing toward its target of eradicating absolute poverty by 2020. And the government has committed to the Sustainable Development Goals.

China has progressed from an economy with basic agriculture and technology to a global manufacturing powerhouse. It is now transitioning to an economy driven more by consumption and services. China has become a front-runner in areas such as e-commerce and shared economies. New technologies and entrepreneurs are fostering the emergence of innovative industrial clusters.

I have spoken on several occasions about eight key conditions for economic development. This idea of eight conditions was inspired by the experiences of China and others. They are: 

  1. investment in infrastructure; 
  2. investment in education and health; 
  3. sound macroeconomic management; 
  4. open investment and trade regimes; 
  5. good governance and the strong delivery of public services; 
  6. social inclusiveness; 
  7. a clear vision for the future; and 
  8. security, political stability, and friendship with other countries. 

Indeed, China has devoted a larger portion of its gross domestic product (GDP) to infrastructure investment, such as in power and transport, compared with other developing countries. Investment in human capital has allowed China to better realize the potential of its large population. China has pursued prudent macroeconomic management, especially after the early 1990s. Its determination to adopt market systems and open trade and investment regimes has been unwavering. Regarding inclusiveness, since the founding of the People’s Republic, the status of farmers and women has been significantly enhanced. The government’s five-year plans have showed clear vision and strategy for the country’s development and reform. 

Still, I have been wondering what the key is to China’s success. Last year, a senior Chinese government official said to me that contrary to perceptions many people have, China’s rapid growth was not just brought about by state guidance. Social drivers were the key. Reforms which started in 1978 unleashed people’s aspiration to grow, to invent, and to live better lives.

III. Challenges for China in a New Era

Today, I would like to share my thoughts on how China can achieve high-quality development in a new era by tackling remaining and emerging challenges. I know that Chinese leaders understand these challenges. They were discussed at the 19th National Congress of the Communist Party last October and the recently concluded first session of the 13th National People’s Congress.

I will focus on three challenges.

The first is inclusiveness. China must ensure that the entire population can enjoy the fruits of growth more equally. China has lifted millions out of poverty and people can enjoy better lives overall. But today, it is also true that China is facing the challenge of growing inequality.  

China is home to a large number of billionaires, but many people in lagging areas and in parts of cities still live at a subsistence level and lack access to basic services such as clean water and sanitation. China’s Gini coefficient for income in 2016 was high at 0.46.

Inequality is not only bad for social fairness; it will also negatively affect growth. If people do not feel equal, they have less incentive to work hard and educate their children. An equal society with a broad middle class is the basis for stability.

In my view, China is already a very dynamic and innovative country with momentum for continued growth. Making society more inclusive and equal is a greater challenge for China than achieving further technological development and industrial transformation.  

Mobility between urban and rural areas is necessary for balanced and inclusive growth. The government is unifying the rural and urban hukou (戶口), the household registration system, for small and midsized cities. The Government Work Report presented to the 13th People’s Congress confirmed the continued effort to expand access to many social services such as education, health, and public housing in cities for migrant workers.

Reforming the tax system to support income redistribution is a priority. This should include increasing the contribution of personal income tax to government revenue and introducing taxation on inheritance and capital gains. In 2016, China’s personal income tax revenue was a mere 1.4% of GDP, compared with the OECD average of 8%. Local governments’ taxation power should be strengthened, including through the introduction of property tax, so that they have sufficient revenue to deliver social services. ADB is providing China with technical assistance on these reforms.

Education and skills development, especially in lagging areas and with a focus on gender equality, is a strong tool to achieve inclusive growth. ADB is currently supporting a comprehensive, province-wide reform of technical and vocational education and training (TVET) in Guangxi (廣西).

Fostering small and medium-sized enterprises (SMEs) through microfinance and capacity building is also important. An ADB-financed project in the Xinjiang Uygur Autonomous Region (新疆維吾爾自治區) is boosting traditional garment production and tourism in support of ethnic minorities, especially women.

China’s second challenge in the new era is to tackle climate change and promote a better environment. Indeed, China is in many respects championing a green economy and is a crucial player in global efforts to mitigate climate change under the COP21 Paris Agreement.

ADB is supporting a holistic plan for the Yangtze River Economic Belt (長江經濟帶) based on the concept of ecological civilization. We are planning to provide total funding of $2 billion for a number of interrelated projects. ADB will support water pollution control and water resources management in the upper and middle reaches of the river.

In the Greater Beijing-Tianjin-Hebei area (京津冀地區), ADB has been engaged in a series of projects and reform programs since 2015 to improve air quality. For example, in 2017, ADB approved a $500 million loan to help establish a Regional Emission Reduction and Pollution Control Facility. The facility will catalyze private sector resources and support the deployment of high technologies for major emitting industries.

The third challenge I want to take up is China’s aging population. The number of people aged 65 years and above in China reached a record 158 million in 2017, while China’s working age population started to decline in 2014. China’s elderly dependency ratio is expected to exceed 30% by the mid-2030s, from 15% in 2016.

ADB has been supporting China’s development needs in an aging society. Our actions include support in reforming the rural social security system, strengthening health and pension administration, and building age-friendly cities. In Hubei and Hebei (湖北和河北), ADB has been working to support elderly care services provided by local authorities in partnership with the private sector.

IV. Importance of macroeconomic stability and the market

There are many challenges in China’s new era, including the three I have just mentioned. To tackle such challenges and sustain development, I would like to stress that macroeconomic stability and an efficient market are prerequisites.

Regarding macroeconomic stability, as discussed in the Central Economic Work Conference last December, policymakers clearly understand the potential risks from overcapacity in some sectors, rising real estate prices, overleveraging in parts of the financial sector, and the high debt levels of the corporate sector and local authorities.

China is taking a comprehensive and proactive approach to prevent systemic financial risks. It established last year the Financial Stability and Development Committee under the State Council, comprising the Central Bank, the Ministry of Finance, and financial regulators to ensure financial stability and coordinate financial reform. A new regulatory commission will be formed by merging the existing banking and insurance regulatory commissions, to better regulate the country’s banking and insurance sectors. Prudential supervision functions of the Central Bank will also be strengthened.

Regarding the importance of the market, I was encouraged by Vice Premier Liu He’s (劉鶴) speech when I attended the World Economic Forum in Davos this January. He stated that China will continue to “let the market play a decisive role in resource allocation.” He also mentioned that China is against protectionism and that it will protect property rights, especially intellectual property rights; promote fair competition; substantially open up the services sector; ease barriers to entry in the financial sector; and increase imports.

I strongly believe that government and policies should lay the groundwork for economic development. But the market is critical for efficiency, innovations, and sustainable growth. Proper incentives for economic players based on rules are essential. Industrial policies should be designed and implemented in a manner which will not constrain fair competition between companies within and outside the country and will not harm efficiency over the long term.  

V. Conclusion

Ladies and gentlemen:

China's position in the world community is totally different today from 40 years ago. China has a very large presence in the areas of industry, commerce, finance, culture, geopolitics, and others. Its influence and presence may be greater than what the Chinese people themselves believe.

Therefore, it is quite natural that the global community expects China to play an even more important role in multiple areas. I trust that China can support other developing countries by sharing its development experiences.  And China will continue to make great contributions to the world and gain respect by continuing to learn from experiences of its own and others and absorbing beneficial results of human civilizations, whether they be from the East or West.

Here, I would like to recall the famous first phrase of The Analects of Confucius or Lun Yu (論語).

Confucius said: “Isn't it a pleasure to learn, and then from time to time recite and practice what you have learned? Isn't it also a great joy when friends visit from distant places?”

子曰:「學而時習之,不亦説乎?有朋自遠方來,不亦樂乎?」

I studied this in my high school days in Japan. At that time, I didn't fully understand the profoundness of the saying. Over the years, I have become increasingly aware that learning is important, but to recite and practice is even more important for all of us.  

I would like to conclude my remarks by following Confucius’ second point.

Seeing so many friends visiting from all over the world to exchange views is another great joy.

Thank you.