China's bold economic reforms have been successful but it still needs to let the yuan move more freely, complete bank reform and lay a solid legal basis for reform, the Organisation for Economic Co-operation and Development (OECD) said in its first full survey of China's economy.
The Paris-based club of 30 mostly rich countries was fulsome in its praise of reform over the last quarter century since China began the process of opening up to the outside world.
"China's economic growth has averaged 9½ per cent over the past two decades. The rapid pace of economic change is likely to be sustained for some time. These gains have contributed to higher personal incomes and to a significant reduction in poverty," the report, released yesterday, said.
"At the same time, the economy has substantially integrated with the world economy. A large part of these gains have come through profound shifts in government policies.
"Reforms have allowed market prices and investors to play significant roles in production and trade," it said.
China is the world's seventh-largest economy, but the OECD said China would leapfrog Italy, France and Britain by the beginning of the next decade.
China is not a member of the OECD, but is an observer and has also begun to attend meetings of finance ministers of the Group of Seven industrial nations.
The report stressed the need for the introduction of new laws, including long-awaited bankruptcy and company rules. It also called for the enforcement of existing laws, to improve the business environment.
The slow pace of legal reform is a headache for many western firms trying to work in China, particularly in the area of intellectual property (IP) rights.
The OECD said it was increasingly becoming a problem for Chinese companies too, as it deterred them from innovation and developing new products.
"It can be very difficult to obtain judgments in court and even more difficult to obtain enforcements," the OECD said.
"Chinese entrepreneurs feel that expansion is made difficult by the lack of objectivity of judiciaries trying cases involving the infringement of trade secrets, intellectual property rights and contract enforcement," it said.
It said that fiscal policy had been more successful at maintaining stability than monetary policy over the past decade, because of the yuan's nominal peg to the dollar, which the government partially lifted in July with a 2.1 per cent revaluation and a switch to a managed float.
"Overall, a policy of allowing greater flexibility in the exchange rate would allow the authorities to guard against the risk of any further increase in inflation in product and asset markets, to more easily adapt monetary policy to domestic concerns and to allow market forces to determine bank interest rates to a greater extent," it said.
The OECD estimated nearly 30 per cent of the banking sector still had to be recapitalised and part of the unfinished task would include refinancing the state-controlled asset management companies, which took on huge nonperforming loans as part of the government-orchestrated reform.
