China: The case for change on the road to 2030

China should complete its transition to a market economy -- through enterprise, land, labour, and financial sector reforms -- strengthen its private sector, open its markets to greater competition and innovation, and ensure equality of opportunity to help achieve its goal of a new structure for economic growth.

These are some of the key findings of a joint research report by a team from the World Bank and the Development Research Centre of China's State Council, which lays out the case for a new development strategy for China to rebalance the role of public and private sector and society, to reach the goal of a high income country by 2030.

A woman rides her tricycle loaded with polystyrene boxes on a street in Shanghai on February 29, 2012. China could face an economic crisis in the next 20 years if it does not quickly overhaul its development model, World Bank and Chinese government researchers warned recently. AFP

The report, "China 2030: Building a Modern, Harmonious, and Creative High-Income Society", recommends steps to deal with the risks facing China over the next 20 years, including the risk of a hard landing in the short term, as well as challenges posed by an ageing and shrinking workforce, rising inequality, environmental stresses and external imbalances.

"China's leaders have recognised that the country's growth model, which has been so successful for the past 30 years, will need to be changed to accommodate new challenges," said World Bank Group President Robert B. Zoellick.

"The case for reform is compelling because China has now reached a turning point in its development path. Managing the transition from a middle income to a high-income country will prove challenging; add to this a global environment that will likely remain uncertain and volatile for the foreseeable future and the need for change assumes even greater importance."

The report lays out six strategic directions for China's future: completing the transition to a market economy; accelerating the pace of open innovation; going "green" to transform environmental stresses into green growth as a driver for development; expanding opportunities and services such as health, education and access to jobs for all people; modernising and strengthening its domestic fiscal system; and seeking mutually beneficial relations with the world by connecting China's structural reforms to the changing international economy.

"Central to the report's findings is the need for China to modernise its domestic financial base and move to a public financial system-- at all levels of government -- that's transparent and accountable, overseen by fewer but stronger institutions, to help fund a changing economic, environmental and social agenda," Zoellick said.

"There is growing recognition, supported by the findings of the research report, that China's growth will decline gradually in the years leading to 2030 as China reaches the limits of growth brought about by current technologies in its current economic structure.

The report advocates Chinese policymakers should shift from a focus entirely on the quantity of growth to include the quality of growth as well.

Reforms should include commercialising the banking system, gradually removing interest rate controls, deepening the capital market and further developing independent and strong regulatory bodies to support the eventual integration of China's financial sector within the global financial system. Financial reforms in the next two decades should be decisive, comprehensive and well coordinated, following a properly sequenced roadmap.

A priority is to liberalise interest rates according to market principles. On land reform, priority should be accorded to protect farmers' rights over agricultural land, expanding land registration and rental rights. To assist with labour reforms, changes in the residency permit system - the hukou - are a priority.

It says such an open innovation system would be a prerequisite to benefit fully from global innovation links. For China to advance the "going green" development agenda, it will need to look at long term market incentives to encourage enterprises and households to go green.

This should include more public investments, and the better design and enforcement of regulations to complement market incentives, such as taxes, fees, tradable permits and quotas, and eco-labelling.

This can include reforms in pension and unemployment systems so workers have reasonable support in their old age or when jobless. This can ensure comprehensive coverage of pension insurance, especially for rural people and migrant workers in cities.

The report also warns that extending the current level of urban services and social protection to rural residents and migrants -- well over half the population -- will pose a significant fiscal burden and should be implemented prudently.

There is untapped potential for revenue through higher taxes on energy consumption, taking dividends from State-owned enterprises, and levying taxes on personal incomes, motor vehicles, and property. The report proposes a sequencing of reforms, as well as quick wins and actions to address short term risks. Support for reforms will be stronger if the plans are based on full participation throughout all levels of society.

The biggest risk is that vested interests will try to thwart reforms. As a key stakeholder on the global economy, China can consider how its structural reforms relate to rebalancing changes globally.

China should support free trade and back a multilateral agreement on investment. China's long-term interests lie in global free trade and a stable and efficient international financial and monetary system, relying on multilateral frameworks to help shape the global governance agenda.

China's growing weight in world trade, the size of its economy and its role as the world's largest creditor will make the internationalisation of China's renminbi inevitable. Acceptance of the RMB as a major global reserve currency will depend on the pace and success of financial sector reforms and opening of its external capital accounts.