China is at a critical juncture in its economic transformation as it tries to rebalance what is generally seen as an exhausted growth model. A unifying theme across the reforms that will deliver this transformation is that it can no longer be achieved by raising the amount of physical investment and government direction of resource allocation. Instead China is building a new set of policy frameworks that will allow markets to function more effectively—not unfettered markets, but markets that work efficiently, in line with broad social and other policy goals, and in a sustainable way. Hence, China is now building a new soft infrastructure, that is, the institutional plumbing that underpins and guides the functioning of markets as the key organizing principle toward achieving sustained economic and social progress. Against this background, this volume provides policymakers, academics, and the public with valuable information about policies and institutions in China today. It also looks at the road ahead and key principles that can help China in navigating it. The book focuses on issues crucial in the country’s transformation, such as tax policy and administration, social security, state-owned enterprise reform, medium-term expenditure frameworks, the role of local government finances, capital account liberalization, and renminbi internationalization. As China moves toward a more price-based allocation of resources, strengthening monetary policy frameworks and financial sector regulation will be particularly important in channeling resources to the most productive sectors and minimizing the risks of financial sector stress. Also, upgrading statistical frameworks will be critical for macroeconomic policymaking and investors. Visit : http://www.elibrary.imf.org/page/modernizing-china

Modernizing China

Investing in Soft Infrastructure

Edited by

W. Raphael Lam

Markus Rodlauer

Alfred Schipke

© 2017 International Monetary Fund

Cover design: Jesse Sanchez

Cataloging-in-Publication Data

Joint Bank-Fund Library

Names: Lam, W. Raphael | Rodlauer, Markus. | Schipke, Alfred, 1959- | International Monetary Fund.

Title: Modernizing China : investing in soft infrastructure / edited by W. Raphael Lam, Markus Rodlauer, Alfred Schipke.

Description: Washington, DC : International Monetary Fund, 2017. | Includes bibliographical references.

Identifiers: ISBN 9781513539942

Subjects: LCSH: Infrastructure (Economics)–China. | China—Economic conditions. | Corporate governance. | Fiscal policy–China. | Monetary policy—China.

Classification: LCC HC430.C3 M63 2017

ISBN 978-1-51353-994-2 (Paper)

978-1-47555-849-4 (ePub)

978-1-47555-852-4 (Mobipocket)

978-1-47555-854-8 (PDF)

Disclaimer: The views expressed in this book are those of the authors and do not necessarily represent the views of the International Monetary Fund, its Executive Board, or management.

Please send orders to:

International Monetary Fund, Publication Services

P.O. Box 92780, Washington, DC 20090, U.S.A.

Tel.: (202) 623-7430 Fax: (202) 623-7201

E-mail: publications@imf.org

Internet: www.elibrary.imf.org



  • Foreword

  • Acknowledgments

  • Contributors

  • Abbreviations and Acronyms

  • Introduction and Summary

  • 1 China’s Economic Success and Reforms: Investing in Soft Infrastructure

    • W. Raphael Lam, Markus Rodlauer, and Alfred Schipke

  • Fiscal Policy Frameworks

  • 2 Modernizing the Tax Policy Regime

    • Ruud de Mooij, W. Raphael Lam, and Philippe Wingender

  • 3 Strengthening Tax Administration

    • John Brondolo and ZHANG Zhiyong

  • 4 A Medium-Term Expenditure Framework for More Effective Fiscal Policy

    • Holger van Eden, David Gentry, and Sanjeev Gupta

  • 5 Social Security Reform for Sustainability and Equity

    • Mauricio Soto and Sanjeev Gupta

  • 6 Local Government Finances and Fiscal Risks

    • W. Raphael Lam, WEI Jianing, and Holger van Eden

  • Monetary and Financial Policy Frameworks

  • 7 Interest Rate Transmission in a New Monetary Policy Framework

    • MA Jun

  • 8 Capital Account Opening and Capital Flow Management

    • Karl Habermeier, Annamaria Kokenyne Ivanics, Salim M. Darbar, Chikako Baba, ZHU Ling, and Viktoriya Zotova

  • 9 Renminbi Internationalization

    • Malhar Nabar and Camilo E. Tovar

  • 10 A Rapidly Changing Financial System

    • Naomi N. Griffin and James P. Walsh

  • State-Owned Enterprise Frameworks

  • 11 State-Owned Enterprise Reform

    • W. Raphael Lam and Alfred Schipke

  • Macroeconomic Statistics for Policymaking

  • 12 Upgrading Macroeconomic Statistics

    • ZHAO Xiuzhen and Robert Dippelsman

  • Index


China’s economic growth over the past 35 years has sharply reduced poverty, created a large and rapidly growing middle class, and made its physical infrastructure a benchmark for countries around the world. Now the economy has embarked on its next transformation toward higher-income and advanced economy status.

In line with the proverb in the Chinese Book of Odes (Shijing), “pursuing reform is a continuous mission regardless of the glorious past,” China has launched comprehensive reforms to promote growth that is sustainable, inclusive, and environment friendly. This requires a more market-driven economy, based more on services and consumption than on industry and physical investment. It also requires investing more in “soft infrastructure,” including frameworks for well-functioning markets and effective macroeconomic management.

Drawing on international experiences, this book provides guidance for a strengthening of fiscal, monetary, and financial sector frameworks. It encourages further reforms of state-owned enterprises, calls for policy actions to address the financial risks of local governments’ funding practices, and highlights the need for better and more frequent macroeconomic statistics.

The recent inclusion of the Chinese renminbi in the IMF’s Special Drawing Rights basket has recognized the significant reform progress achieved in many areas. Now is the time to build on these accomplishments. By expanding and deepening reforms, China will be able to support durable growth and stability at home and abroad.

The IMF remains a committed partner in China’s transformation, offering policy advice, technical assistance, and training. We hope this book will contribute to the broader discussion about how best to achieve a successful transformation.

Christine Lagarde

Managing Director

International Monetary Fund


Modernizing China: Investing in Soft Infrastructure comprehensively analyzes the institutions and policies that govern important macroeconomic and financial areas in China, reviews reform progress, and—based on international experience—suggests ways to strengthen policy frameworks further.

The publication involved broad collaboration across many IMF departments, as well as contributions from Chinese colleagues. It also benefited from valuable inputs from James Daniel and other colleagues on the China team in the IMF’s Asia and Pacific Department.

We express our strong appreciation for the continued support of ZHU Jun, AI Ming, and other colleagues at the People’s Bank of China, as well as the IMF Executive Director JIN Zhongxia. Likewise, we benefited from invaluable comments and feedback of our Chinese and World Bank colleagues, and participants at the 2015 and 2016 Joint People’s Bank of China/IMF Conferences.

We are indebted to the IMF’s Editorial and Publications Division. Particular thanks go to Gemma Rose Diaz for working overtime and managing the production of the book, as well as Linda Long, Michael Harrup, and Patricia Loo for their many contributions. We also thank Jeremy Clift, Jeffrey Hayden, and Linda Griffin Kean for their unwavering support. Lesa Yee from the IMF China team went the extra mile in coordinating manuscript production.

We are very grateful to Eric Van Zant, Lucy Morales, and Katy Whipple for their outstanding editing of the manuscript and handling of the many updates and changes.

W. Raphael Lam, Markus Rodlauer, and Alfred Schipke



Chikako Baba is Economist in the Monetary and Macroprudential Policies Division of the IMF’s Monetary and Capital Markets Department. She has worked on a number of core policy papers related to capital flow management, macroprudential policy, and monetary policy. Ms. Baba holds a Ph.D. in economics from the University of Wisconsin-Madison. Since joining the IMF, she has also worked in the African Department.

John Brondolo is Senior Economist in the Revenue Administration 1 Division of the IMF’s Fiscal Affairs Department. During his 25-year career at the IMF, Mr. Brondolo has assisted many IMF member countries in designing and implementing tax administration reform programs. Since the early 1990s, he has advised the State Administration of Taxation on a broad range of reform initiatives and is currently responsible for managing the IMF’s technical cooperation activities with the administration. Mr. Brondolo has also published papers on tax administration topics, including Collecting Taxes in an Economic Crisis: Challenges and Policy Options. He possesses a Master of Public Policy degree from the John F. Kennedy School of Government, Harvard University.

Salim M. Darbar is Senior Economist in the Monetary and Macroprudential Policies Division of the IMF’s Monetary and Capital Markets Department. In recent years, he has mostly worked on issues related to macroprudential policies, capital flow management, and foreign exchange regulations. Previously, he worked on emerging market and developing economies in the IMF’s European Department, African Department, and Middle East Department. Mr. Darbar holds a Ph.D. in economics from Tulane University.

Ruud A. de Mooij is Deputy Division Chief in the Tax Policy Division of the IMF’s Fiscal Affairs Department. Mr. de Mooij is responsible for much of the analytical work of the division, including recent work on fiscal policy and inequality, international spillovers from corporate taxation, and investment tax incentives. He also contributes to technical assistance on tax policy to IMF member countries. Before joining the IMF, Mr. de Mooij was Professor of Public Economics at Erasmus University Rotterdam in the Netherlands. He has published extensively on taxation issues, including in the American Economic Review and the Journal of Public Economics. Mr. de Mooij is research fellow at the Oxford University Center for Business Taxation, the University of Bergen, ZEW in Mannheim, and the CESifo network in Munich. He is also member of the Board of the National Tax Association.

Robert Dippelsman is Deputy Division Chief of the Real Sector Division of the IMF’s Statistics Department. He previously worked in the Balance of Payments and Government Finance Divisions of the Statistics Department. Before joining the IMF, he worked in the Australian Bureau of Statistics.

David Gentry is Senior Economist in the Fiscal Affairs Department of the IMF. In this capacity he addresses public financial management issues relating to fiscal planning, budget preparation, and treasury management by leading technical assistance missions, organizing technical assistance carried out by external experts, and participating in the analytical agenda of Fiscal Affairs Department. His technical assistance work is concentrated in the Asia and Pacific region. In recent years he has participated in major Fiscal Affairs Department analytical efforts, including updating the Fiscal Transparency Code and Manual and conducting studies on the effectiveness of Group of Twenty countries’ budget institutions and improving the efficiency of public investment. Prior to joining the IMF headquarters staff he served as resident budget adviser to ministries of finance in Albania, Georgia, and Mongolia under the auspices of the IMF and the U.S. Department of the Treasury.

Naomi Griffin is Senior Economist in the Monetary and Capital Markets Department at the IMF, managing the delivery of financial sector technical assistance to a number of countries worldwide. Ms. Griffin’s previous assignments at the IMF include country surveillance on emerging markets in Latin America. Prior to joining the IMF in 2011, she worked at the U.S. Congressional Budget Office, analyzing the effects of economic policies during the global financial crisis. She holds a Ph.D. in economics from the University of Maryland and a Master of Arts in international relations from Johns Hopkins University’s School of Advanced International Studies.

Sanjeev Gupta is Deputy Director of the Fiscal Affairs Department at the IMF and previously was in its African Department and European Department. Mr. Gupta has led IMF missions to some 25 countries in Africa, Asia, Europe, and the Middle East, and represented the institution in numerous international meetings and conferences. Prior to joining the IMF, he was a fellow of the Kiel Institute of World Economics, Germany; Professor in the Administrative Staff College of India, Hyderabad; and Secretary of the Federation of Indian Chambers of Commerce and Industry. Mr. Gupta has authored/coauthored over 150 papers on macroeconomic and fiscal issues, and authored/coauthored/coedited 11 books; the most recent books, all published by the IMF, are The Economics of Public Health Care Reform in Advanced and Emerging Economies in 2012, Energy Subsidy Reform: Lessons and Implications in 2013, Equitable and Sustainable Pensions: Challenges and Experiences in 2014, and Fiscal Policy and Inequality in 2015.

Karl Habermeier is Assistant Director in the IMF’s Monetary and Capital Markets Department, where he leads the division responsible for monetary and macroprudential policies. His recent work has focused on the challenges for monetary policy after the crisis, the development of macroprudential frameworks, and the management of international capital flows. Mr. Habermeier holds a Ph.D. in economics from Stanford University.

Annamaria Kokenyne Ivanics is Lead Financial Sector Expert in the IMF’s Monetary and Capital Markets Department. Ms. Kokenyne Ivanics’ work has focused on crisis countries, capital flow management, and foreign exchange markets and frameworks. Before joining the IMF, she was the Head of the International Economic Relations Department in the Ministry of Finance in Hungary. Ms. Kokenyne holds a Master of Science in economics from Budapest University of Economics and a J.D. from Eotvos University, Hungary.

W. Raphael Lam is IMF Deputy Resident Representative in China. He comanages the office by providing policy advice and undertaking analytical work, and helps coordinate IMF-China technical assistance and training in China. Previously, he worked in the European Department, Finance Department, and the Asia and Pacific Department. He participated in the IMF’s lending program to Iceland during the global financial crisis and Japan’s Financial Sector Assessment Program, and was involved in IMF regional surveillance in Asia. He has written research papers on a wide range of issues on China, including real estate, the labor market, local government finances, and state-owned enterprise reform. Mr. Lam previously worked with the Hong Kong Monetary Authority and has a Ph.D. in economics from University of California, Los Angeles.

MA Jun is Chief Economist at the People’s Bank of China’s Research Bureau. Before joining the central bank in early 2014, he worked for 13 years at Deutsche Bank, where he was Managing Director, Chief Economist for Greater China, and Head of China and Hong Kong Strategy. Prior to joining Deutsche Bank in 2000, he worked as public policy specialist, economist, and Senior Economist at the IMF and World Bank from 1992–2000. From 1988–90, he was a research fellow at the Development Research Center of China’s State Council. Mr. Ma has published 11 books and several hundred articles on the Chinese economy, global economy, and financial markets. His main research interests include macroeconomics, monetary and financial policies, and environmental economics. Mr. Ma received his Ph.D. in economics from Georgetown University in 1994 and a Master’s in management science from Fudan University in 1988.

Malhar Nabar is Deputy Division Chief in the World Economic Studies Division of the IMF’s Research Department. Previously, he worked on the China team in the Asia and Pacific Department and was Mission Chief for Hong Kong SAR. His research interests are in financial development, investment, and productivity growth. He has published in the Journal of Development Economics, Economic Inquiry, Journal of Macroeconomics, and IMF Working Papers. In 2013 he coedited the book of recent IMF research China’s Economy in Transition. Mr. Nabar holds a Ph.D. in economics from Brown University.

Markus Rodlauer is Deputy Director of the IMF’s Asia and Pacific Department. Among other leadership responsibilities, he heads the IMF’s China team, which conducted the annual Article IV Consultations with China in recent years. His previous jobs at the IMF included Deputy Director of Human Resources; Deputy Director in the Western Hemisphere Department; Mission Chief for a number of countries in Asia, Europe, and South America; and IMF Representative to Poland and the Philippines. Mr. Rodlauer worked with the Ministry of Foreign Affairs of Austria before joining the IMF. His academic training includes degrees in law, economics, and international relations.

Alfred Schipke is IMF Senior Resident Representative for China. He provides policy advice, leads the analytical work of the office, and coordinates the IMF’s training and technical assistance in China. Previously, he was Division Chief in the Asia and Pacific Department, where he coordinated the work on fast-growing low-income countries in southeast Asia (frontier economies) and led missions to Vietnam. He was a Division Chief in the IMF’s Western Hemisphere Department in charge of the Latin Caribbean and Eastern Caribbean Currency Union divisions and negotiated a number of IMF programs. He teaches international finance at Harvard University, John F. Kennedy School of Government, and has authored and edited a number of books and articles. His research focuses on economic integration and the linkages between macroeconomics and finance.

Mauricio Soto is Senior Economist at the IMF, where he has assessed the fiscal impact of social insurance programs in advanced and emerging market economies (largely pensions and health). He has collaborated with the authorities of more than a dozen countries in analyzing fiscal issues over the past five years. Prior to joining the IMF, he worked as a researcher on retirement issues—first at the Center for Retirement Research at Boston College and most recently at the Urban Institute. He has authored and coauthored several papers on age-related spending, and his research has been published in Labour, the Journal of Pension Economics and Finance, and the Journal of Financial Planning.

Camilo E. Tovar is Senior Economist at the Strategy Division of the IMF’s Strategy, Policy, and Review Department. Previously, he worked on Pakistan and in the Western Hemisphere Department. Prior to joining the IMF, Mr. Tovar worked at the Bank for International Settlements. He has served as Economic Advisor to the Executive Secretary of the United Nations Economic Commission for Latin America and the Caribbean in Chile, as well as Advisor to the Finance Minister of Colombia and to the Director of the National Planning Department in Colombia. Mr. Tovar holds a Ph.D. and M.Sc. in economics from the University of Wisconsin-Madison and an M.A. in economics from the University of Los Andes (Colombia). His research has been published in refereed journals, including the BIS Quarterly Review, Journal of International Money and Finance, Journal of International Commerce Economics and Policy, Economic Review, Open Economies Review, and Economics e-Journal.

Holger van Eden is Deputy Division Chief in the Public Financial Management II Division of the Fiscal Affairs Department of the IMF. He has worked extensively with ministries of finance in eastern Europe, Asia, Latin America, and the Caribbean. His focus areas range from budget preparation, public investment management, finance ministry institutional restructuring, and budget and fiscal responsibility laws to government treasury and cash management. Mr. van Eden has led and participated in more than 50 IMF technical assistance missions, including to China, as well as to Belgium, Bhutan, Brazil, Colombia, Estonia, Greece, India, Indonesia, Jamaica, Japan, Mexico, Mongolia, the Netherlands, and Thailand. Before joining the IMF, Mr. van Eden worked as team leader and project coordinator in international consultancy, as an economic journalist and editor, and as a financial consultant for a global accounting firm. He started his career in the Netherlands Ministry of Finance. Mr. van Eden is currently coeditor of the IMF’s PFM Blog.

James P. Walsh is Deputy Chief in the IMF’s Monetary and Capital Markets Department, focusing on issues related to monetary policy and financial stability, particularly in Asia and the Americas. He is also Deputy Mission Chief for the China Financial Sector Assessment Program. His analytical work has covered macro-financial linkages, inflation, financing infrastructure investment, and systemic financial risks. In 2014 he coedited The Future of Asian Finance. He has a Ph.D. in economics from the University of Chicago.

WEI Jianing is Director-General and Researcher in the Development Research Center of the State Council. He has had extensive experience in the center, specializing in macroeconomics. He first joined the center’s Macro Economy Department in 1991 and became the Director-General (Inspector) in 2013. Mr. Wei has collaborated and written joint works with many distinguished and prominent economists, including Mr. Wu Jinglian and Mr. Sun Xiangqing. He has been prolific and has published on macroeconomic policies, financial risks and supervision, and fiscal issues on local government finances, which serve as inputs to the policy design. In 2014 he published a book on resolving the risks of local government debt and new municipal financing. He received his doctoral degree in economics from the China Academy of Social Science.

Philippe Wingender is Economist in the Tax Policy Division of the Fiscal Affairs Department at the IMF. Mr. Wingender joined the Fiscal Affairs Department after obtaining his Ph.D. in economics from the University of California, Berkeley. His research interests include labor supply responses to tax changes, the incidence of tax reform, taxation and informality, and the macroeconomic effects of fiscal policy. As an IMF economist, he has worked on several countries, including China, as well as on Bosnia and Herzegovina, Kosovo, Trinidad and Tobago, and Uganda.

ZHANG Zhiyong is former Deputy Commissioner of State Tax Administration (SAT) of China. During his 33-year career there, Mr. Zhang held a wide range of senior positions, including Director General of the International Taxation Department, Director General of the Large Business Taxation Department, Director General of the SAT’s Beijing Municipal Tax Office, and Director of the Income Tax Division of the Foreign Investment Taxation Department. Through these positions, he has been deeply involved in many of China’s tax policy and administration reforms and has worked closely with international organizations and revenue agencies of other countries. Mr. Zhang has a Bachelor of Arts in English from the Beijing Foreign Language Institute and has been a Visiting Scholar of Tax Laws at the Law School of Columbia University.

ZHAO Xiuzhen is Senior Economist in the Strategy, Standards, and Review Division of the IMF’s Statistics Department. She previously worked in the Financial Institutions Division of the Statistics Department. Before joining the IMF, Ms. Zhao worked in the National Bureau of Statistics of China.

ZHU Ling is Economist in the Monetary and Macroprudential Policies Division of the IMF’s Monetary and Capital Markets Department. Mr. Zhu holds a Ph.D. in economics from the University of Maryland. His research focuses on capital flows, capital flow management, and financial stability.

Viktoriya Zotova is Research Analyst in the Monetary and Macroprudential Policies Division of the IMF’s Monetary and Capital Markets Department. She has worked in the areas of foreign exchange regulations and capital flows and has provided research and analytical support for a number of empirical and policy papers. Ms. Zotova holds a Bachelor of Arts in economics from St. Norbert College.

Abbreviations and Acronyms


asset management company


Annual Report on Exchange Arrangements and Exchange Restrictions


base erosion and profit shifting


Bank for International Settlements


Balance of Payments and International Investment Position Manual, Sixth Edition


China Banking Regulatory Commission


credit default swap


China Interbank Bond Market


Chinese yuan (renminbi)


consumer price index


China Securities Regulatory Commission


China Tax Administration Information System


Data Gaps Initiative


dynamic stochastic general equilibrium


Electronic Broking Services


foreign direct investment


Financial Stability Board


financial soundness indicator


Group of Twenty


General Data Dissemination System


Government Finance Statistics Manual


Golden Tax Project


international banking statistics


international monetary system


internal revenue service


joint-stock commercial bank


local government financing vehicle


London Interbank Offered Rate


mutual agreement procedure


Material Product System


medium-term budget framework


medium-term expenditure framework


medium-term fiscal framework


medium-term program framework


National Bureau of Statistics


National Development and Reform Commission


National People’s Congress


nonperforming loan


Organisation for Economic Co-operation and Development




People’s Bank of China


permanent establishment


producer price index


public-private partnership


Qualified Domestic Institutional Investor


Qualified Foreign Institutional Investor




Register for Government Approval of Financial Obligations


residential property price index


Renminbi Qualified Foreign Institutional Investor


State Administration of Foreign Exchange


Special Administrative Region


State-Owned Assets Supervision and Administration Commission


State Administration of Taxation


Special Data Dissemination Standard


special drawing right


Shanghai Interbank Offered Rate


small and medium-sized enterprise


System of National Accounts


state-owned enterprise


structural vector autoregression


Tax Collection Law


total factor productivity


total social financing


United Nations Conference on Trade and Development


unremunerated reserve requirement


value-added tax


wealth management product


World Trade Organization