People’s Republic of China: Staff Report for the 2010 Article IV Consultation—Informational Annex

The Chinese government’s macroeconomic policy response to the crisis has delivered positive results, and mitigated the impact of the global downturn on its economy. The challenge now is to sustain this strong growth performance while switching decisively to an economy that is powered by the Chinese consumer. This includes maintaining the fiscal stimulus, maintaining supervisory and regulatory vigilance, deploying prudential measures to counter unwarranted growth in real estate prices, liberalizing the financial system, building out China’s social safety net, and capitalizing on urbanization, among others.

Abstract

The Chinese government’s macroeconomic policy response to the crisis has delivered positive results, and mitigated the impact of the global downturn on its economy. The challenge now is to sustain this strong growth performance while switching decisively to an economy that is powered by the Chinese consumer. This includes maintaining the fiscal stimulus, maintaining supervisory and regulatory vigilance, deploying prudential measures to counter unwarranted growth in real estate prices, liberalizing the financial system, building out China’s social safety net, and capitalizing on urbanization, among others.

Annex I. China: Fund Relations

I. Membership Status: Joined 12/27/45; Article VIII (December 1, 1996)

II. General Resources Account:

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III. SDR Department:

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IV. Outstanding Purchases and Loans: None

V. Financial Arrangements:

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VI. Projected Obligations to Fund (SDR million; based on existing use of resources and present holdings of SDRs):

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VII. Exchange Arrangements:

1. China’s exchange rate regime is currently classified as a stabilized arrangement. On July 21, 2005, the People’s Bank of China (PBC) announced that the exchange rate of the renminbi against the U.S. dollar would be revalued upward by about 2.1 percent (from RMB 8.28/US$ to RMB 8.11/US$) and the exchange rate regime would move to a managed float in which renminbi’s value is set with reference to a basket of currencies. The stated intention of the Chinese authorities was to increase the flexibility of the renminbi’s exchange rate. The authorities indicated that they will not publish the currencies in the reference basket and their relative weight. The PBC indicated that it would adjust the exchange rate trading band as necessary to reflect market developments and financial and economic conditions. Under the new regime, the band around the daily trading price of the U.S. dollar against the renminbi was kept at ± 0.3 percent around the central parity published by the PBC while the trade prices of the non-U.S. dollar currencies against the renminbi were allowed to move within a certain band announced by PBC, which was initially set at ±1.5 percent and increased to ±3 percent in September 2005. In August 2005, the governor of PBC revealed that U.S. dollars, Euro, Japanese yen, and Korean won were the main currencies included in the basket, and U.K. pound, the Thai baht, and the Russian ruble were among other currencies included in the basket. In May 2007, the band around the daily trading price of the U.S. dollar against the renminbi was widened to ± 0.5 percent. After maintaining the renminbi closely linked to the U.S. dollar between July 2008 and June 2010, the PBC announced on June 19, 2010 a return to the managed floating exchange rate regime prevailing prior the global financial crisis with the exchange rate allowed to move up to ±0.5 percent from a central parity rate.

2. On January 4, 2006, over-the-counter (OTC) trading of spot foreign exchange was introduced with 13 banks initially designated as market makers and the number of market makers has since risen to 22. The centralized spot foreign exchange trading system (CFETS) remains operative, but its central parity rate (renminbi against the U.S. dollar) is now based on a weighted average of CFETS and OTC transactions. Under the new system, CFETS first inquires prices from all market makers before the opening of the market on each business day, exclude the highest and lowest offers, and then calculates the weighted average of the remaining prices in the sample as the central parity for the renminbi against the U.S. dollar for the day. The weights for the market makers, which remain undisclosed, are determined by the CFETS in line with the transaction volumes of the respective market makers in the market.

3. China accepted the obligations of Article VIII, Sections 2, 3, and 4 of the Fund’s Articles of Agreement on December 1, 1996. There are repatriation and surrender requirements on proceeds from exports and from invisible transactions and current transfers. Starting on August 13, 2007, all enterprises (domestic institutions) having foreign exchange revenue from foreign operation or from current accounts may keep foreign exchange receipts according to their operational needs in their current account foreign exchange accounts. Domestic institutions that had no current account foreign exchange revenue in the previous year are allowed to retain an initial limit of foreign exchange revenue equivalent to US$500,000. Current account foreign exchange accounts with special sources and designated uses have limits of 100 percent of actual foreign currency income. In the case of export-import and manufacturing enterprises that, because of actual operating needs, must retain all current account foreign exchange revenues, SAFE may determine their limits as 100 percent of actual foreign exchange revenue and actual needs. From invisible transaction, balances, if any, beyond operational needs must be sold to foreign exchange banks, with amount exceeding US$50,000 requiring documents be submitted to SAFE. There are no measures currently in force that have been determined to be exchange restrictions subject to Fund jurisdiction. However, China has notified measures to the Fund, pursuant to procedures under the Executive Board Decision 144-(52/51), which apply to measures imposed solely for national or international security reasons.

4. Exchange controls continue to apply to most capital transactions. Effective on July 1, 2006, quotas on foreign exchange purchases for foreign direct investment (FDI) were abolished, and domestic investors were allowed to purchase foreign exchange to finance pre-FDI activities. Since December 1, 2002, qualified foreign institutional investors (QFIIs) have been allowed to invest domestically in A shares, subject to certain restrictions, and all nonresidents have been allowed to purchase B shares, which are denominated in U.S. dollars or Hong Kong dollars. The overall QFII quota was increased to US$30 billion in December 2007 from US$10 million. The Qualified Domestic Institutional Investor (QDII) scheme was introduced in 2004, and measures have since been taken to promote its development. Since May 1, 2006, residents can purchase up to US$20,000 foreign exchange for depositing in banks or for current account transactions and this limit was raised to US$50,000 in September 2006. Beyond the quota, purchases require relevant documents. In May 2007, the QDII scheme was expanded to allow qualified banks to invest retail funds in foreign equities. Effective July 5, 2007 the China Securities and Regulatory Commission extended QDII to securities and fund-management companies. The firms have to meet certain capital and other requirements. From April 2006, qualified insurance companies were also allowed to invest their own foreign exchange externally under the QDII scheme. In 2004, international financial institutions were approved to raise funds domestically in renminbi for use offshore, while in December 2007, it was announced that foreign-funded enterprises would be allowed to issue renminbi bonds. Other nonresidents are still not permitted to issue capital or money market securities in the domestic market. An annual foreign borrowing plan sets mandatory ceilings for all medium- and long-term borrowing by government departments and enterprises (except FFEs which are subject to individual limits negotiated in the investment approval process).

VIII. Article IV Consultation:

5. China is on the standard 12-month consultation cycle. The 2009 Article IV mission was concluded on July 8, 2009. The staff report was not published.

IX. Technical Assistance:

6. Technical assistance provided in 2000 through January 2008 is summarized in Annex V.

X. Resident Representative:

9. The resident representative office in Beijing was opened in October 1991. Mr. Il Houng Lee is the Senior Resident Representative and Mr. Murtaza Syed is the Resident Representative.

Annex II. China: Relations with the World Bank Group1

1. The World Bank has been active in China since 1980. World Bank commitments to China as of end-FY 2010 are expected to total about $47 billion for 323 projects. About 75 of these projects are under implementation, as well as a significant number of trust funds, making China’s portfolio one of the largest in the Bank. World Bank-supported projects are found in almost all parts of China and in many sectors of the economy, with infrastructure (transport, energy, urban development) accounting for more than half of the total portfolio, and rural development, social sectors (health, education, social protection), and direct poverty reduction programs comprising the remainder. Roughly three-quarters of Bank supported activities have environmental objectives and a strong environment focus runs across sectors with environment-related projects in energy, urban wastewater, water supply and sanitation, and rural development.

2. The nature of the China-World Bank partnership has also changed over time. Initially, China looked to the Bank for technical assistance to introduce basic economic reforms, modern project management methodologies, and new technologies. With time, the partnership increasingly focused on institutional strengthening and knowledge transfer. As China has successfully adopted new practices and registered unprecedented development achievements, the remaining development challenges have become less amenable to standard solutions. Instead, China has engaged the Bank in a two-way exchange to tailor unique approaches that match local realities and capacity with global experiences. The Bank has also increasingly sought to support China in sharing its own important development experiences and knowledge with the rest of the world. Going forward, China is placing an increasing emphasis on growth that is balanced with social and environmental concerns. Given the resources constraint and difficult reform challenges, innovative approaches, ideas, and system reforms will be critical to China’s achieving its national goals.

3. The World Bank Group Country Partnership Strategy (CPS), endorsed by the WB Board in May 2006, covers both lending and non-lending activities and is designed to support the five strategic themes consistent with China’s 11th Five-Year Program: integrating China into the world economy, reducing poverty and inequality, addressing resource scarcities and environmental challenges, strengthening the financial sector, and improving market and public institutions. The mid-term Country Partnership Strategy Progress Report (Report 46896-CN) completed in January 2009 determined that the Strategy is well on track to fulfill or exceed most strategic targets. The Progress Report notes that implementation of the CPS has largely proceeded as envisaged, however there has been a more intensified engagement in a number of areas, including: China’s integration into the world economy, especially regarding south-south learning; energy efficiency, environment and climate change; and, more recently, integrated urban-rural development. Bank support for disaster and risk management generally, and earthquake reconstruction, specifically, in the wake of the tragic May 2008 Sichuan earthquake has been mobilized. The Bank is also providing support to help the government in managing the impacts of the current global economic downturn.

4. In FY 2009 lending totaled $2.3 billion in IBRD loans for 13 projects. These projects focus on urban environment improvement, transportation (urban transport, inland waterways, railways and provincial highways), vocational training, eco-farming, flood and watershed management, coal bed methane development and a cultural and natural heritage project. The Bank also supported reconstruction following the Wenchuan earthquake with a $710 million loan. For FY 2010 we envisage lending of $1.4 billion in total for 14 projects in support of poverty reduction, eco-livestock development, food safety, sustainable forestry, urban environment and transport, river basin management, biomass heat power cogeneration and vocational education. As in the past, these lending operations are knowledge-based: successful pilots may be scaled up and replicated in other provinces or at the national level.

5. In addition to financial assistance, the provision of economic analysis, policy advice, technical assistance and training is an essential part of the Bank’s partnership with China. The Bank has responded to the country’s evolving needs, by having a better balance between comprehensive reports on issues requiring detailed technical analysis and more demand-driven rapid delivery brief policy notes, supplemented by other forms of collaboration such as senior-level workshops and focused study tours.

6. Key analyses that were recently released include: Quarterly Economic Updates, reports on trade issues, pension reform, health care reform, improving rural-urban linkages in Chongqing and Guangdong, rural compulsory education, rural urban migration, energy intensity, capital market development, land market reform, and financial sector development.

7. The China Economic Reform Implementation project, a technical cooperation loan, was approved in FY 2006. A large program of technical assistance has also been financed by trust funds from within and outside the Bank, covering issues such as environmental management, financial sector reform, statistical reform, poverty issues, and social security. The World Bank Institute carries out a wide range of training, peer learning and South-South knowledge exchange programs, including through use of the Global Development Learning Network.

8. China has also signed 20 carbon purchase agreements with the World Bank totaling USD 1.297 billion as of June 2010.

Representation: The People’s Republic of China assumed China’s representation in the World Bank on May 15, 1980.

Capital Subscription: China’s current subscription is 44,799 shares, amounting to US$5,404.3 billion, which is 2.85 percent of the total subscribed shares of IBRD. China has fully subscribed to its share allocation.

Resident Mission: A resident IBRD office in Beijing has been in operation since October 1985. In October 1997, responsibility for managing the Bank’s total program for China was decentralized to the Beijing office.

International Finance Corporation (IFC): \ As of June 15, 2010, IFC had invested $4.65 billion in 193 projects across all major sectors ($1.65 billion in equity, $2.00 billion in loans, $754 million in syndications and $250 million in guarantees). IFC’s early partners were mostly foreign investors, but now 85 percent of IFC’s clients are domestic companies. The investment program for FY 2010 is expected to be approximately $420 million. IFC’s China strategy focuses on climate change, balanced rural-urban development, and South-South investment particularly focused on Africa. A resident IFC office in Beijing has been in operation since 1992. In July 2000, IFC began to operate its regional headquarters in Hong Kong. In 2002, IFC opened an office in Chengdu to provide advisory services to small and medium enterprises (SMEs) in Western region of China.

Annex III. China: Relations with the Asian Development Bank1

1. The Asian Development Bank’s (ADB) partnership with the People’s Republic of China (PRC) has evolved since the PRC became a member of ADB in March 1986. The PRC is ADB’s second largest shareholder among regional members and the third largest overall, as well as an important middle-income country client. By the end of 2009, the PRC’s cumulative borrowing from ADB reached $22.2 billion with 156 loans for public sector projects. Of the total public sector loans, 56 percent was allocated to the transport sector, followed by water supply, sanitation and waste management (13 percent), energy (12 percent), agriculture and natural resources (8 percent), multisector (5 percent), industry and trade (3 percent), and finance (3 percent). Over the past 23 years, ADB has helped finance 29 private sector projects in the PRC totaling $2.1 billion.

2. ADB also funds technical assistance for the PRC. By the end of 2009, ADB had provided a total of $331.8 million in grants for 598 technical assistance projects, consisting of $100.1 million for project preparation and $231.7 million for policy advice and capacity development.

3. Overall, the PRC has demonstrated strong capabilities in implementing projects. The good performance shows the strong sense of project ownership among agencies involved in the design, implementation, and management of projects, as well as the rigorous screening process for development projects, particularly those proposed for external financing. Loan disbursement and contract award performance is good.

4. The PRC has demonstrated its strong partnership with ADB by contributing $35 million to the Asian Development Fund, and establishing the $20 million Poverty Reduction and Regional Cooperation Fund. The Poverty Reduction and Regional Cooperation Fund—the first fund established in ADB by a developing member country—provides technical assistance for projects in the Greater Mekong Subregion and in Central Asia.

5. In 2008, the Asian Development Bank issued its most recent Country Partnership Strategy (CPS) for the People’s Republic of China, covering 2008 to 2010. The CPS was developed in close cooperation with the PRC Government, and supports the government’s implementation of the 11th 5-Year Plan through four strategic pillars: (i) inclusive growth and balanced development; (ii) resource efficiency and environmental sustainability; (iii) regional cooperation and public goods; and (iv) the enabling environment for private sector development. In addition, two themes cut across all of ADB’s operations: (i) knowledge and innovation; and (ii) governance. A new CPS is currently under preparation, covering 2011 to 2015.

6. Projected public sector lending in 2010-11 will total about $2.98 million, of which 42 percent will support transport infrastructure and maintenance; 22 percent for agriculture, rural development and natural resource management; 22 percent for urban development, water supply and sanitation improvement; and 14 percent for the energy sector. With 85 percent of the projects located in the western and central regions, and all projects having an environmental focus, the pipeline closely follows the strategic pillars of the CPS, particularly its emphasis on inclusive growth and environmental protection.

7. The ADB’s lending program will continue to be supported by technical assistance. Grants for technical assistance program are expected to be $15 million to $20 million annually. To enhance the strategic focus of ADB operations, better meet the goals of the government’s development plans, and address pressing concerns on environmental protection and energy preservation, several advisory technical assistance projects are directly related to resource efficiency, environment protection, and climate change initiatives.

Table III.1.

China: ADB’s Commitments and Disbursements (Public Sector Loans), 1993-2009

(In millions of U.S. dollars)

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Refers to cumulative contract awards.

Refers to disbursements for the year.

Annex IV. China: Statistical Issues

1. While economic statistics are adequate for surveillance purposes, weakness remain in the quality of the data, including coverage, frequency and timeliness. Nevertheless, China has made significant strides in bringing its economic and financial statistics into line with international good practice. In April 2002, China began participation in the Fund’s GDDS, and it certified and updated the metadata posted on the Fund’s DSBB (the most comprehensive documentation of economic and financial statistics available in English), in early 2009 (with the exception of financial sector and social demographic sector, which were certified in 2006). The technical assistance (TA) and training evaluation mission in March 2009 concluded that STA’s TA and training missions to China were highly appreciated by all recipient agencies.

Real Sector Statistics

2. The National Bureau of Statistics (NBS) compiles and disseminates annual GDP by activity in current and constant prices (2005). The techniques for deriving volume measures of GDP are not sound and need to be improved. GDP by expenditure is compiled at current and constant 2000 prices, but the constant price estimates are not published. Quarterly GDP estimates are compiled in cumulative form, with minimal revisions, making it difficult to assess quarterly developments accurately or to make seasonal adjustments. Data on the expenditure components of GDP are not available on a quarterly basis. Nevertheless, the NBS has made a number of improvements to the range and quality of national accounts data, the most important being improving the exhaustiveness of the GDP estimates by activity. Further improvements are intended, including the adoption of the 1993 System of National Accounts, further improvements to quarterly GDP estimates. However, no target dates have been set. As in other countries, rapid economic change, including the expansion of the private sector, presents new problems for data compilation. The ability to change the collection of data is restricted by the decentralized nature of the statistical system. Extensive technical assistance has been provided from multilateral and bilateral institutions.

3. Monthly industrial production, retail sales, and fixed investment indices are compiled with the corresponding month of the previous year as a base period. However, no chain-linked time series are produced. Data revisions tend to be made without publishing the entire revised series.

4. Labor market statistics—including employment and wage data—are not comprehensive, and are only available on an annual basis, with considerable lag.

5. In January 2001, the NBS began to publish an annually-chained Laspeyres price index, which more accurately reflects consumer spending patterns (e.g., the weight of services increased, while the weight of food declined). The number of survey items has been expanded to around 700. The most recent weights of the major CPI components were provided to the staff in 2006. Prior to 2001, the index was compiled and disseminated on a month to month and year to year basis using current year weights for most items. The data for this index are for the period 1978-2000.

Government Finance Statistics

6. Serious data shortcomings continue to hamper fiscal analysis. Budgetary data exclude spending associated with domestic bond proceeds on-lent to local governments and official external borrowing. Also, data on the social and extra budgetary funds are only provided annually and with a long lag. Expenditure classification remains poor, mainly because data are not classified by economic type. However, the situation should gradually improve with the recent introduction of a revised budget classification system, starting with the 2010 budget. The authorities have indicated an intention to develop accrual based measures of fiscal performance over the medium term while also strengthening the compilation of cash based GFS.

7. China has reported general government cash-based budget data for 2003-2007 following the GFSM 2001 methodology for publication in the 2009 GFS Yearbook. However, these data are limited, with no data provided on government debt and transactions in financial assets and liabilities. The revenue classification does not fully distinguish between revenue and grants, tax and nontax revenue, and current and capital revenue. The presentation of expenditure by function is largely aligned with international best practice. Owing to source data issues, the authorities have not yet been able to report a GFSM 2001 Statement of Sources and Uses of Cash for the budgetary central government accounts on a subannual basis. As a result, there are no fiscal data for China on the Principal Global Indicators website.

Monetary and Financial Statistics

8. In recent years, improvements have been made by the People’s Bank of China (PBC) in monetary and financial statistics. The most notable progress made by the PBC are as follows: (1) expanding the coverage of financial institutions; (2) adjusting the sectorization of financial corporations; (3) improving the “all accounts” reporting system; and (4) improving data dissemination following the GDDS recommendations, such as disseminating advance release calendars on the PBC’s websites. On financial soundness indicators (FSIs), China began reporting annual data on core FSIs to the Fund under a pilot project although no agreement has been given by the authorities for publication of these data.

9. However, the monetary and banking surveys lack sufficient detail with regard to bank claims on the government, hampering the estimation of the fiscal deficit from the financing side. The reported net foreign assets position of PBC does not include exchange rate valuation effects and interest earnings on foreign reserves. The PBC has also ceased to report separate data on central government deposits in its balance sheet since April 2005 because the MOF no longer distinguishes between central and other government deposit accounts. This change has led to breaks in data series of monetary base and monetary aggregates. In addition, detailed breakdowns of bank credit by industry, and by borrower (including by the various elements of the state and nonstate sectors), are not publicly available.

10. Due to the restructuring of the banking sector, new statistical issues have arisen, such as how to record the transfer of nonperforming loans to asset management companies, and how to sectorize these companies in the banking survey. The monetary and financial statistics mission that visited Beijing in 2007 and 2009 made recommendations for addressing these issues. These missions also assisted the authorities in addressing issues related to (1) the implementation of Standardized Report Forms; (2) expansion of data coverage to include other financial corporations; and (3) compilation of FSIs and reporting of FSI data and metadata using the standard templates.

11. A financial statistics mission will visit China in the 2nd half of 2010 to assist the authorities in advancing their work in addressing data issues on monetary and financial statistics and financial soundness indicators.

External Sector Statistics

12. The State Administration of Foreign Exchange (SAFE) relies on an International Transactions Reporting System (ITRS) which produces data derived from information on foreign exchange transactions conducted by banks. To supplement the ITRS, data on travel credits and trade credits are collected through periodic sample surveys, while additional data are collected from other government agencies and reports on balance sheet information from financial institutions and data on portfolio investment and direct investment.

13. The data are compiled (in U.S. dollars) largely in accordance with the fifth edition of the Balance of Payments Manual (BPM5). Preliminary semi-annual (January-June) data are compiled and disseminated within three months after the end of the reference period while annual data are disseminated four to five months following the end of the reference period. It appears that the authorities may be close to being able to publish quarterly estimates of the balance of payments. Within the current account, component detail is available on goods, services, income, and transfers. Data on the financial account, with significant component detail for functional categories, and data on the capital account are also available. Data on China’s international investment position (IIP) are published for the period 2004-2009.

14. The coverage of direct investment transactions remains a problematic issue in the balance of payments and IIP statistics, although progress is being made in developing these statistics. Data on transactions for the nonfinancial sector, received mainly from the Ministry of Commerce (formerly Ministry of Foreign Trade and Cooperation), apparently do not cover all required elements such as disinvestments. In 2007, inward direct investment stock data of the nonfinancial sector were based on new source data collected through the “Joint Annual Review and Evaluation of Overall Performance on China’s Inward FDI,” a joint government department effort to collect performance data from foreign-funded enterprises. Since ITRS is the major data source for BOP, in order to ensure its smooth operation, regular training programs for staff in the provincial offices of SAFE were recommended. In addition, in January 2003 a legislative guarantee for the improvement of the quality of ITRS reporting entitled “The Checking System on Balance of Payments Reporting Data (experimental)” was promulgated by the SAFE. An upgraded version of the ITRS has been used since 2009.

15. The Fund has provided extensive technical assistance and training to improve balance of payments and IIP statistics. At the Joint China-IMF Training Program in Dalian, STA conducted a specialized seminar on Cross-border Stocks and Flows in June 2006 and a Balance of Payments and IIP course in June 2007. Following China’s agreement to participate in the Coordinated Direct Investment Survey (CDIS), STA visited Beijing in April 2008 to conduct an interagency meeting on the CDIS. At the request of SAFE, STA also conducted a one-week seminar on the new draft Balance of Payments and International Investment Position Manual (BPM6) in Kunming, China.

16. The Fund has also provided technical assistance on the coverage, timeliness, and periodicity of data on official reserves, reserves-related liabilities, as well as on other external assets and liabilities, financial derivative activities, and other contingent and potential liabilities. Despite an ostensibly modest level of external vulnerability, there remains a need to strengthen external debt monitoring and compilation. STA conducted a seminar on external debt statistics in August 2005 as part of the China Training Program. In January 2010, China started submitting total and public external debt data for the Quarterly External Debt Statistics (QEDS) database, a notable step forward.

Data Reporting to STA for Publications

17. Despite improvements in reporting a number of breaks remain in the series, and comparable historical data are not available. Reporting of data to STA for IFS has, in the past, tended to be sporadic and with a considerable time lag. Following the introduction of new reporting arrangements, the timeliness of consumer price, industrial production, trade value, and total GDP data in IFS has improved substantially. However, the range of information is relatively limited, with no data published on producer prices, wages, trade volumes or prices/unit values. The authorities have recently resumed reporting data on international reserves for IFS. However, the monthly time series will now be submitted every three months, instead of every month.

Data Dissemination to the Public

18. The publication of a quarterly statistical bulletin by the PBC has significantly improved the timing and coverage of publicly available data on the monetary accounts and the main real sector indicators. However, the monthly statistical publications do not contain many time series (e.g., unemployment) or the disaggregation necessary for analysis. Moreover, several important time series, particularly on the main fiscal variables, are not released in a systematic and timely manner. Extensive annual economic data are available in various statistical yearbooks, but these are published nine months or more after the end of the year.

China—Table of Common Indicators Required for Surveillance

(As of June 17, 2010)

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Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

Only 12-month growth rates are reported (price indices are not available).

Data on financing (foreign, domestic bank, and domestic nonbank financing) is not available.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Data on the exports and imports of goods are provided monthly. Services trade data is provided semi-annually and released with the current account statistics.

For real GDP, level data are available only on an annual basis (growth rates are available on a quarterly, cumulative basis).

Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A); Irregular (I); Not Available (NA).

10 While officially transmitted on a monthly basis, these data are available from news sources on a daily basis.

Interest rates change only infrequently; these changes are publicly announced.

Data provided semi-annually.

Annex V. China: Fiscal Reforms and Technical Assistance

1. In recent years, the Fund has provided technical assistance in a number of areas (Table V.1). This annex focuses on the main issues and recommendations in the fiscal area.

Table V.1.

China—Summary of Technical Assistance, 2001-09

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Fiscal Technical Assistance Program

2. FAD has largely provided advice on tax policy, tax administration, budget and treasury reforms, and intergovernmental relations.

Tax Policy

3. The scope of the Fund TA work in this area has been quite comprehensive, covering every major tax: the value-added tax (VAT), the business tax, the enterprise income tax (EIT), and the personal income tax (PIT), or the tax treatment of specific sectors (i.e., financial sector).

4. On the VAT, the focus of the Fund’s TA advice on the VAT has been on transforming it into a consumption-type VAT (now being piloted). As there are important revenue and central-province intergovernmental implications of the VAT reform, the Fund has paid particular attention to alternative transition strategies. The Fund’s TA advice has also focused on improving the structure of the EIT, including the unification of the regimes applying separately to domestic and foreign enterprises, and rationalizing and reducing the scope of EIT incentives. The EIT was unified on January 1, 2008. For the PIT, whose yield is still relatively insignificant, its structure should be streamlined and its rates simplified; the authorities have recently increased the PIT income exemption threshold, along the lines of previous Fund’s advice. In addition, the liberalization of the financial sector under the WTO commitments has important tax implications, some of which has already been covered by Fund TA; such as the August 2007 mission which advised the authorities on financial taxation. The authorities have also expressed interest in receiving TA on streamlining real estate taxes, which are an important revenue handle for local governments. A mission on revenue forecasting took place in March 2008, and a mission on tax gap estimation is scheduled for June 2009.

Tax Administration

5. The authorities have been putting in place the basic building blocks of a modern national tax administration. In this regard, the Fund TA program has aimed at assisting the State Administration of Taxation (SAT) to develop the strategic capacity required for it to manage a national tax system, with assistance provided to both the central and provincial governments. During 2006-07, TA covered strategic planning, compliance risk management, business process reengineering, VAT administration, taxpayer services, and the planned IT modernization program, Golden Tax Project 3 (GTP 3). A seminar on strategic planning and management practices in support of previous FAD recommendations was conducted January 2008. The SAT has made good progress particularly in VAT administration and delivery of taxpayer services (including the introduction of e-services). Importantly, compliance risk management capacity is under development and a major IT system enhancement is in the beginning stages. Other organizational reforms have proven more difficult, such as implementing a fully functional organization structure with expanded headquarters responsibilities and staffing, and integrating strategic and annual business planning into the SAT’s management processes. With the assistance of the Resident Representative in Beijing, the SAT’s TA needs for the immediate future have been determined as consolidating the VAT on services, and in large taxpayer compliance programs—both areas will be addressed by FAD during FY2011.

Public Financial Management

6. In order to improve control, allocation and management of public spending, several budget and treasury reforms have been implemented in recent years. These include: improving budget preparation, especially budget classification; introducing departmental budgets; centralizing the government payments function; and establishing treasury single accounts (TSA) at the central and provincial levels.1

7. Up until 2007, these efforts were supported by extensive technical assistance from FAD, which also provided TA for a possible reform of the 1994 Budget Law and on accrual accounting (see Table V.1). Topics for further TA—including for preparing medium-term expenditure frameworks, improving fiscal transparency and macrofiscal forecasting, developing government financial management information systems (GFMISs), and strengthening government cash management—were discussed in 2007. However, the authorities have not yet followed up with requests for TA in any of these areas. In 2009 FAD participated and provided the keynote speech at an international conference in Hainan Province on local government cash management organized by MOF and the ADB. FAD has offered to provide further TA in this area.

Intergovernmental Fiscal Relations

8. The authorities are aware of the need to reform the system of intergovernmental fiscal relations, as imbalances between the center and subnational levels are growing and regional disparities are widening. There is a need to clarify expenditure mandates, including by centralizing some spending responsibilities such as pensions. Revenue sharing and the design of the transfer system also need to be reformed. In November 2007, FAD organized a conference on “Reforming Assignments and Next Steps in Intergovernmental Reforms” (in Hangzhou) with funding from the UNDP and the Chinese authorities. The authorities confirmed that they have now established a Sub-National Debt Management Division in the Ministry of Finance, and that one of the additional areas of reform will be to assess subnational risks and liabilities.

1

Prepared by World Bank staff.

1

Prepared by Asian Development Bank staff.

1

A standard Treasury Single Account (TSA) is a centralized bank account or a set of linked bank accounts through which the government, including its entities and spending units, transacts all receipts and payments and consolidates its cash balances. TSA reform has been introduced in all 36 provinces, autonomous regions and municipalities, and is being pursued in some 500 prefectures and larger cities.