OECD report finds mainland failure to implement thorough change may limit

The Organisation for Economic Co-operation and Development has warned the mainland's economic growth is being impaired by a failure to carry out thorough reform of state enterprises and the financial sector.

Releasing its biannual Economic Outlook report, the OECD said the reform efforts were difficult to assess and questions remained about whether they were sufficiently broad or if their recent successes were sustainable.

The report noted that despite reforms such as the restructuring of the People's Bank of China's regulatory framework and the creation of an asset management company for bad debt at the Construction Bank of China, state banks were still directed to make loans to troubled enterprises, which meant a rise in bad debt was inevitable.

Similarly, state enterprise reform, which has seen mergers and acquisitions of smaller and medium-sized enterprises, and restructuring of the coal and textiles industries - with the loss of 660,000 textiles jobs last year - also do not appear to go far enough.

'Effective replacement mechanisms to ensure management accountability and improve corporate governance of larger enterprises largely remain to be developed,' the OECD said.

'The competitive viability of restructured medium and smaller enterprises [also] remain to be tested and further restructuring is likely to require more extensive use of measures such as bankruptcy, that have been rarely used so far.' Predicting yesterday that mainland growth would slow to 7.2 per cent this year and 6.8 per cent next year from 7.8 per cent last year, the OECD also warned jobs would have to be found for workers in transition and the newly unemployed.

It also said the government faced a budget financing problem with revenues falling far below the international norm.

'Although the official budget deficit and public debt ratios are low by international standards, unofficial estimates, including off-budget operations, suggest that the overall fiscal situation is more problematic,' it said.

In particular, the report said if bad loans were counted as government obligations, then revenue would be considered as quite scarce in terms of Beijing's responsibilities.

It said the overall share of government tax and other explicit revenues to GDP was only 18 per cent and revenue share of the central government was only 50 per cent.

'Revenue scarcity has been an important contributor to structural problems, notably the use of bank lending to cover losses of state enterprises,' the report said.

'It also constrains current reforms: for example, mergers of financially stronger with weaker enterprises have been favoured as a means to limit demands on the government's budget.

'Moreover, demand for revenues will rise further as government takes on pension, health, and other social welfare obligations now borne by enterprises.' It acknowledged the authorities were conducting reforms to broaden the tax base and consolidate and rationalise local government fees as well as improve tax collection.

Meanwhile, efforts to encourage more foreign direct investment were unlikely to be successful until economic conditions around Asia improved, it said.