Fifth, taking account of China's interaction with the rest of the world. This has three dimensions. First, as the global financial crisis will almost certainly have deep sustained effects on the growth rate and structure of world demand, China's external environment will not return to "business as usual". As a large country which has greatly benefited from opening up and globalization, this will require non-trivial adjustments in the sources and patterns of economic growth. Second, as China's role in the global economy increases, including through increased outward investment, its development and policies will have increasing impacts on global markets and other countries, which needs to be factored into policy making. These growing links will also have implications for planning physical infrastructure and promoting trade facilitation. Finally, working in concert with other countries, China will be involved in tackling a range of issues on global and regional public goods, including on the environment.

Box 1. Possible next steps in reform of SOE dividend policy

China's SOEs have become very profitable. Continuous reform and restructuring in the 1990s, rapid overall growth, and a favorable policy setting have led to steady improvement of SOE profitability in China since 1998. SOE profits fell in the first part of 2009, but recovered and were up 10 percent for the year as a whole. In 2007, aggregate profits of nonfinancial SOEs reached 7 percent of GDP. Had they been completely added to the government's budget, total fiscal revenue would have been around one-third higher.

China is carrying out a pilot scheme on raising SOE dividend. In view of the absence of a SOE dividend policy since 1994, the State Council launched a reform in 2007 that aims to collect dividend from central SOEs and channel it to a State Capital Management Budget (SCMB) on a pilot basis. In 2008, the first SCMB was formulated and implemented. The pilot was scheduled to be completed in three years.

What is the desirable direction for further reform of China's SOE dividend policy after the pilot? A recent World Bank policy note recommends three main policy actions.[19]

The first is to increase the flexibility of SOE dividend payments by adding a dividend ratio determination mechanism to the existing system of the state ownership function. A desirable mechanism could be defined as follows: each SOE's dividend ratio has two components, a fixed one and a variable one. The fixed component is uniform across the sector. The variable component is set via a four-step process with the SOE board's proposal of the variable dividend ratio target as part of the Responsibility Statement, SOE and State-Owned Assets Supervision and Administration Commission (SASAC) discussion followed by agreement, and SASAC's evaluation.

The second involves government monitoring and adjustment of the average dividend ratio of all central SOEs. One or more of the following three approaches could be considered. The first is to accept whatever is turned out by the recommended mechanism to determine the dividend ratio. If some degree of planning and targeting with regard to the average dividend ratio of all central SOEs turns out to be justified, two other approaches could then be considered. The authorities could either carry out an in-depth study to gauge the appropriate level of dividend ratios in various sectors and key SOEs by assessing the investment efficiency of SOE profit, or simply set a target in the 20-50 percent range in the 12th Five-Year Program, taking into consideration factors such as overall SOE reform strategy and sectoral development program.

The third is to start integrating the SCMB with the general budget. The government could consider to: (i) transfer the SOE dividend revenue to the general budget, and (ii) incorporate the SCMB into the general budget.

Box 2.Pension Portability Reform in China

In early 2010, the government took measures to improve the portability of pension rights and benefits. According to the Interim Guideline on the Portability of Pension Benefits issued by the State Council, urban and migrant workers will become able to carry and retain accumulated pension benefits with them when they move between provinces and change jobs. This is an important step toward unifying the pension system nationwide and pooling of pension funds at higher level to facilitate labor mobility in China.

China's fragmented urban pension system has hindered the portability of pension rights and benefits and thus labor mobility and labor market efficiency. Pension funds have operated locally at the city/county level. The balances of pension funds differ significantly between provinces. Those in developed provinces usually have a large surplus, while those in lagging provinces tend to face deficits. In the absence of a national framework or policy, there were no incentives encouraging the transfer of accumulated pension funds between provinces under the decentralized fiscal system. Since workers could only transfer the funds from accumulated individual accounts, most rural migrants choose to claim the benefits accumulated in individual accounts and withdraw from the urban pension scheme when they returned to the countryside or moved to another city.

The measures are meant to make portable also a part of the social pooling account benefits. China's urban pension scheme is partially funded with two pillars: a social pooling account and an individual account. Employers are asked to contribute 20 percent of their total payroll to the social pooling account and workers are asked to contribute 8 percent of their wage to individual accounts. Pension benefits have two sources: the social pooling pension and the annuitized individual account accumulation.[20] The new policy measures allow workers to transfer the full amounts from the individual account and three-fifth from the social pooling account. This is the first time that workers become able to transfer a portion of the accumulated social pooling funds between regions.

If implemented successfully, this policy reform could have several positive impacts. First, it would improve protection of pension rights for urban and migrant workers and increase equity. Second, it would encourage urban and migrant workers to participate in the urban pension scheme and expand its coverage. In 2008, 24.2 million rural migrants participated in the urban pension scheme, 17.2 percent of all rural migrants. Third, it could facilitate rural-urban integration and improve the quality of urbanization. Urbanization in China is inevitable and most rural migrants are young and tend to choose to live in cities permanently. In addition to encouraging the participation of workers, the portability of pension rights and benefits would allow the pooling of funds from the provincial to the national level, thus creating favorable conditions for eventual unification of China's pension system. Fourth, it could improve labor mobility and labor market efficiency as well as people's quality of life.

These measures are a good step towards further reform facilitating high quality urbanization. Regional coordination of pension funds and service delivery requires a strong capacity of management systems and service networks as well as information exchange, to support the increasing transfer of pension funds and labor mobility. It may be necessary to boost this capacity. Also, these measures may put more pressure on resolving the remaining factors that limit labor mobility, such as the hukou system and eligibility for public services and, fundamentally, the intergovernmental fiscal system.

Notes:

[1] The FAI data typically suggests much higher growth than the annual national accounts data on gross fixed capital formation. This is in part because of a conceptual difference. The FAI data includes spending on land transactions, which does not lead to capital formation. But the differences between the two are too large to be fully explained by this factor. Our government-influenced investment covers utilities, transport, scientific research, water and environmental conservation, education, health care, social security, culture, sport, and public administration.

[2] The total stock of real estate related loans—including those for land development, real estate development and mortgages—rose 38 percent in 2009 to 7.3 trillion yuan at end-2009 (18 percent of the total; 22 percent of GDP).

[3] The preliminary national accounts data includes changes in inventories.

[4] At a press conference during the NPC meetings in early March, the People's Bank of China governor Zhou referred to the peg as a "special policy" during a "special period."

[5] Per capita rural wage income growth, which includes the impact of both wage and employment developments, dropped sharply to 7-8 percent (yoy) in the last quarter of 2008 and the first quarter of 2009. However, it recovered quickly and reached more than 13.5 percent (yoy) in the second half of 2009.

[6]For more discussion on global prospects, see the WB's Global Prospects 2010 at www.worldbank.org/gep2010

[7] The Bank expects energy and metal prices to be contained by the large inventory overhang and agricultural markets to be "well supplied." See Global Commodity Markets, companion to the GEP 2010.

[8] The Ministry of Finance in January announced that Central Government public investment will amount to 993 billion yuan this year, compared to 924 billion yuan in 2009 (and 421 billion yuan in 2008).

[9] As explained below, while some local government expenditures are carried over into 2010, revenues are estimated conservatively in the budget, and on mainstream economic projections and revenue buoyancy assumptions the cash deficit could remain more or less unchanged.

[10] The fiscal deficit reported by the government includes local government infrastructure spending equal to 0.7 percent of GDP that was carried over into 2010.

[11] The financial data of the extra-budgetary funds is not yet known.

[12] The budget estimates revenue growth of 8 percent. On mainstream economic forecasts and taking note that revenues have outgrown nominal GDP growth substantially in recent years would result in higher revenues.

[13] An increase in the reserve requirement ratio (RRR) has a similar one-off impact as an open market operation. Thus, while it is a useful signaling device, RRR adjustments do not tighten monetary conditions in a lasting way.

[14] Movements over time in this indicator using official data do not look particularly worrying. However, there are concerns that the official data underestimate average house price increases and overestimate average wage growth. Moreover, it is difficult to benchmark the level of the ratio, due to the unequal income distribution.

[15] Premier Wen Jiabao noted during the NPC meetings that the Central Government aims to speed up the construction of common commercial housing and affordable housing, and speed up the construction of public rental housing for low-income families.

[16] Sometimes called Urban Development and Construction Companies, in the economic statistics their activities show up in the enterprise sector.

[17] Local government fiscal activity is broadly divided in two parts. General budget spending is largely current spending, financed by local current revenues and Central Government transfers and refunds. The spending on infrastructure and urban development is extra-budgetary, financed by land sale revenue and other non-current revenue, notably bank loans. Since 2007, land sales and related expenditures are reported in local governments' funds budgets, but they are not consolidated with the general budget of local governments.

[18] Examples include the introduction of the household responsibility system in agriculture, the opening up of the tradables sector beginning with the establishment of special economic zones, extensive price liberalization, restructuring and privatization of SOEs, and reforms associated with accession to the WTO.

[19]See www.worldbank.org/china (English version) and www.worldbank.org.cn/china (Chinese version).

[20] The social pooling pension depends on the weighted average provincial wage, the indexed individual wage, and the number of years people have contributed. n