OECD calls for moves on interest rates, market opening and taxation

China needs to implement major reforms to ensure a fourth decade of rapid growth, converging living standards and a greener economy, said a survey by the Organization for Economic Cooperation and Development.

The necessary reforms include deregulating interest rates, opening markets dominated by State-owned enterprises to competition, increasing the supply of building land, treating migrants to cities in an even-handed fashion, taxing carbon and deregulating energy prices.

"Full implementation of these reforms will foster socially inclusive urbanization, a key to a continued rise in domestic demand," said Angel Gurria, secretary-general of the OECD, at a news conference on Friday in Beijing.

Gurria reiterated his estimate - first made late last year - that China's GDP will grow 8.5 percent this year and 8.9 percent in 2014. The growth target set by the Chinese government for 2013 is 7.5 percent.

Richard Herd, a senior economist at the OECD, said the optimistic estimate was supported by the country's accommodative monetary policies, a larger fiscal deficit, and the fact that investment in infrastructure and railways has picked up.

"Therefore we'll begin to see more spending, moderately," Herd said.

"Against that, although it's difficult to see in just the first two months, economic climate indicators are sending positive signs," he said.

Gurria said the gradual pick-up in activity provides a strong background for the reforms China needs to put in place to continue on the road to prosperity.

"We are encouraged by the new leadership's policy vision and welcome its emphasis on initiatives to make growth not only strong, but also inclusive and sustainable over the years ahead," Gurria said.

But he also warned on the risks ahead, such as the off-budget liabilities of local governments' financing platforms.

"More transparency is needed for the off-balance debt," he said, adding that the debt of SOEs should also be included in the government's figures.

Regarding additional reforms in the financial sector, Gurria said that China should continue moving toward market-determined interest rates and align the regulation of bond markets for long maturities with market practices for shorter ones.

"Quotas for inward investment in equities and long-dated bonds should progressively increase," he said, adding that offshore renminbi deposits should be more widely used on the Chinese mainland.

In addition, he said: "Rules for opening new sectors to private investment, including foreign investment, should be clarified."

Commenting on the urbanization efforts - expected to be the main driver of growth over the next decade - Gurria called for a substantial rise in the annual quotas for new building land, to reduce pressure on property prices.

However, Yang Weimin, vice-minister of the Office of the Central Leading Group on Financial and Economic Affairs of the Communist Party of China, who was also speaking at the conference, said that land supply is expected to remain limited, especially in first-tier cities such as Beijing, Shanghai and Guangzhou.

"The built-up area has taken up half of the urban area of these cities and cannot be further expanded," Yang said, adding that this has been the guiding theory for these cities since 2006.

But Gurria and Yang share some views on tax policies to guide the country toward a greener future.

Further improvements are needed in energy efficiency efforts and in reducing carbon-dioxide emissions, with carbon taxation preferable to emissions trading, Gurria said.

Energy conservation should also be encouraged, through higher excise duties on gasoline. Water prices should be raised for end-users, and levies and pollution taxes increased. Standards for motor vehicle emissions and fuel quality should be tightened, he added.

According to Yang, the rollout of the country's tax reform will start with changes to resource taxes, followed by the introduction of an environmental tax.

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