In a new report, the OECD says that China needs to make far-reaching reforms in public and corporate governance if it is to continue on a stable growth path leading to full integration into the world economy.

The report concludes that the country’s governance arrangements suffer from a number of serious fault lines, particularly in relation to China’s public finances and social stability. It notes that public resources that could be used to finance social services are absorbed by efforts to shore up loss-making state-owned companies and prevent default on loans they have received from state-owned banks. Local government structures are burdened by heavy spending obligations without appropriate matching revenues or an effective system of transfers.

Decisions on public capital expenditure are taken by the National Development and Reform Commission, while the budget is managed by the Ministry of Finance. Staffing decisions with regard to public employees down to a certain level are made by yet another body, without compulsory co-ordination. In addition, the OECD notes, organizational and co-ordination problems result from the co-existence of structures inherited from the past with new institutions.

The OECD observes that economic growth alone will not solve all these problems, and recommends that China should: redefine the role of public authorities; reform relations across levels of government to ensure that local authorities act in accordance with national objectives in relation to issues such as the rural/urban balance, redistribution of wealth, the environment and central control versus local autonomy; develop more effective tools for evaluating the effect of government policies; ensure greater consistency among laws affecting a particular area and see that laws mandating broad principles are accompanied by more specific regulations for implementation; step up enforcement through a system of incentives accompanied by sanctions matching the potential benefits to miscreants from violations; give market participants a level playing-field in terms of laws and regulations; regulate businesses and individuals on a basis of economic performance rather than according to bureaucratic categories; and, establish a sound competition policy to reduce market segmentation and local protectionism, consolidate the intellectual property rights regime and further restructure state banks and industries.

The report allows that China has already taken some steps to improve its public and private governance, however, it observes, laws and regulations are often applied in an unsystematic manner and can be skewed by special interests. It notes that China has made progress in strengthening the budget management and civil service systems – the two main pillars of public administration – but many weaknesses remain, leading to inefficiencies.