Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Table of Contents Acknowledgments..................................................................................................................................i Abbreviations ......................................................................................................................................iii Executive Summary..............................................................................................................................v Managing the Transition to a Slower but More Sustainable Growth............................................. vi Helping the Remaining Poor and Sharing the Benefits of Growth................................................viii Meeting the Challenges of Pollution and Climate Change...............................................................x Improving Data and Addressing the Knowledge Gap.....................................................................xi SCD Prioritization..........................................................................................................................xii Chapter I. Securing a Sustainable Path to the “New Normal”...................................................... 1 Introduction..................................................................................................................................... 1 Extent of Reforms Will Determine China’s Growth Outlook......................................................... 2 Financial Sector Reforms................................................................................................................ 5 Expanding the “Decisive Role” of Markets and SOE Reforms...................................................... 8 Promoting Innovations to Support Productivity-Led Growth........................................................ 11 Economic and Social Costs of Industrial Restructuring.................................................................14 Sustainable Urbanization................................................................................................................16 Key Priorities..................................................................................................................................17 Chapter II. Sharing the Benefits of Growth.....................................................................................19 Introduction.....................................................................................................................................19 Unprecedented Poverty Reduction and the Remaining Challenges...............................................20 Sharing Prosperity with the Bottom 40 Percent..............................................................................23 Spatial Disparity and Institutional Constraints to Migration..........................................................26 Redistributive Fiscal (Tax and Transfers) Policies.........................................................................29 Closing the Rural-Urban Gap by Strengthening Rural Agriculture................................................30 Social Protection and Poverty Reduction Programs.......................................................................32 Education for the Poor....................................................................................................................35 Health Services for the Poor...........................................................................................................38 Improving the Targeting and Evaluation of Poverty Programs......................................................41 Key Priorities..................................................................................................................................42 Annex..............................................................................................................................................43 Table of Contents Chapter III. Governance and Institutions for Development........................................................... 47 Introduction..................................................................................................................................... 47 Strengthening Local Government Management of Public Resources.............................................49 Reforms of the Cadre Management System.................................................................................... 51 Enhancing Transparency to Strengthen Accountability...................................................................52 Producing Regulations That Meet the Needs of the Economy........................................................ 54 Rule of Law and Corruption............................................................................................................56 Key Priorities...................................................................................................................................58 Chapter IV. Green Growth for Sustainability...................................................................................59 Introduction......................................................................................................................................59 The Threat of Air Pollution..............................................................................................................61 China’s Sizable Impact on Climate Change.................................................................................... 62 Greening Energy and Industry......................................................................................................... 63 Water and Soil Pollution..................................................................................................................65 Sustainable Management of Natural Resources.............................................................................. 67 Natural Disasters..............................................................................................................................70 Strengthening Governance and Institutions for the Environment....................................................71 Improving Environmental Information............................................................................................72 Key Priorities...................................................................................................................................73 Chapter V. Leveraging Global Trade and Investments....................................................................75 Introduction......................................................................................................................................75 Trade................................................................................................................................................ 76 Foreign Investments.........................................................................................................................80 Global Connectivity and the Belt and Road Initiative.....................................................................83 Key Priorities...................................................................................................................................85 List of Figures Figure 1. 1: China real growth rate...................................................................................................... 1 Figure 1. 2: Growth accounting for China........................................................................................... 2 Figure 1. 3: Quarterly credit to GDP ratio, percent............................................................................. 5 Figure 1. 4: Credit to GDP ratio, percent............................................................................................ 5 Figure 1. 5: Incremental capital-output ratio (ICOR) and real GDP growth...................................... 6 Figure 1. 6: Fixed investment by ownership, 2006-2015 (percent)..................................................... 8 Figure 1. 7: Return on assets of state and private industrial firms (percent), 1996-2016................... 9 Figure 1. 8: OECD product market regulation indicators (2013)....................................................... 10 Figure 1. 9: R&D Expenditures as a Share of GDP vs. GDP/Capita...................................................12 Figure 2. 1: China’s poverty head count ratio..................................................................................... 19 Figure 2. 2: Average per capita consumption growth (left) and income shares of the bottom 40 percent (right).................................................................................................24 Figure 2. 3: Gini coefficients versus GDP per capita (constant 2010 us$)..........................................25 Figure 2. 4: China’s Gini coefficients..................................................................................................25 Figure 2. 5: Bottom 40 percent income shares versus log GDP per capita.........................................26 Figure 2. 6: Urban-rural and interprovincial disparity (left); inter- and intra-provincial disparity (thiel index of county per capita GDP; right)...................................................27 Figure 2. 7: Poverty convergence (left) and regional distribution of the poor (right).........................28 Figure 2. 8: Redistributive effect of fiscal