The longer-term sustainability of China's economic growth, however, will depend on strengthening the private sector and deepening reforms in capital markets and the finance and banking sectors, the Paris-based Organisation for Economic Cooperation and Development (OECD) says in its first Economic Survey of China.

"The pace of economic change in China has been extremely rapid since the start of economic reforms just over 25 years ago," said the 205-page report, which came out on Friday.

"Economic growth has averaged 9.5% over the past two decades and seems likely to continue at that pace for some time."

Changes needed

China's economic expansion "represents one of the most sustained and rapid economic transformations seen in the world economy in the past 50 years" but key changes must occur if the miracle is to continue, it warned.

Rapid urbanisation has created
social problems

The changes must come about as rapid urbanisation brings hundreds of millions of farmers to the cities, as the income gap widens, as employment and social security pressures grow and as environmental deterioration becomes increasingly burdensome.

Besides predicting China's economic growth in 2005 and 2006, the report said the current account balance would rise to $100 billion this year and 101 billion in 2006 based on an export-driven economy largely run by private and foreign enterprises.

In 2004, the current account balance was $68.7 billion.

Restructuring

With China's private sector now the dominant player in many industries and a bigger creator of jobs than the state, the regulatory framework still does not meet the needs of private businesses, while poorly performing state-owned companies "are in dire need of restructuring," it said.

China's private sector is now the
dominant player

To stimulate the growth of private enterprise, China must revise its corporate law, pass bankruptcy laws and improve the quality of its judicial and law enforcement systems, the report said.

"Further development of the capital markets will help to lower enterprise debt loads, reduce the exposure of the banking sector to commercial risks, facilitate restructuring and ownership change of enterprises, and improve market discipline over business behaviour," it said.

It said Chinese stock markets continue to be hampered by government-imposed factors, including a preference to only list state-owned companies, non-commercial criteria for new listings and restrictions on the participation of financial institutions.

Exchange rate

Continued banking and finance reforms were essential, especially improvements in corporate governance in banks, while greater exchange rate flexibility would also allow the government to better control inflationary pressures and investment flows.

"Overall, a policy of allowing greater flexibility in the exchange rate would allow the authorities to guard against the risk of any further increase in inflation in both product and asset markets," it said.

It would also allow authorities "to more easily adapt monetary policy to domestic concerns and to allow market forces to determine bank interest rates to a greater extent".

China's July 2005 revaluation of the currency, together with the associated change in the exchange rate arrangements, was "a step in this direction", it said, but more needed to be done.

"Re-organisation of the remainder of the banking system is still needed and would be best accompanied by a growing marketisation of the banking sector," it said.

"Almost 30% of the banking sector remains to be recapitalised."