From rescue to recovery: towards a sustainable transition for China after the COVID-19 pandemic

A submission to the China Development Forum 2020.

Transforming China’s economy for a stronger, more sustainable and resilient future in a changing world will involve action across many fronts. In this paper the authors focus on two key strands of analysis and action necessary to generate incentives for firms, workers and government at different levels, to foster and deliver recovery and the new form of growth:

• The first is the coordinated development of clean, compact and connected (CCC) cities alongside the restructuring of existing metropolitan areas.
• The second involves drivers of structural change, including institutional, fiscal and financial underpinnings.

Main messages

• China’s 14th Plan must take into account both its own challenge and the world context while planning the move from rescue to recovery from COVID-19.
• China’s export-led growth strategy is now at risk, given that major trading partners have yet to transition from the pandemic rescue stage and are facing deep recessions. Consequently, the economic recovery phase in China must embody a shift to domestic consumption, bolstered by the strengthening of innovation and new urban design, governance and fiscal institutions.
• A shift is needed from the export-oriented megacity ‘hubs’ on the eastern seaboard to CCC cities, supplemented by the development of zones of non-contiguous innovation activities and of the sustainable urban transformation embodied by this structural change.
• These measures must be based on clean sources of energy and low-carbon technologies that facilitate e-commerce, management of big data, and fin-tech.
• COVID-19 has highlighted that high population density can be problematic where there are highly contagious diseases. CCC cities will require design and strategies that leverage the very strong advantages of living and working in close proximity to others, while managing the difficulties these features create in terms of disease transmission.
• It is easier to design clean and efficient buildings, grids and infrastructure in more manageable county-size sub-jurisdictions and CCC cities than in the metropolises. For this infrastructure to function well, accountability for delivery of services and local tax and financing mechanisms will be crucial.
• Fiscal reforms will be needed to ensure that investment programmes, including stimulus packages, provide sustainable incentives to firms, workers and governments at different levels, strengthen local budgets and facilitate access to private finance without exacerbating fiscal risks.
• The proposed restructuring of central transfers directly to cities and counties and making ‘special purpose bonds’ available for infrastructure is a good start. But it is important to go beyond transfers and borrowing to include local own-source taxes, to reduce risk and ensure greater local accountability for the new responsibilities.
• Appropriate local own-tax instruments or handles, administered by the State Tax Administration, are critical for accountability.