Information about Asia and the Pacific Asia y el Pacífico
Chapter

Appendix I Summary of Structural Reforms

Author(s):
David Burton, Wanda Tseng, Kalpana Kochhar, Hoe Khor, and Dubravko Mihaljek
Published Date:
September 1994
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Information about Asia and the Pacific Asia y el Pacífico
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Status up to 1993Planned Reform MeasuresImplementation StatusMedium-Term Goals
I. Exchange and Trade System
Exchange System

Complex and lacking in transparency. Dual exchange rates since 1986, when swap centers were established to trade in retention quotas. Access to swap markets progressively liberalized since 1986. Retention and trading of foreign exchange limited to FFEs and certain domestic enterprises. About 80 percent of transactions were estimated to take place at swap market rates.
Unify exchange rates; abolish retention system and the foreign exchange plan; liberalize access to foreign exchange for trade and trade-related services transactions; and move to full current account convertibility. Exchange rate to be determined in an inter-bank market for foreign exchange, with intervention by the PBC to limit volatility.A new exchange system was introduced on January 1, 1994, featuring a unified exchange rate that is determined in an interbank market. New regulations were introduced for domestic enterprises with liberalized access for trade and trade-related transactions. FFEs remain subject to regulations on foreign exchange balancing requirement. Foreign exchange market segmented into interbank market for domestic enterprises and swap market for FFEs.Establish integrated foreign exchange market.



Attain current account convertibility and, eventually, full convertibility.
A national electronic interbank trading system linking 12 major cities became operational on April 1, 1994. Network to be extended to 8 other cities by year end.
Trade System

Complex and subject to administrative control. Many trade regulations were not publicly available.
Enact Foreign Trade Law. Publish all rules and regulations on trade.Foreign Trade Law enacted in May 1994 and became effective on July 1, 1994. Nearly all existing trade regulations have either been rescinded or published as of end-1993.Establish a liberalized trade regime in the context of reaccession to the GATT.
Imports controlled through tariffs and nontariff barriers, including licenses and other controls.Streamline tariff structure. Bind maximum tariff on most nonagricultural products at 35 percent over next three to five years. Reduce maximum tariff on most agricultural products to 40 percent over ten years. Reduce goods subject to licensing requirements by two thirds by end-1995 from a total of 53 product categories in 1993.On December 31, 1993, tariffs on about 3,000 commodities were reduced, lowering the average tariff rate from 40 percent to about 36 percent. Tariffs on 235 import items were reduced temporarily for one year effective January 1, 1994.
Import licensing requirements were removed for 9 commodity categories on December 31, 1993, and those for an additional 20 categories are to be removed as of December 31, 1994. In May 1994, licensing and quota controls were lifted on 195 commodities.
The mandatory export plan was abolished in 1991. Export controls including licensing covered about 50 percent of exports. Mandatory import planning applied to five product groups.Eliminate mandatory trade planning on imports.Mandatory trade planning eliminated starting in 1994.
II. Monetary Policy and Financial System
Central Bank and Banking System

Weak legal and regulatory framework.
Enact laws on central banking, general banking, and bills of exchange.Draft laws under review; they are expected to be enacted in second half of 1994.Establish a strong central bank that can effectively conduct monetary policy and supervise the financial system, and a modern banking system that is competitive and meets the needs of a market-based economy.
PBC had little independence and a highly decentralized structure.



Local branches of PBC and specialized banks were highly vulnerable to pressure from local governments to provide loans for local projects.
Strengthen the PBC as a central bank that has autonomy in the implementation of monetary policy. Restructure organization of PBC and reform functions of local PBC branches.The PBC’s authority is expected to be strengthened with the passage of the new central banking law.



Local PBC branches prohibited from providing loans to banks, except for settlement purposes.
Eliminate numerous local PBC branches and establish several regional PBC branches encompassing several provinces. Focus functions of local PBC branches on supervision and research.
The state-owned specialized banks were not commercially oriented and had high levels of nonperforming loans.Commercialize the specialized banks. Establish three policy banks: State Development Bank, Export-Import Bank, and the Agricultural Credit Bank to take over policy lending.Ongoing. The three new policy banks have been established, and two became operational by mid-1994.Ensure that all policy lending is undertaken by the policy banks, so that the specialized banks can focus on commercial lending.
Bank supervision was oriented toward ensuring compliance with credit plan and lending criteria.Strengthen prudential supervision.Ongoing.Establish a modern supervision system in line with commercial banking.
Payments system was outdated and inefficient, with high level of intrabank float.Modernize payments system.The design of a new payments system is complete, and bidding has gone out to vendors for a pilot project.Create an efficient payments system to meet the demands of a growing economy and facilitate the conduct of monetary policy.
Accounting system was highly decentralized and outdated.Adopt new accounting system in line with international practices.A standard code of accounts for financial institutions is expected to be issued in 1994. Banks’ accounts are being consolidated.Establish a modern accounting system for banks.
Monetary Policy

Relied primarily on the annual credit plan. Interest rates were set by the PBC and adjusted infrequently. Other indirect instruments, such as PBC lending to banks and required and excess reserves ratios, were not used actively.
Phase out credit plan and move to indicative targeting of money, using reserve money as operational target. Develop open market operations. Liberalize interest rates.The credit plan will continue to be used in 1994 but will be supplemented by monetary targeting.



Experiments with open market operations will be undertaken in Shanghai in 1995. In coordination with the Ministry of Finance, short-term treasury bills in book entry form will be issued to facilitate trading. Training in techniques of open market operations has begun. Greater flexibility of interest rates on loans is being allowed.
Increase reliance on indirect instruments to conduct monetary policy, with the objective of achieving stability of the renminbi.
Interbank markets were locally based and organized by financial intermediaries sponsored by the local PBC branches. Loans tended to be long term and used for financing projects.Develop securities (including short-term treasury bills) and interbank markets to facilitate open market operations.Regulation and supervision of interbank markets are being strengthened, and short-term money market instruments are coming into use. Development of overnight money market and integration of interbank markets is being encouraged.Establish an efficient and nationally integrated interbank market that can facilitate the transmission of monetary policy through open market operations.
Monetary statistics were oriented toward monitoring implementation of the credit plan. Coverage was incomplete.Introduce more comprehensive and timely statistical reporting system.Statistical reporting forms are undergoing revision.Improve monetary statistics to facilitate policy analysis, formulation, and implementation.
Nonbank Financial System

Weak supervisory and regulatory framework.
Enact law to regulate nonbank operations of financial institutions.Drafting has not started.Establish a diversified financial system to meet the needs of a market-based economy.
Two stock exchanges were established in Shanghai and Shenzhen in 1991. The Securities Regulatory Commission was established in 1992 to supervise the development of the securities industry. By end-1993, 183 companies had been listed on the two stock exchanges, and market capitalization was estimated at about $40 billion.Enact securities law and establish legal and regulatory framework to guide the development of the industry. Encourage formation of limited liability and joint-stock companies.The securities law is expected to be enacted in 1994. More listings of companies have been approved in 1994.Develop the stock market into a major source of funding and vehicle for restructuring SOEs.
Secondary markets in government bonds were formally established in 1988 and developed rapidly.Develop primary and secondary markets in government securities. Diversify maturities and types of government securities issued.Short-term treasury bills were issued through a system of primary dealers to banks and institutional investors in 1994.Establish an active primary and secondary market in government securities to facilitate the issuance of government debt instruments and open market operations.
Savings institutions were not well developed.Develop more long-term savings institutions, such as pension funds and mortgage institutions.Ongoing.Develop savings institutions to mobilize long-term savings.
III. Taxation and Fiscal System
Tax System

Complex, inefficient, and highly inelastic; tax burden distributed unequally.
Introduce new, simplified tax system, with the aims of improving buoyancy and efficiency of system and distributing tax burden more equally.New tax system implemented on January 1, 1994.99Establish modern tax system more suitable to the needs of a market-based economy.
Enterprise income tax

Tax laws differed by type of ownership.



Nominal rate of 55 percent applied to SOEs. However, in practice, taxes paid were governed by the CRS. Loan repayments were tax deductible; no accelerated depreciation; and special taxes on retained earnings were applied.
Abolish CRS and apply uniform tax law to all domestic enterprises with maximum rate of 33 percent; standardize tax deductions; end deductions for loan repayments; abolish two special levies (key energy and transportation projects fund and budgetary regulatory fund), wage adjustment tax, and tax on bonuses; base tax exemptions on law.Implemented on January 1, 1994.Unify tax laws for domestic and foreign enterprises.
Preferential tax rates and tax exemptions were provided to enterprises in open economic zones.
Personal income tax

Different tax laws for domestic and foreign residents; high threshold; exemption for living expenses.
Simplify and unify the personal tax on domestic and foreign residents.Implemented on January 1, 1994.Move toward global income tax; integrate corporate and personal income taxation.
VAT

Narrow coverage; 12 different rates; limited use of invoice credit method; numerous exemptions.
Broaden coverage to include production, wholesale and retail trade, and imports; set basic rate of 17 percent, with lower rate (13 percent) to be applied mainly on food and agricultural tools; use invoice credit method as standard base; and base exemptions on law.Introduced on January 1, 1994.Develop VAT into a major revenue source and modernize VAT administration; achieve high revenue buoyancy.
Excises (product tax)

Broad coverage (imports, agricultural products, liquor, tobacco, chemical, electrical, and rubber products); many rates; local surcharges.
Narrow coverage to liquor, tobacco, and luxury consumer goods.Implemented on January 1, 1994.
Turnover tax (business tax)

Levied on services (including transportation and construction), and wholesale and retail trade; many rates; tax base included taxes on inputs.
Narrow coverage and reduce number of tax rates.Implemented on January 1, 1994.Replace turnover tax with VAT on most services.
Other taxes

About 24 minor low-yield taxes were in use that were costly to administer; lack of transparency; local authorities levied special fees and charges.
Eliminate about a dozen minor taxes; end levying of local special fees and charges.Implemented on January 1, 1994.Further reduce number of taxes; introduce property taxation.
Intergovernmental Fiscal Relations

Revenue contracts governed the fiscal relations between central and provincial governments. Local fiscal autonomy had contributed to rapid development in some regions but had also led to an erosion in the central control over revenue and fiscal policy as well as a widening of regional disparities.
Transform revenue contract system to one based on uniform rules of tax assignment and tax sharing. Certain taxes will be assigned to local governments, others to central government, and the rest will be shared according to a predetermined formula.New system introduced on January 1, 1994, but revenue impact to be phased in over several years.Allow central government to collect 60 percent of total revenue and improve its control over fiscal policy.
Establish grants commission to distribute surplus revenue collected by central government to the provinces, based on objective criteria.Preparatory work under way.Reduce regional fiscal disparities.
Reform expenditure assignment system.Preparatory work beginning.Strengthen expenditure control.
Tax Administration

Most taxes collected by local tax bureaus, which then remit the contracted amount of revenue to the central government.
Establish National Tax Service (NTS) to collect taxes assigned to the central government and shared taxes. Local taxes will continue to be collected by local tax bureaus. Modernize tax administration.NTS formally established on January 1, 1994. Design of new tax administration system, including computerization, is under preparation. Implementation is expected to begin later in 1994 or early in 1995.Establish an efficient tax administration system.
Budgetary System

No Budget Law.
Enact Budget Law.Budget Law enacted by the National People’s Congress in March 1994.Establish transparent budgetary procedures and effective expenditure control.
Unified budget of both central and provincial governments. Overall budget approved by the National People’s Congress in March of each year.Establish separate budgets for central and provincial governments, with the provincial budgets subject to the approval of the provincial People’s Congresses.New budgetary procedures will be implemented in 1994.
In 1992, a dual budget system was adopted that distinguishes between the current and development budget.Adopt more analytical budgetary presentation, in line with international conventions.Introduced three-tier budget that distinguishes between current, development, and financing items.
Treasury functions performed by PBC. Weak expenditure control system.Strengthen treasury function and expenditure control.To be implemented.
Public Administration

Civil service system

Highly centralized “cadre” system; same wage and promotion system for all government workers; recruitment through government assignment; no dismissals, demotions, or resignations; little mobility; wages for workers with equivalent skills lower than in SOEs.
Replace “cadre” system with civil service system, characterized by recruitment through civil service examinations, performance-based promotions, dismissals and demotions, and mobility schemes. Institute wage system reform.Civil service reform will be completed by 1996. The number of government employees was reduced by 2,000–3,000 in 1993, with another 8,000 to be terminated by 1994, resulting in a total retrenchment of 20 percent at central level. The wage gap with SOEs will be reduced within three to four years. In mid-1994, retrenchment at provincial and lower levels began, which will lead to reduction of provincial government staff by 25 percent within three years. Civil service examination initiated for lower-level staff. New wage scale adopted.Establish an efficient civil service.
Government administrative system

Government structure was reformed in 1986–87 to eliminate many line ministries. Nevertheless, the structure of Government has remained monolithic, with overlapping functions of different departments, large numbers of redundant workers, inefficient and inflexible administration, and nontransparent procedures.
Reorganize the State Council and macro control ministries; streamline linkages between different ministries through separation, mergers, and closures.Line ministries will be abolished in 1994; the number of State Council institutions was reduced from 86 to 59 and the number of committees from 85 to 26.Complete reorganization of government administration to complement and support other market-oriented reforms; focus Government’s role on macroeconomic management and development of legal and regulatory framework and other supporting infrastructure for efficient functioning of markets.
IV. Investment System
Central control over investment declined gradually as decentralization took place. However, an elaborate project approval system for medium- and large-scale projects still existed, under which approval was necessary from the State Planning Commission (SPC). For smaller-scale projects, local authorities were granted powers to approve projects within certain cost limits.Establish an investment risk mechanism. All investment projects will be divided into three categories: (I) social projects, to be financed through the budget; (2) large-scale infrastructure projects, to be financed mainly by the policy banks and subject to approval by the SPC and other government agencies; and (3) all other investment decisions and projects, which will be made and financed, respectively, on a market basis.Ongoing. Progress will depend on speed of enterprise and financial reforms.Develop a system in which most investments will be determined mainly by the market, and in which the level of aggregate investment can be regulated through monetary and fiscal policies.
All foreign investment subject to approval by the Ministry of Foreign Trade and Economic Relations and the SPC and restricted to certain sectors and localities.Open up more sectors and regions to foreign investment.Ongoing. Major influx of foreign investment has occurred in 1992–93.Utilize foreign investment to modernize and develop the economy, including restructuring of SOEs.
V. State-Owned Enterprises and Related Reform
SOEs

SOE sector contains more than 100,000 industrial enterprises, including about 11,000 medium-sized and large ones.
Expand use of the shareholding system (or corporatization), with the aim of separating the role of the state as an owner from the management of the enterprises.Ten thousand SOEs are involved in a program of asset valuation and accounting reform, of which 1,000 have been selected for management reform. The shareholding system will be adopted in 100 medium- and large-scale enterprises.Transform most SOEs into autonomous, competitive, legal entities fully accountable for their profits and losses, thus establishing a level playing field for all enterprises.
Despite experiments with enterprise reforms since the early 1980s, performance of the SOE sector remained weak. About one third of SOEs were estimated to be making losses, and another one third were breaking even.
Autonomy and financial accountability remained weak. SOEs operated under the direct supervision of the central or local governments. However, beginning in 1991, several large SOEs were transformed into joint-stock companies and listed their shares on domestic and international stock exchanges.Enact Company Law that will establish the legal framework for the corporatization of the SOEs. The law will define enforceable rights for shareholding companies.Company Law was enacted in December 1993 and became effective in July 1994.
The Bankruptcy Law was enacted in 1986 but applied infrequently, mainly to small SOEs.Subject enterprises to market discipline. An increasing number of the loss-making enterprises will be merged, sold, or closed in accordance with the Bankruptcy Law.Ongoing. Experiments with bankruptcy of large and medium-sized SOEs in 18 major cities are under way.
SOEs bore a heavy social burden, including the provision of employment, social security, and services such as housing and education.Establish a social security system independent of work units and commercialize housing.Ongoing.Separate all social functions from the SOEs within three years.
Social Security

Pension

Retirement benefits were provided mainly by enterprises for their employees and were not transferable. Experiments were undertaken with pooling of pension funds.
Establish provident funds.



Extend pooling of enterprise pension funds; standardize contribution rates, eligibility criteria, and benefits; extend coverage; and introduce individual retirement insurance and pension funds.
Ongoing. Provident funds are being established in many cities.Move toward a nationwide comprehensive provident fund.
Health insurance

Wide coverage of SOE employees and retirees; rising medical costs were financed jointly by SOEs and Government.
Introduce major illness insurance for retirees; individual participation in health care costs; and contractual management of health care (SOEs and hospitals). Establish work injury insurance pools and maternity insurance pools for working women.Major illness insurance for retirees was introduced in 1993, and a similar program for current employees is under study.Establish a comprehensive health care system that is independent of the work units.
Unemployment insurance

Unemployment insurance was established in 1986, with relatively broad coverage for SOEs but low contribution rates and benefits.
Extend unemployment insurance coverage to all SOE employees and to workers outside the SOE sector.Unemployment coverage will be extended to all SOE employees by 1995 and to workers outside the SOE sector by 1998.Establish comprehensive unemployment insurance system to facilitate enterprise reform.
Promote development of services sector and nonstate sectors to absorb surplus labor.Ongoing.
Housing

Mainly provided by work units, with housing subsidy equivalent to 20–25 percent of average money wage. Rent increases have been undertaken in most cities since 1991. Limited sale of housing.
Continue rent reforms, with the objective of raising housing rents to about 6 percent of household wage income by end-1995 and converting housing subsidies into money wages; increase sales of housing units; and formulate a nationwide model for housing reform.Rents have been increasing in most cities to cover key components of housing costs. Focus is being shifted to sale of housing units, the prices of which will incorporate a small profit margin in addition to cost (including construction and land costs).



Adoption of State Council resolution on urban housing reform is expected in near future.
Raise rents to commercial levels. Develop a housing market independent of the work units.
Price System

The price system was greatly liberaliz ed. by 1993, it was estimated that the proportion of goods subject to price control was 5 percent for retail goods, 15 percent for means of production, and 10 percent for agricultural products. Only 5 percent of total industrial output was subject to mandatory planning.
Further liberalize prices, especially in energy and transportation.Coal prices were liberalized in 1994. Transportation prices are expected to be adjusted.



Petroleum prices were adjusted in May 1994 and grain and other food prices in June 1994. However, price inspection, especially for food products, has intensified during 1994.
Allow prices to be freely determined by market forces.
99See Appendix V for details of the new tax system.

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