ANNUAL REPORT

7
develop globally competitive domestic firms by investing in foreign
firms to meet industrial policy goals (U.S. semiconductor firms are
a notable example), rolling out the “Made in China 2025” and “Internet
Plus” initiatives, and creating government-controlled venture
capital firms. The scale and volume of resources the Chinese government
has directed toward expanding domestic production capacity
and creating globally competitive domestic firms may undermine
fair competition, erode U.S. commercial and military technological
advantages, displace U.S. workers, and increase U.S. dependence on
foreign production.
The Chinese government is also attempting to boost domestic consumption
and provide a higher quality of life for its citizens by increasing
urbanization, reforming the hukou household registration
system, improving citizens’ access to healthcare, and cleaning up
severe environmental degradation. To finance this ambitious reform
agenda, the Chinese government wants to attract greater domestic
and foreign private sector investment and improve capital allocation
efficiency through fiscal and financial reforms. These reforms
would permit a greater role for the market while simultaneously
maintaining state control. This year’s fiscal reforms were successful
at restructuring existing local government debt obligations through
debt-for-bond swaps and clarifying central-local tax collection and
expenditure responsibilities, but announced reforms are not creating
new, sustainable sources of funding such as a property tax needed
by local governments.
In the financial sector, the People’s Bank of China liberalized
deposit rates, reopened its securitization market, widened foreign
access to interbank bond market, loosened quotas and remittance
restrictions for capital accounts, and promoted green finance and
the internationalization of the RMB. But reforms necessary to increase
the liquidity of financial markets and attract foreign investors—strengthening
auditing and accounting standards, regulatory
frameworks, and corporate governance—have proceeded more slowly.
The Chinese government’s gradual steps toward loosening capital
controls and promoting the internationalization of the RMB are
increasing China’s presence in the international financial system as
more global investors are able to invest in China’s stock and bond
markets, and more Chinese investors are able to invest internationally.
While China’s continued use of capital controls and slow progress
on strengthening financial institutions and governance have
ensured U.S. exposure to China’s financial system remains limited,
the impact of China’s slowing growth and economic reforms on international
trade, commodities demand, and investor confidence is
affecting global markets.
Conclusions
• The 13th Five-Year Plan (FYP) (2016–2020) seeks to address
China’s “unbalanced, uncoordinated, and unsustainable growth”
and create a “moderately prosperous society in all respects”
through innovative, open, green, coordinated, and inclusive
growth. This agenda strengthens the Chinese Communist Party’s
and Chinese government’s roles in managing the economy