With the help of massive government stimulus action, China is now leading the world economy out of recession, according to a new OECD report. Already the world’s second largest economy, China could well overtake the United States to become the leading producer of manufactured goods in the next five to seven years, it says.

The OECD’s latest Economic Survey of China says it will be important to ensure that government saving, now falling in the wake of the crisis, does not revert to its previous, excessively high levels. Public spending should be stepped up to support much needed social reforms in areas such as education, welfare assistance, pensions and health.

China can afford the extra spending as its public finances remain strong. Gross government debt amounted to only 21% of GDP in 2008. The stimulus measures, which nevertheless dwarfed those of other countries, are expected to increase this debt ratio by only 3% of GDP in 2010. By contrast, gross public debt in OECD countries is projected to almost reach their total GDP this year and even exceed it in 2011.

Speaking at the launch of the survey in Beijing, OECD Chief Economist and Deputy Secretary General Pier Carlo Padoan said; “The Chinese government’s swift and vigorous action to support its economy has contained the impact of the global recession.

By helping to rebalance China’s economy towards stronger domestic demand, the stimulus is also benefitting the rest of the world. Further stepping up of social spending in China will be important both to foster social cohesion domestically and to promote continued external rebalancing.”‪

Even though government reforms have focussed increasingly on the need for social cohesion over recent years, the survey identifies a number of areas where action is needed for living standards in China to continue to improve over the longer term:

- Further progress is needed to unify the fragmented system of welfare assistance, pension and health care. Responsibility for social protection should ultimately be transferred from cities to the national level to ensure better integration, efficiency and solidarity.

- The registration system and restrictions on migrant workers’ access to social services creates obstacles to labour mobility and should be relaxed.

- Health care reforms need to be pursued to ensure that provision at a local level is improved, hospitals are run more efficiently and that eventually the different insurance systems are merged.

- These reforms will also help alleviate international imbalances by keeping saving at a lower level. So would greater exchange rate flexibility.

- Although banks and financial institutions are generally stronger and better regulated than a few years ago, further opening is needed together with firmer supervision.

- Competition and productivity can be boosted by cutting red tape, loosening traditional ties between state-owned enterprises and central authorities, allowing private companies to operate in the network industries and lowering barriers to foreign direct investment in services.