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Promoting Innovation and Market Competition are key to China’s Future Growth

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China needs to foster new drivers of growth to address productivity challenges, intensify reforms and promote greater innovation in the economy, according to a new report jointly released by China’s Development Research Center of the State Council (DRC), China’s Ministry of Finance and the World Bank Group (WBG).

China has experienced a remarkable period of high rates of growth over the past four decades. But the traditional drivers of growth are running out of steam. China is now at a crossroads, with declining returns to public investment and rapid aging. Developing new drivers of growth will require more efficient allocation of resources while reducing environmental impacts and continuously boosting productivity. Unlocking the new drivers will also require governance reforms to let market forces play a decisive role in allocating resources and a reorientation of China’s innovation system.

A joint research team of DRC, MOF, and the WBG analyzed China’s new development opportunities and challenges, resulting in the report, Innovative China: New Drivers of Growth.

It is necessary for China to promote new drivers of growth to boost the country’s productivity. We need to carry out reforms to make the economy more efficient, competitive and productive. The report provides valuable insights and recommendations that will help us develop a reform agenda for a more innovative and productive economic system,” said Kun Liu, China’s Minister of Finance.

“China’s economy is shifting from high-speed growth to high-quality development. It needs to rely on deeper reform, higher level opening up and more integrated and efficient innovation to boost productivity and build a modern economic system. The joint research has yielded a series of important results, which are valuable for China to cultivate new growth drivers and promote a new round of reform and opening up,” said Jiantang Ma, Party Secretary and Vice President (Minister in charge), Development Research Center of the State Council, China.

“The report makes clear that investing in people, removing remaining distortions in the economy and reducing market barriers to competition will be critical as China works to boost its innovation capabilities”, said Victoria Kwakwa, World Bank Vice President for East Asia and the Pacific.

The new report proposes that China address its productivity challenges by promoting the “three Ds” – removing distortions in the allocation of resources in the economy, accelerating diffusion of existing advanced technologies and innovations, and fostering discovery of new technologies, products, and processes so as to expand China’s productivity frontier. The report develops recommendations in seven areas to promote the “three Ds”: strengthening competition and creating a level playing field for all investors, recalibrating China’s innovation system, building human capital, allocating financial and human resources more efficiently, leveraging regional development and integration, promoting economic globalization and international competitiveness and adapting the model of regulation and governance to adjusting the balance between the state and the market.

To allocate resources more efficiently and remove distortions in the economy, the report recommends further improvements in the business climate – building on advances in recent years – faster progress in the reform of state-owned enterprises, and greater discipline on government support to specific industries. The report also suggests that the allocation of capital could be improved, mitigating the build-up of risks in the financial sector, enhancing oversight of the fintech industry, promoting the development of small and medium enterprises, and ensuring that venture capital and government guidance funds are commercially operated and professionally managed. Fair competition for the country’s huge pool of investable funds would make the economy both more competitive and adaptable. Further, the report suggests the need for more market-based mechanisms to leverage the potential of coordinated regional development and urbanization, including further relaxation of the hukou household registration system and the introduction of tradeable land quotas across regional jurisdictions to enhance the efficiency of public investments and increase the returns on existing public assets.

The promotion of market competition is also central to the diffusion of technologies. The report argues that China still has considerable scope to benefit from further opening of its economy to foreign investment and competition, including by speeding up development of the regulations and administrative review and licensing procedures needed to implement the country’s new Foreign Investment Law. In addition, the report points to the critical role of human capital, including managerial skills, in facilitating the diffusion of technologies. In this regard, a major priority is to address the remaining regional disparities in educational attainment. Curriculum reforms, pedagogical advancement to promote creativity and the cognitive skills of students and the establishment of a lifelong learning system would ensure that China’s workforce can adapt to the changing skill needs of its economy.

China has rapidly improved its innovation capabilities in recent years. Nonetheless, to foster further discovery of new products and processes, the report proposes a recalibration of China’s national innovation system. The objective of such recalibration should be to make it bottom-up, market-oriented and inclusive and to develop innovation support programs that are more demand-based. It also suggests reorienting a greater share of public R&D support to basic research, strengthening of intellectual property rights and improving the quality of patents. Robust market competition would incentivize enterprises to continuously innovate and upgrade.

The report argues that unlocking the new drivers of growth will require continuous reforms. To help boost innovation and productivity, the role of the state needs to evolve and focus on providing stable market expectations, a clear and fair business environment, strengthening the regulatory system and the rule of law, and reforming the management of civil service performance to further support the market system.

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Post-Brexit UK will continue to offer significant opportunities

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PwC’s new report, Brexit and beyond: Assessing the impact on Europe’s asset and wealth managers, outlines the chief findings from qualitative interviews with senior executives at more than 20 global asset and wealth managers (AWMs) covering both the preparations for Brexit made by AWMs so far and their views of what the future holds for their businesses and the industry as a whole.

As the political and economic climate around Brexit continues to provide uncertainty across the globe, many AWMs feel confident that they are prepared for Day One following the UK’s departure from the EU – deal or no deal. But for them, this is only the beginning of the story. AWMs are now beginning to think hard about what comes next – above all, about how to best position their businesses for future growth and profitability.

“We received a clear message that the UK will remain a very important part of Europe’s finance ecosystem beyond Brexit. To this end, and to prevent further fracture, uncertainty and costs for business and investors, there is a strong desire among our clients for close alignment based on regulatory equivalence between the UK and the EU27,” said Andy O’Callaghan, Global Asset and Wealth Management Advisory Leader.

The report details the position of AWMs on Day One after Brexit, how they anticipate their operating models changing further in the months and years that follow, and how they see the long-term outlook for the industry as a whole.

Five key takeaways from the report:

More than three years after the referendum, there is still little clarity about the future relationship between the UK and the EU. While the EU’s equivalence regime offers a potentially powerful insurance policy against future uncertainty, AWMs may suffer collateral damage if trade negotiations become politicised.

Most AWMs we interviewed say they are ready for Brexit, helped by the interventions of Europe’s supervisory authorities, and should be able to continue operating largely seamlessly, even in the case of no deal. However, market and economic volatility is a concern.

The future for the UK’s AWM sector is now unclear. Policymakers and the AWM sector will need to focus on cementing the UK’s status as a centre of excellence for portfolio management while deciding the extent of tax and/or regulatory alignment is a viable option for driving funds growth.

EU27 centres such as Ireland and Luxembourg now have an opportunity to consolidate and grow their substantial funds industries, but fragmentation and domestic competition pose a potential risk to the industry.

EU27 AWMs are still unclear about the best way to access the lucrative UK market.

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Emerging East Asia Bond Market Growth Steady Amid Global Slowdown

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Emerging East Asia’s local currency bond market posted steady growth during the third quarter of 2019 despite persistent trade uncertainties and a global economic downturn, according to the latest issue of the Asian Development Bank’s (ADB) Asia Bond Monitor.

“The ongoing trade dispute between the People’s Republic of China (PRC) and the United States and a sharper-than-expected economic slowdown in advanced economies and the PRC continue to pose the biggest downside risks to the region’s financial stability,” said ADB Chief Economist Mr. Yasuyuki Sawada. “However, monetary policy easing in several advanced economies is helping to keep financial conditions stable.”

Emerging East Asia comprises the PRC; Hong Kong, China; Indonesia; the Republic of Korea; Malaysia; the Philippines; Singapore; Thailand; and Viet Nam.

Local currency bonds outstanding in emerging East Asia reached $15.2 trillion at the end of September. This was 3.1% higher than at the end of June. Local currency government bonds outstanding totaled $9.4 trillion, accounting for 61.8% of the total, while the stock of corporate bonds was $5.8 trillion. A total of $1.5 trillion in local currency bonds were issued in the third quarter, up 0.9% versus the previous three months.

The PRC remained emerging East Asia’s largest bond market at $11.5 trillion, accounting for 75.4% of emerging East Asia’s outstanding bonds. Indonesia had the fastest-growing local currency bond market in the region during the third quarter, boosted by large issuance of treasury bills and bonds.

A special theme chapter examines the relationship between bond market development and the risk-taking behavior of banks. The analysis finds that well-developed bond markets reduce the overall risk of banks and improve their liquidity positions. This suggests bond market development can contribute to the soundness of the banking system.

An annual liquidity survey in the report shows increased liquidity and trading volumes in most regional local currency bond markets in 2019 versus 2018. It also highlights the need for a well-functioning hedging mechanism and diversified investor base for both government and corporate bonds.

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Job Quality in Cambodia is Improving, but New Policies Are Needed to Benefit from Global Markets

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The diversity and quality of jobs available in Cambodia is improving, yet new policies are needed for Cambodia to benefit from the opportunities available in future global markets, according to a World Bank report, Cambodia’s Future Jobs: Linking to the Economy of Tomorrow, released today.

Of the 8 million jobs in Cambodia, 37 percent are wage jobs, many of which offer higher earnings and more protections to workers. However, the other 63 percent of jobs remain more traditional. Such jobs on family farms or in household enterprises are weakly integrated in the modern economy and offer workers lower earnings.

“The diversity and quality of jobs in Cambodia has gradually improved,” said Inguna Dobraja, World Bank Country Manager for Cambodia. “But global trends, such as the growing Asian middle class, shifting trade patterns, and automation require that Cambodia re-think its jobs strategy as it advances to the next stage of export-led development.”

Foreign-owned firms have been significant contributors of higher quality jobs in Cambodia. By 2015, one-third of all wage jobs in Cambodia were in foreign-owned firms. During the period 2010-2015, the garments industry was the fastest-growing occupation sector, increasing its share of employment by 1.1 percent per year.

Domestic firms are more numerous than foreign-owned firms, but they do not contribute as many jobs. Domestic firms employ an average 8 workers, compared to 124 in foreign-owned firms. A key concern is ensuring Cambodian workers are equipped with the skills to compete with workers from other countries for jobs in foreign-owned firms. In 2016, 37.6 of exporters cited an inadequately educated workforce as a top business obstacle.

The report recommends a four-pronged strategy to securing more and better jobs in the future: diversify exports into higher value-added production; create a domestic business environment that supports local firms growth; strengthen linkages between the domestic and export sectors of the economy; and invest in workers’ skills and education. The report further details seven policy recommendations that would advance these strategic goals:

Diversify exports and foreign direct investment (FDI) into higher value-added value chains. Most current jobs are in low-value segments of global value chains. Simplifying processes, providing incentives to foreign investors, and creating quality assurance facilities will encourage diversification of exports and FDI into higher value-added value chains or segments of value chains.

Streamline procedures and reduce the costs of establishing and expanding small- and medium-size enterprises (SMEs), which have considerable potential to create jobs. Such policies would include reducing the cost of doing business for local firms, increasing firm contributions to worker skills development, increasing access to financing through grant programs and fiscal incentives, and providing support to firms to hire more workers.

Help household enterprises enhance their productivity and create better jobs. Household enterprises account for one out of every five jobs in Cambodia and this will grow with increased urbanization. Information technology, for example, can help household enterprises improve their basic business practices and access broader markets.

Support the development of links between exporting FDI firms and domestic input-supplying firms, by, for example, providing incentives to foreign firms to source their inputs from local SMEs, creating a directory of local suppliers with the capacity to partner with foreign firms, and establishing local supplier development programs.

Build a skills development system that will attract higher-value FDI and increase productivity across the economy. Cambodia’s workforce is getting by with only 6.3 years of education on average. Policymakers should focus on reforming today’s education system to help the tomorrow’s workers acquire the broad range of skills needed to work in a knowledge-intensive economy andengage enterprises in the design, financing, and support of a technical and vocational training system to serve today’s workers.

Promote efficient labor mobility and job matching by opening formal international migration channels and supporting programs that encourage circular migration, and by disseminating information about job opportunities inside and outside of the country to students, jobseekers, education and training institutes, and employers so that skills development choices are aligned with the changing labor market demand.

Regain macroeconomic independence and exchange-rate flexibility. US dollar fluctuations have a significant impact on Cambodia’s trade and commodities sectors, which are responsible for most of the country’s jobs. As Cambodia begins to export to a broader range of countries, macroeconomic and fiscal stability will help shield existing jobs from factors related to the US dollar.

“The success of Cambodia’s job strategy will depend on the participation and cooperation of stakeholders across the economy, not only policy makers and government leaders, but also entrepreneurs, investors, development partners, and, of course, workers themselves,” said Wendy Cunningham, Lead Economist and a lead author of the report.

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