No. 37 | 2020, China’s Inaugural Year of Moderate Prosperity
On January 4, 2020, the Academic Center for Chinese Economic Practice and Thinking (ACCEPT) held the 37th Tsinghua University Forum on China and the World Economy in the Auditorium of the Weilun Building at the School of Economics and Management. The forum was centered on the theme of 2020, China’s Inaugural Year of Moderate Prosperity.
Guests in attendance included: Mr. Li Daokui, Chief Economist of the BRICS New Development Bank (NDB); Liu Shangxi, President of the Chinese Academy of Fiscal Sciences (CAFS); Huang Qunhui, Director of the Institute of Economics at the Chinese Academy of Social Sciences (CASS); He Dexu, President of the National Academy of Economic Strategy at CASS; Cao Fengqi, founding Executive Vice President of the Guanghua School of Management at Peking University; Qin Hong, Senior Researcher of the National Academy of Development and Strategy and Director of the Urban Renewal Research Center at Renmin University; Huang Zhangkai, Associate Professor of the School of Economics and Management at Tsinghua University; and Yuan Gangming and Neil Schwartz, research fellows of ACCEPT. Li Ke’aobo, Vice President of ACCEPT, presided over the meeting and released the Report on the Analysis and Forecast of Macro-economy in China for Q1, 2020 (hereinafter referred to as the Report) jointly with Li Bing, research fellow of ACCEPT.
The Report shows that China’s domestic economy has continued to experience a downward trend since the second half of 2018, with decelerating growth quarter on quarter. Following years of industrial overcapacity reduction, there is a lack of momentum for overall investment. PPI turned negative once again in the latter half of the year, and the growth of consumption constantly slowed. Excluding the factor of pork, the prices of other commodities stably decreased, a sign of sluggish domestic demand, a cooling economy, and a lack of confidence by market participants. However, China has concurrently made remarkable achievements in supply-side structural reform and effectively addressed the issue of a rapidly rising leverage ratio. Though the leverage ratio saw slight increases in 2019, the total volume of leverage was maintained within a reasonable range, relieving serious concerns. Moving forward, we should focus on adjusting leverage structure and optimizing its quality.
According to the Report, the global economy is presently faced with gloomy prospects for growth. Thus, China must shift the driving focus of its economy away from external demand. Therefore, while adhering to supply-side structural reform, we should take a holistic view in managing long-term demand. In addition, we should proactively cultivate the market to release demand and promote economic recovery. On this topic, the Report includes a mid-to-long-term analysis of six sectors, namely, the middle-income group, automobile consumption, health care and education, infrastructure investment, real estate, and the financial market.
It is estimated that China’s middle-income group includes 400 million people in total, while its relatively low-income group includes 1 billion. The demands of these two groups are far from being met. For the middle-income population, the Report recommends that we should enhance the management of complex demand in fields such as health care, education, automobiles, and housing, while refraining from one-size-fits-all approaches to social governance. In terms of the low-income group, the Report suggests that after China wins the battle against poverty and realizes its goal of becoming a moderately prosperous society, we can shift 400 million people from the low-income group to the middle-income group within 15 years (or three five-year plan periods), so as to successfully double the population of the middle-income group. According to the forecast of the Report, this initiative is expected to drive China’s annual GDP growth up by 0.7-0.75 percentage points and provide momentum for the long-term, high-quality development of the Chinese economy.
The Report predicts that China’s decelerating growth quarter on quarter will come to a halt in 2020—the total growth rate is expected to reach 6.1% for the whole year.
After the introduction of the Report, Li Daokui, Chief Economist of the BRICS New Development Bank (NDB) delivered his comments. Mr. Li pointed out that over the past 41 years, China’s development has relied on two strategies. First, learning from the technologies of Western developed countries. Second, promoting the industrial development of certain coastal areas by tapping into overseas markets. However, the international environment is currently undergoing profound changes, and the Chinese economy must switch to a new model of development—namely, to build up the economy and embark on the development path of a major power. To this end, we should remain open to learning while also honing our core technologies and tapping into our own huge market. According to Li Daokui, from this point forward, China should gradually adjust its approach to macroeconomic management, shifting its focus from the supply-side to the management and release of long-term demands. On one hand, we should cultivate and release the complex needs of the middle-income group by modernizing the capacity and system of state governance. On the other hand, we must double the population of the middle-income group as soon as possible by speeding up urbanization. From Li Daokui’s perspective, the government has an important role to play in institutional innovation. For instance, local governments should be allowed to collect a portion of local taxes from the revenue and consumption of their residents instead of simply levying on the production side. In this way, local governments will be better motivated to develop and tap into local markets while also managing demands.
From Liu Shangxi’s perspective, the passive response mechanism on the supply side is mainly to blame for China’s current economic downturn. He believes that unfair market competition and deficient government management have led to a mismatch between purchasing power demand and supply. Thus, the government should provide conditions for the supply of products and services. His policy recommendations are first to protect intellectual property rights and support innovative enterprises. Second, to ensure fair opportunities for personal development, to narrow the capacity gap, and to increase vocational education. In particular, Liu Shangxi believes we should reform the identity system, promote labor mobility, and foster a fair atmosphere for employment and entrepreneurship. In addition, more financial resources should be invested in education, health care, elderly care, and other basic public services. We should reasonably divide and define the financial and administrative rights of both central and local finance.
According to Huang Qunhui, the primary contradiction within the Chinese economy is on the supply side, especially in the manufacturing industry. In the transition and expansion from low-end manufacturing to high-end manufacturing, demand has not been fully met, and product quality has left room for improvement. Enterprises must develop their capacity for innovation and tap into the demands for transformation and upgrading, but is difficult to fully address the structural problems faced by the manufacturing industry in the short term. Moreover, the links between supply and demand are complicated in many areas, and are faced with institutional constraints. The existing foundation of the manufacturing industry has proven adaptable to the high-speed growth of low-cost industrialization, whereas for subsequent development, we must meet the demand for high-quality urbanization. At present, China is still undergoing industrialization, and thus we should be careful to avoid premature de-industrialization. As we upgrade the manufacturing industry, we should focus not only on smart and high-end technology, but also on the transition of the traditional manufacturing industry through information-based, service-oriented, green, and intelligent integration.
He Dexu pointed out that at the end of 2017, the central government was deeply concerned about severe financial risks. For over a year, numerous measures were taken to mitigate such risks, including the stabilization of the leverage ratio and the special renovation of Internet finance. The vast majority of risks were successfully prevented and brought under control during this time, but there is still a long way to go regarding local government debts as well as risks in the real estate market, the financial technology field, and small and medium-sized banks. With the expansion and deepening of financial opening-up and the drastic fluctuation of the international market, China now faces greater external shocks and risks. Therefore, our economic systems and mechanisms should work to constantly improve supervision, strengthen national governance capacity, realize the modernization of the financial governance system, and create a stable and flexible environment for the sustainable and sound development of China’s economy.
Cao Fengqi remarked that the capital market has played a role in the reform of state-owned enterprises and the development of the private economy, but its development is still generally unsatisfactory. When circulating capital is insufficient, this problem cannot be solved wholly by incremental or loan methods such as reducing the reserve requirement ratio or issuing more money. Rather, the situation must be addressed through stock funds in the capital market. However, the capital market is not a pure financing market, and it is necessary to improve the quality of listed companies and prevent fraudulent listings. China's stock market should establish the concept of investment based on investors' value to increase returns. Many listed companies have either no dividends or only symbolic ones. In fact, 90% of investors in the secondary market are retail investors, 70% of whom have lost profits. As we can see, it is difficult for a capital market that cannot obtain returns to develop in the long run. Cao Fengqi believes that the stable operation of the science and technology innovation board and the implementation of the new Securities Law are conducive to improving the quality of listed companies, promoting the structure of the capital market, and ensuring healthy development.
According to Qin Hong, the real estate industry is expected to achieve steady development for three reasons: first, the total sales volume of commercial housing in the real estate industry has been higher than total investment for four consecutive years; second, the inventory is not too expansive; and third, hundreds of enterprises have closed down, leading to industry integration. Now, the top 100 enterprises account for about 70% of the sales volume for the whole industry, while the regional selection, cost control, and brand building of large enterprises are all superior to those of small businesses. Qin Hong predicts that prices in separate regions will rise differently in the future. Prices in third and fourth tier cities will rise slightly, while those in first and second tier cities will remain relatively stable due to the policy control of the central government.
Huang Zhangkai pointed out that the current scale of state-owned enterprise assets is already large enough. In 2018, the total assets of non-financial state-owned enterprises in China totaled 210.4 trillion yuan—2.3 times China’s GDP, including 135.0 trillion yuan of liabilities and 58.7 trillion yuan of capital equity. Furthermore, the return on assets decreased from 6% in 2007-2008 to 2% in 2018. According to Huang Zhangkai, the reform of state-owned enterprises requires a change in mindset, and SASAC should shift from managing assets to managing capital. At the same time, for those basic industries with high risks and long ROI periods in the new economy, such as chip industry funds, Huang Zhangkai believes that state-owned capital should play a major role.
Yuan Gangming argued that the main reason for China's economic downturn in 2019 is that its currency is too tight, especially with regard to the credit control of private enterprises. He believes that there have been two major mistakes in monetary policy in recent years: one is that the target of reducing the leverage ratio has led to a decrease in the speed and volume of currency issuance, thus limiting the external financing of enterprises and leading to a drop in investment; the other mistake is a credit mismatch. The limited credit supply has not been put into industries and enterprises with high returns on capital. Most funds have been invested in medium- and long-term projects, while short-term projects have received little, limiting current economic growth. Yuan Gangming believes that to change the downward trend of China's economy, we must concurrently adjust the quantity and structure of monetary policy.
Neil Schwartz remarked that Trump's impeachment is unlikely to pass the Senate, where the Republicans currently have the majority. Whether Trump will be re-elected depends on the performance of democratic competitors and the U.S. economy this year. Trump’s support in part comes from American manufacturing workers and farmers, who see themselves as the victims of globalization over the past two or three decades. However, in actuality, their difficulties are the result of scientific and technological development. The current low unemployment rate and rising stock prices in the United States have made people very optimistic about future prospects for economic growth. Although farmers have suffered losses due to trade frictions, they have also gotten record subsidies from the government. Mr. Schwartz pointed out that from a historical point of view, the American people have traditionally not supported a change in leadership while at war, and the new international conflict between the United States and Iran may become a red swan event in Sino-US relations. With the first phase of the trade agreement basically reached between the two countries, the China-US relationship may ease in 2020.
