No. 29 | Seeking a Breakthrough in 2016

On the afternoon of October 29th, 2016, the 29th CCWE Macro-economy Forum, organized by Center for China in the World Economy (CCWE), Tsinghua University was held in Grand Lecture Hall, Weilun Building, Tsinghua University. For three quarters in a row, Chinese economy had maintained a 6.7% growth rate. There was a saying that Chinese economy had already stabilized. However, there were real estate bubbles in some regions, and fixed asset investment had not been very active. Moreover, import and export had maintained negative growth. All of these signs indicated that Chinese economy was still struggling amid the complicated global situation. Therefore; it needed to seek a breakthrough. Against this background, CCWE invites the brightest global scholars, governors andexecutives from research institutions, businesses and international organizations tojointly discuss how to seek a breakthrough in the transformation and upgrading of Chinese economy. Guest speakers included Zhang Xiaoqiang, Deputy Managing Director, China Center for International Economic Exchanges (CCIEE)/former Deputy Director of NDRC, Qiu Baoxing, President of Urban Planning Society of China, Counselor of the State Council, Jia Kang, Dean, Academy of New Supply-side Economics, and Former Head, Academy of Fiscal Sciences, Ministry of Finance, Wu Xiaoqiu, Vice President, Renmin University, Chai Qiang, Deputy Secretary General, China Institute of Real Estate Appraisers and Agents, Zhu Wenli, Professor, School of International Studies, Peking University, Francis Lui, Professor, Department of Economics, HKUST, Yuan Gangming, Research Fellow, Center for China in the World Economy (CCWE), Tsinghua University. The forum was chaired by Professor David Li, Director of CCWE.  

First, Mr. Zhang Xiaoqiang delivered a keynote speech on “Review and Outlook on Supply-side Structural Reform”. He pointed out that supply-side structural reform kicked off with a good start this year, and achieved substantial results in addressing overcapacity, reducing inventory, deleverage, and lowering costs. However, much more efforts were needed. Bolstering areas of weakness remained a priority. Both sides face problems at present and in the following period. But the major issue was from the supply side.There was still a wide gap in high-end manufacturing and modern service industry. Mr. Zhang stressed that enterprises should become the major task force of technological innovation, promote green economic growth, facilitate financial system reform, regulate real estate market, actively engage in global economic governance and be brave to crack “hard nuts”.

Next, Professor David Li introduced the conclusions of CCWE’s latest macro-economy report. In the first quarters of 2016, Chinese economy performed within a reasonable range with a growth rate of 6.7%. Year-on-Year PPI, which experienced a negative growth for 54 months in a row turned positive in September. Growth rate of manufacturing andprivate investment stopped decreasing for the timebeing. Industrial added value and industry as well as enterprises profits moved in a positive direction. Judging from the above-mentioned positive macro data, Chinese economy had stopped the downward spiral. But CCWE macro analysis team thought that it was still too early to conclude that Chinese economy had recovered.At present, the improvement of macro-economy was mainly attributed to favorable policies, such asinfrastructure investment expansion. Spontaneous economic growth still lacked momentum. Private investment and manufacturing investment were still at a historic low. Positive PPI and improvement of industry and enterprises profits were mainly driven by increase of upstream raw materials’ price including bulk commodities. Real estate market would continue differentiated regulation, and its contribution to economic growth can hardly sustain. Foreign trade was still struggling against a weak global economic recovery and adjustment of division of labor in international trade. Therefore, it was hard to conclude that Chinese economy hadstabilizedand the bottoming process would continue.The report concluded that Chinese economy’s priority now was pushing forward reform, establishing an appropriate relationship between government and enterprises through incentive-compatible mechanisms, and releasing long-term growth potential of Chinese economy.

Professor David Li stressed that building a team of officials who had aspirations, incentives and were subject to supervision. Aspirations meant that the team of officialsmust regard national renewal, economic prosperity, and people’s well-being as their highest political ideals. Incentives meant the team of officials should be awarded tangible incentives, which was the experience of Singapore and other successful economies. Being subject to supervision meant that any illegal behaviors should be punished which needed not only inter-Party disciplinary inspection and supervision, but also oversight and punishment from public opinion, the public and prosecution and judiciary systems.

In penal discussion session, guest speakers shared their view on current hot issues.

Mr. Qiu Baoxing firstly shared his understanding about the fluctuations in real estate market. He thought that in the long term the differentiation position of real estate market would be more and more obvious. House prices in first-tier cities would continue to increase and the price in third and fourth-tier cities would stabilize. If properly adjusted, the real estate market would never go down as we had a large proportion of sound real estate rigid demand: immigrant workers move into the city and urban residents needed to improve their living conditions, etc. At the same time, Mr. Qiu pointed out that provincial governments held a wrong idea “Maintaining and facilitating investments through real estate market” which generated real estate bubbles. He thought that real estate market regulations should be based on local conditions, combine centralized regulation with separate regulation and replace old administrative ordinances with economic means.

The subject of real estate attracted the keen interest of the guest speakers and the audience. Mr. Chai Qiang stressed that the first factor behind the quick house price spike was monetary factor and the second factor was the demonstration effect of some iconic housing properties. Media hype stirred up investors and consumers panic. He pointed out that government’s rapid interference through purchase restrictionsto stabilizehouse market achieved some results; In October, the number of house inspections in Beijing and Shenzhen had significantly dropped. As to Professor David Li’s “Seeking a breakthrough in real estate market”, Mr. Chai thought that impacted by external factors, real estate market needed to straighten out relationships and integrate reform and there was no panacea.

Real estate market and stock market were both facing problems and they were replaceable. If investors’ enthusiasm for real estate faded, they would turn to stock market for high capital returns. Would this lead to stock price increase? Mr. Wu Xiaoqiu thought that this issue should be analyzed from the background of macro-economy. At present, China’s M2 was large enough to account for 240% of GDP and M2’s growth rate maintained a 13% growth rate, which formed a huge and enlarging monetary pool.In order to prevent CPI’s vicious increase, we must seek outlet for the monetary pool and stock market was a good instrument. Real estate market featured poor liquidity. Although it can bear M2’s pressure, it should not be the mainstream. Capital maker including bond market and stock market should undertake this responsibility and attract more investors (including pension funds) to allocate assets through multi-layer capital market, divert risks and benefit from the investment. From this perspective, the trend of stock price increase existed.

Dean Jia Kang acknowledged that there was obvious differentiation in real estate market. He thought that the issues lied inhuge policy change.In fact, housing regulation meant more than purchase restriction or cancelling purchase restriction, and it also needed the support of land system, housing system, investment and financing system and the entire financial system.The government should start with policy supply, optimize structure and fully leverage the market to play the decisive role in resource allocation. In terms of policy supply, a much followed policy was real estate tax. It still needed a long time before the real estate tax was launched. But some measures had been introduced, such as some pilot projects in a few cities.From a long term, real estate tax is a must have for China to establish modern tax system and it an unavoidable historic test. As to the question “whether annual income exceeds 120,000 constitutes high income”, Mr. Jia Kang pointed out that time had changed, and previous high income standard needed to adjust and keep up with the time.

Professor Francis Lui mentioned that in many countries, housing price and stock price moved in the same direction. But this was not the case in China. The majority of Chinese urban residents’asset was deposited in bank and the rise and fall of stock rice didn’t affect their housing purchasing power. This was not beneficial for the long-term growth of Chinese economy. As to real estate tax, Professor Lui thought that its effect depended on its policy design. After Hong Kong introduced the real estate tax, housing price was not reduced because real estate tax restricted supply while dampened demand. And there were many ways to avoid the tax. In regard to the low Hang Seng Index, Professor Lui thought that Hong Kong’s stock market was basically stable and its price increase was largely influenced by mainland’s economic growth. If mainland’s economy was heading toward the positive direction, Hong Kong’s stock market would also embrace a boom. Likewise, if problems occurred in mainland’s economy, Hong Kong’s stock market would also suffer losses.

Around the world, the hottest issue is U.S. presidential election. U.S. politics was experiencing a historic change right now. Professor Zhu Wenli pointed out that the election of Donald Trump, which was very unpredictable, would exert a tremendous influence onglobal politics. At the same time, she thought that judging from opinion poll, Hillary Clinton was very likely to win. If elected, she was assumed to be tougher than President Obama, but she would make slight adjustment on economic policies favorable to China. Professor Zhuagreed with the slight changes in China’s and U.S.’ comparative advantages put forward in CCWE’s quarterly macro-economy report. She thought that Hillary would continue Obama’s “reindustrialization” strategy, and increase manufacturing employment opportunities, and this would have a huge impact on the trade between China and U.S. as well as the overall global economic structure.

Later, guest speakers and the audience cordially exchanged ideas on many topics, including RMB internationalization, registration-based IPO system, exchange rate fluctuation, second-child policy, land system reform, etc.