No. 30 | Seeking Progress while Maintaining Stability

The 30th CCWE Macroeconomics Forum organized by Center for China in the World Economy (CCWE) was held in the afternoon of January 8, 2017 in International Lecture Hall, Weilun Building, Tsinghua University. Zhu Guangyao, Vice Minister of Finance and Yu Bin, member of Party Leading Group and General Office Director of the Development Research Center of the State Council made keynote speeches on the forum. Distinguished guests attending the roundtable meeting include Zhu Baoliang, Chief Economist of the Economic Forecasting Department of the State Information Center, Cao Fengqi, Professor in Guanghua School of Management, Peking University, Chen Yunfeng, Secretary-General of China Real Estate Manager Alliance and Chairman of Youpu China, Gao Jian, Deputy General Manager-Morgan Stanley Huaxin Fund Management Co., Ltd., Francis Lui, Professor of the Department of Economics, the Hong Kong University of Science and Technology, Ruan Zongze, Executive Vice President of China Institute of International Studies, Yi Xianrong, former Director of Macroeconomics Office, Institute of Finance, China Academy of Social Sciences and Yuan Gangming, Research Fellow with CCWE. The forum was moderated by David Daokui Li, Director of CCWE.  

In the keynote speech section, Mr. Zhu Guangyao started off by reviewing the results of China’s economic development in 2016 and analyzed domestic and foreign situations faced by the Chinese economy in 2017. He said that in 2016, the guiding philosophy for China’s economic thinking made two important contributions to the global economy and to the perception of global economic development. First of all, President Xi Jinping made a summary of China’s development philosophy during the G20 Summit. The summary was uniquely Chinese and is an important contribution that China has made to the development philosophy of the world; secondly, China contributed more than 30% of the world’s new economic increment in 2016. After that, Mr. Zhu Guangyao said that “seeking progress while maintaining stability” is the keynote set by the central government for the work of 2017. Thirdly, although China’s economic growth faces the challenge of three uncertainties in 2017, namely trade protectionism, populism and newly elected American President Donald Trump, under the strong leadership of comrade Xi Jinping, and following the arrangement of the Party Central Committee, the Chinese economy will undoubtedly be able to maintain healthy and sustained development. 

Then, Professor Li Daokui introduced and interpreted the latest issue of CCWE’s Macroeconomic Analysis and Forecast Report. Professor Li said that after taking office, the new president of the United State Mr. Trump will probably do the following three things: cutting taxes, trade protection and infrastructure construction and the global economy may suffer the impact, making the international situation which is already full of uncertainties even more complicated and confusing. Against this backdrop, Professor Li Daokui offered in-depth analysis of the Chinese economy. In the aspect of investment, in order to stabilize growth, infrastructure investment strategy will probably remain in 2017. In the real estate sector, purchasing restrictions and changes in loan policies in some regions will have direct impact on the prices and sales volumes of real estate in 2017. In terms of exchange rate and outflow of funds, according to calculation made by CCWE, the main factor that causes the outflow of funds are enterprises and not households. We must focus on managing the main source of fund outflow and stabilize people’s expectations. In terms of import and export, as there might be changes in the U.S. and in the world trade arena, the government needs to offer help to exporting enterprises from both policy and diplomatic aspects. In terms of consumption, growths of car consumption and per capita disposable income have slowed down. Worsened by factors such as increasing pressure of housing loans, consumption may slide down slightly in 2017, though the overall situation will remain stable. In reduction of excess production capacities, it needs to speed up the elimination of outdated capacities and boost the recovery of prices, so that technology-driven and environmentally friendly enterprises can make more profit and become driving force for economic growth. In financial aspect, we need to accelerate and strengthen reorganization of company bonds and nonperforming bank loans, while maintain the overall stability of the financial sector. At the end of his speech, Professor Li Daokui announced CCWE’s macroeconomic forecast. It is forecasted that in 2017, the growth rate of China’s economy will be 6.6%, growth rate of fixed asset investment will be 8.9%, consumption will grow at a speed of 10.0%, increase of supply of broad money will be 11.9%, accumulated growth of import will be -0.5%, accumulated growth of export will be -3.5%, CPI will be 2.2% and PPI will be 3.0%. On the whole, it can be expected that we can meet the requirement of “seeking progress while maintaining stability” in 2017. 

Following Professor Li, Yu Bin, member of Party Leading Group and General Office Director of the Development Research Center of the State Council made a keynote speech. Mr. Yu believes that “seeking progress while maintaining stability” requires major changes in three aspects. First, the aim of stability must be shifted from guaranteeing employment to prevention of risks; second, the method of maintaining stability should be changed from increasing infrastructural investment to boost growth to lowering enterprises’ tax burden, stimulating the vitality of enterprises and increasing endogenous power of growth in the economy; third, stabilizing growth calls to turn from continuing expansion of demand to reducing supply through structural reform of the supply side. At the end of his speech, Mr. Yu, praised the macroeconomic report of CCWE.

Then, the roundtable discussion section began.

Ruan Zongze, Executive Vice President of China Institute of International Studies believes that Trump’s election as the president of the United States was the biggest “black swan event” in 2016. As 2018 will be the year of midterm elections, after taking office, Trump needs to prove himself with some good results in a limited period of time. When he is in a haste to seek quick success, it is likely that more unexpected things may happen. In addition, if Trump wants to bargain with China with matters of principles such the Taiwan issue, there is no way that he can succeed.

According to Zhu Baoliang, Chief Economist of the Economic Forecasting Department of the State Information Center, in the eight years after the subprime mortgage crisis, the world economy has been in the rehabilitation period. Both the U.S. and the Chinese economies are poised to hit bottom, though it is hard to predict when it will happen. At the moment, all major economies are endeavoring to pull through and China needs to have enough patience. In addition, the international impact Trump may bring, domestic exchange rate and tax issues also need attention.

Mr. Gao Jian is the Deputy General Manager-Morgan Stanley Huaxin Fund Management Co., Ltd. In his opinion, first of all, there is still pressure of devaluation of Renminbi; second, the Central Bank hopes that the devaluation of exchange rate can be a gradual, controllable and orderly releasing process. The most panic period following the recent round of drastic devaluation is over; third, exchange rate should be able to be stabilized at around 7.3 in 2017 and it is necessary to maintain the rate above the critical point of 7.5; fourth, capital outflow through households and individuals is likely being underestimated and close attention must be paid to foreign exchange reserve; fifth, 2.5 trillion and 2 trillion may likely be the thresholds for foreign exchange reserve.

According to Yuan Gangming, Research Fellow with CCWE，we cannot say that the Chinese economy is “seeking progress while maintaining stability” at present. In his opinion, there is no stability in the development of China’s economy, or we are seeking stability along with the development of the economy. He said that China has to solve the serious structural imbalance problem and the explosive expansion of the real estate sector is the biggest cause of the imbalance. In addition, too much investments made by the government is another major factor for the structural imbalance. 

Chen Yunfeng is the Secretary-General of China Real Estate Manager Alliance and Chairman of Youpu China. He believes that the real estate sector has attracted large amounts of M2 fund and it has brought along the development of many industries behind. For different cities, first-tier cities still look promising, while second-tier cities have begun to polarize and third and fourth-tier cities stuck in all kinds of crises. Therefore 2017 will be slower year for the real estate sector. At the end of his speech, Mr. Chen said that Mr. Trump used to be a real estate developer, so he is expected to be a president who likes to build things, therefore his government may increase investment in different industries.

In the opinion of Cao Fengqi, Professor of Guanghua School of Management, Peking University, the stock market resumed stable development in 2016 and 2017 should be a year to “seek progress while maintaining stability. There is still huge potential in China’s capital market, where we can raise funds to accomplish the five tasks including “de-capacity, destocking, deleverage, lowering costs and mending short boards”. In addition, acquisition is a permanent theme in the capital market. Insurance funds can enter the market and be used to make acquisitions, but it cannot be used to make strategic acquisitions, engage in long-term shareholding and it cannot engage in leveraged buy-out. We must resist acquisition by savages. We are waiting for the appearance of civilized people in the capital market.   

Francis Lui is a Professor of the Department of Economics, the Hong Kong University of Science and Technology. From his experience in the financial crisis of Hong Kong in 1998 and in exchange rate wars, the psychological element of expectation has huge influence on exchange rates. In the context of devaluation of Renminbin and outflow of capital, we need to have the determination to hold on to an equilibrium point and be able to resist any pressure. Actions have to be taken at critical points, even risk the cost of decreasing foreign exchange reserve.  Only by stabilizing people’s confidence can we stabilize exchange rate and the outflow of capital. As for foreign exchange reserve, it will increase gradually in the future.     

In the opinion of Yi Xianrong, former Director of Macroeconomics Office, Institute of Finance, China Academy of Social Sciences, the Central Bank needs to communicate with the market with respect to the exchange rate and give market a clear expectation. China has the ability to keep the control of the exchange rate of Renminbi in its own hand. We need to further optimize foreign exchange management systems without tightening too much. The fundamental solution to Renminbi-related problems is to improve the health of the real economy and to gradually tighten the monetary policy. In addition, with respect to real estate, Yi Xianrong believes that real estate is the core of the problems in China’s economy.