No. 31 | Taking Action for a Prosperous China
The Chinese Economy Strives to Reach the Bottoming Process
With a focus on Taking Action for a Prosperous China, the 31st CCWE Macroeconomics Forum, organized by the Center for China in the World Economy (CCWE) was held on March 12 at Tsinghua University. Since the NPC and CPPCC meetings were taking place in Beijing, some delegates and committee members were able to participate in the forum. They were: Gu Shengzu, member of the Standing Committee of the National People’s Congress (NPC), Vice Chairperson of the Financial and Economic Affairs Committee of the NPC, and Vice Chairman of the China Democratic National Construction Association Central Committee; Jia Kang, member of the National Committee of the Chinese People’s Political Consultative Conference (CPPCC), member of the Subcommittee of Economy of CPPCC, and President of the China Academy of New Supply-side Economics; Jia Qingguo, member of the National Committee of the CPPCC and Dean of the School of International Studies of Peking University; Cao Dewang, member of the National Committee of the CPPCC, and Founder and Chairman of Fuyao Glass Industry Group Co., Ltd.; Cao Yuanzheng, Chairman of BOCI Research Ltd. and former Chief Economist at Bank of China; and Mao Daqing, member of the Nonparty Personage Suggestion Committee of the United Front Work Department of the CPC Central Committee, member of the National Committee of China Association for Science and Technology, and Founder and Chairman of URwork. In addition, Yuan Gangming, Research Fellow at CCWE, also participated in the forum, which was hosted by Professor David Daokui Li, CCWE Director.
David Li began by pointing out that although 2016 marked the sixth consecutive year of a slowdown in China’s economy, bright spots can be found. In 2017, China’s economy will enjoy advances brought about by continuing economic restructuring; positive effects achieved through the policy of cutting overcapacity, destocking, deleveraging, reducing corporate costs and shoring up weak spots, as well as new sources of economic growth released by the deepening of reforms. That being said, China’s economy will still be challenged by the chaotic international environment; risks in the domestic finance industry and stabilize in private investment in the real economy and manufacturing. If China can take advantage of opportunities while containing potential risks, China’s economy is quite likely to bounce back from a bottoming process by the end of 2017 and pick up gradually in 2018 and 2019.
According to the CCWE macroeconomic forecast published at the forum by CCWE, Professor Li predicted that China’s economy would grow by 6.6% in 2017 with fixed asset investment going up by 8.6% and consumption by 10.0%. He also forecasted a growth rate of 11.9% for M2 money supply, -0.5% for the cumulative amount of imports and -3.5% for the cumulative amount of exports. In addition, the assumption is that China’s CPI would rise by 2.1% and PPI by 6.0%.
Following Professor Li's remarks, the forum moved to the panel discussion session, where Mr. Gu Shengzu, a member of the Standing Committee of NPC, stated that one of the main tasks of this year’s Government Work Report was supply-side structural reform, and that the key aspect of the reform was the new innovation-driven transformation and upgrading of the real economy. He also said that progress in high technology further lowered costs and changed the way of life for people in China. In addition, more benefits will be created by individual income tax reform this year.
Mr. Jia Kang, a member of the national committee of CPPCC, said that in terms of individual income tax reform, the spectrum of wages should be expanded, and excesses should be accounted for after being accumulated. Meanwhile, the highest marginal tax rate should be reduced to no more than 30% in order to prevent gold-collar workers from immigrating and encouraging them to roll up their sleeves and work with extra energy in China. Moreover, the ratio of assets income turned in by SOEs is not high enough, and a rise in the ratio is required.
According to Mr. Cao Dewang, a member of the National Committee of the CPPCC, Chinese enterprises are overburdened with high taxation and investment thresholds for electronic products, and the internet sector continue to rise. He added that individual income tax should first and foremost not be designed to hurt the interests of the people; people's daily necessities should be levied at a lower rate or even ultimately be exempted from taxation. In addition, environmental costs of labor, materials, energy and taxation in China are already too high damaging the motivation to make investments.
Mr. Mao Daqing, a member of the National Committee of the China Association for Science and Technology, stated that China’s real estate industry had an obvious impact on the real economy. After the financial crisis, in order to save the real economy, the government saddled the economy with excess liquidity without underlying value. As a result, a large quantity of that liquidity flew into the land and real estate sector, turning 90% of today’s real estate into financial investments. A highly leveraged housing sector will lower people’s consumption power, hurting the real economy and manufacturing sector. Therefore, it is urgently crucial for China to rebalance the relationship between the real estate industry and the real economy.
Mr. Cao Yuanzheng, Chairman of BOCI Research Ltd., expressed the opinion that China’s economy has almost bottomed out, considering the following domestic factors: first, GDP growth over the four quarters of 2016 remained stable; second, PPI performances, corporate profits and results of efforts to cut overcapacity were good enough to stabilize the deleveraging process. As long as China can do that well, the country can ensure that the macro-economy will land on the bottom smoothly. The key is to stabilize the economy from a micro perspective. Given the increasing uncertainties in the international community, China needs to steadfastly safeguard globalization.
Mr. Jia Qingguo said that it is even more difficult to predict President Trump’s future policies than it was to predict if he would secure the presidency. It is uncertain whether the Trump administration will maintain international order, and protect the system of international trade, security policies and the mechanism of nonproliferation of nuclear weapons. The traditional US-dominated globalization model which favors efficiency and fairness rather than equality might come to an end under the new administration. Fortunately, the Sino-US relationship is relatively smooth at the moment, but the Chinese government needs to be patient.
Yuan Gangming, a research fellow at CCWE, mentioned that China cannot claim that the country’s economy has reached the bottom merely on the grounds that corporate income is large enough to offset debts, because profits in the steel industry and fiscal income from land can also achieve the same effect, which is not, by any standards, an indicator of the Chinese economy bottoming-out. At present, the real estate sector has taken up too many resources, and its “high input, low output” model has cost the actual growth rate of China’s economy to drop further. As a result, the real economy has been squeezed and badly damaged.
At the closing Q&A session, researchers and students from Tsinghua University and other institutions, economic enthusiasts and representatives of the press raised questions concerning how to absorb the excess liquidity; how to improve the quality of products made in China; and asked whether the experts had any suggestions regarding tax system reform. In response, guests and Professor David Li offered personal insights that generated lively discussions.
