No. 44 | Opportunities and Challenges for 2023-2027
On December 28, 2022, the Academic Center for Chinese Economic Practice and Thinking (ACCEPT) at Tsinghua University convened the 44th Tsinghua University Forum of China and the World Economy. The forum was held online, with the theme of “Opportunities and Challenges for 2023-2027.” Forum participants included Gao Shanwen, Chief Economist for Essence Securities Co., Ltd.; Jia Kang, Researcher at the Chinese Academy of Fiscal Sciences; David Daokui Li, Director of Tsinghua ACCEPT; Liu Peilin, Chief Expert at the Research Center for Regional Coordinated Development at Zhejiang University and Deputy Director of the Research Institute for Inclusion and Development at Zhejiang University; Vincent Tianquan Mo, Founder of Fang Holdings Ltd. and Director of the China Index Academy; David Qingzhong Pan, Executive Dean of Schwarzman College at Tsinghua University; Qin Hong, Senior Research Fellow of the National Academy of Development and Strategy at Renmin University of China and Director at its Center for Urbanization Research; Yuan Gangming, Research Fellow at Tsinghua ACCEPT; and Yao Jingyuan, Special Researcher at the Counsellors’ Office of the State Council and former Chief Economist at the National Bureau of Statistics of China. Li Ke’aobo, Executive Deputy Director and Research Fellow of Tsinghua ACCEPT, moderated the conference.
During the forum, Tsinghua ACCEPT researchers Li Ke’aobo, Guo Meixin, Wu Shuyu and Lu Lin presented the findings from the center’s latest report on China’s macroeconomic situation entitled “Restoring Growth: China’s Economic Development Prospects for 2023-2027.”
The report stated that in the next five-year period providing a boost to China’s economic growth will be of the utmost importance, which in turn will mean reversing the long-term continuous slowdown in the pace of economic growth that has characterized the recent past. In order to achieve everything detailed in the Report to the 20th National Congress of the Communist Party of China, including the goal of becoming a moderately developed country by 2035 in terms of per capita Gross Domestic Product (GDP), and assuming that per capita GDP growth remains fixed at 3% annually for 2022, the country will need to maintain a compound annual growth rate of 4.61% between 2023 and 2035. At present, however, there are tremendous challenges in the way of realizing this goal. Even without considering the serious impacts from the COVID-19 pandemic, China’s economy between 2010 and 2019 had already been trending downwards in its GDP growth, dropping by 0.33 percentage points on average every year. At this rate of decline, it would take only two years from the start of 2023 for GDP growth to fall below the 4.61% target. At this point in time, therefore, the top priority must be to focus on reversing this trend, otherwise the goal of becoming a moderately developed country by 2035 will be out of reach.
With a view to addressing the slowdown in economic growth, the report outlined eight different challenges and issues for China given its current economic situation: 1) short-term risks to the real estate market and overlapping long-term inflection points; 2) unsustainable local government debt and the resulting severe burden placed on these localities’ economic vitality; 3) sluggish economic activity in the private sector; 4) a persistent slump in consumption growth; 5) inadequate initiative for local governments to pursue economic development; 6) a declining and aging population; 7) rising high levels of youth unemployment; and, 8) a shrinking contribution from international market demand in bolstering domestic economic growth.
At the same time, the report underscored that despite the multiple problems currently facing China’s economic development, one need not be overly pessimistic since most of these problems are of a short-term duration. From a medium to long-term outlook, there is still tremendous room for China’s economy to continue growing in the future, which can be further summarized into seven key projections as follows: 1) the future accelerated optimization of the country’s population, economy and geography will unleash a huge untapped potential for continued economic development; 2) a high savings rate will serve as the mainstay for buffering restructuring and reinvigorating economic growth; 3) high-quality human resources will provide a critical foundation for sustaining economic growth over the long-term; 4) the capacity for scientific and technological innovation will continue to remain enormous; 5) the massive domestic market will continue nurturing some of the world’s leading enterprises in the digital economy; 6) the international economy will increase in its responsiveness and adaptability; and, 7) unification of the national market will generate additional potential for long-term growth.
In order to fully harness the latent long-term growth potential of China’s economy and lend support as it continues to weather short-term headwinds, the report laid out twelve comprehensive policy recommendations aimed at rejuvenating economic growth and development: 1) vigorously promote consumption growth, including by distributing one trillion RMB in consumption vouchers, breaking the vicious cycle arising from ongoing downturns in both economic and consumption growth; 2) stabilize the real estate sector and institute new mechanisms for the sector to continue contributing to economic expansion; 3) actively pursue a reasonable resolution to the problem of local government debt; 4) revive economic activity in the private sector; 5) reenergize the innovative capacity of the digital economy; 6) concentrate on mobilizing the full capacity of human resources, including the demographic reserve of those capable of joining the labor force; 7) expand job creation and reduce unemployment; 8) launch plans for doubling the size of the middle-income group; 9) guarantee the security of supply chains and take the lead in pursuit of a new model of globalization; 10) forge ahead with the greening of industry and the decarbonization of economic growth; 11) promote economic growth by encouraging a favorable business environment; and, 12) bring the government into realignment with market economics, including by encouraging the government to foster, support and supervise the development of the market economy, in this way permitting the government and the market to build momentum in the same direction, accelerate the formation of a unified national market and enhance economic dynamism.
Tsinghua ACCEPT’s Director David Daokui Li stated that in order to accomplish the ambitious goal of becoming a moderately developed country by 2035, China must find a way to reverse the downward trajectory in its economic growth. Although this will prove a formidable task, the potential of China’s economy is immense and there are reasons to remain confident. First of all, the Chinese people are enterprising and hardworking, and with the country having a comparatively high national savings rate, which provides an important means to remedy a great deal of economic problems. Moreover, China possesses a significant capacity for scientific and technological innovation, with the number of new university graduates in the field of engineering across the country every year surpassing that of the U.S., E.U., India, Japan and South Korea combined. Finally, China’s economy is impressively large in its scale and boasts a full array of industrial sectors, while the international situation has meanwhile shown itself to be relatively adaptable and responsive.
In addition, Director Li further consolidated the twelve policy recommendations outlined in the report into three basic overarching messages—that is, macroeconomic revision, microeconomic revitalization, and international stabilization. As for macroeconomic revision, this does not simply refer to the implementation of conventional monetary or fiscal policies. Instead, it means on the one hand transforming a major share of local debt into holdings of low-interest national debt, while sorting out other forms of local debt through centralized mechanisms for debt settlement, and on the other hand it also means readjusting and stabilizing the real estate industry, while offering space for its continued expansion. When it comes to microeconomic revitalization, there are three key groups of people that should be galvanized into action—namely, private entrepreneurs, innovators in science and technology, and local government officials. At the same time, confronting the international situation in all its complexity will require taking a practical and realistic approach along with maintaining a united front and capitalizing on any favorable circumstances. If these three points mentioned above are able to be accomplished, in the near-term future China’s economy will surely have the capability to turn around the declining growth rate and set the country back on track to realizing its bold vision for 2035.
Jia Kang remarked that in the intervening period from the 14th Five-Year Plan to 2035, the momentum of economic performance must be maintained within a reasonable range, such that the strategic goals of modernization in the new era will be achievable according to the established timetable. With proper consideration for the balance between epidemic control and prevention and the resumption of work and production, and after tiding over the most difficult period following the winding down of anti-epidemic measures, it is nearly certain that the situation will become more promising. He emphasized that the deterioration in present expectations is most especially reflected in the reduced confidence of private-sector companies, with the public’s growing misconception and backlash against firms having dealt a heavy blow to the initiative of private enterprise. As far as how to go about supporting private businesses, whether it concerns financing, market entry, etc., policies should be put into effect such that firms are treated equally and without distinction, while letting the broader society progress towards embracing a more business-friendly environment.
In the meantime, although the problem of local government debt is still relatively serious, the optimization of anti-epidemic measures has alleviated some of the strains on local financial resources. While public finances are now under greater pressure these days compared with the past, deficits have consistently remained within an acceptable range. In 2023, public finances need to be brought into further play, including increasing the amount of fiscal deficit where appropriate and making proactive use of government bonds. Localities, in particular, will need to take special care to heed the central authorities and refrain from any hesitation or delays when carrying out decisions. As for revisions to real estate taxes, the next step will be to broaden the scope for piloting reforms. As a pilot demonstration zone for socialism with Chinese characteristics, Shenzhen has shown promise by taking the lead and will be the first to put such reforms into effect.
Yao Jingyuan expressed that despite being in full recovery mode, the fundamentals for China’s economy have still not stabilized. The recovery of the world economy has meanwhile remained lackluster and is even showing early signs of veering towards a recession. As for the economic outlook in 2023 and the balance between exports, investment and consumption, there is less optimism for exports than in 2022, which therefore suggests that any economic recovery will need to be driven by investment and consumption. Expanding consumption requires that people have money to spend, so the number one task for the coming year will be to increase the size of the overall economic pie. By way of comparison, the process for distribution reform is of a comparatively longer-term duration, meaning that the matter of immediate concern during the next five years must be to maintain a higher level of growth. Stabilizing economic growth will go a long way in reversing the pessimistic sentiment of market players and consumers. Thus, if China can make significant headway on this front next year, it will help to inject confidence back into the market. Only when China’s economic growth is able to be sustained at a certain level can one then begin to consider the quality of that growth; hence, both quantity and quality should be given equal attention moving forward.
The second course of action for stimulating consumption is to expand employment, with the 11.5 million university graduates entering the job market next year expected to represent a sizable contribution to the labor force. Every percentage point of GDP growth can create anywhere between 1.8 to 2.2 million new jobs. As such, if China’s economy can achieve a growth rate of 5% or higher in 2023, this will enable job creation to begin playing its part in boosting consumption. So long as economic growth, employment and prices can be maintained at adequate levels, consumption will inevitably begin to pick up again accordingly.
With regard to the manufacturing industry and related investments, Yao pointed out that the 9% growth achieved in the industry this year is an ideal target. Investment in the manufacturing industry can be divided into either extensive expanded reproduction, referring to investments aimed at increasing the scale of production output, and intensive expanded reproduction, referring to investments aimed at increasing the capacity to innovate through the upgrading of equipment and improvements in technology. The scope for technological transformation has itself expanded continuously throughout the year, such that it has now become widely recognized as the primary force driving innovation in the industrial sector. In terms of investments in the industrial sector focused on transforming technology and upgrading equipment, Yao also mentioned two points that deserve attention: first, depreciation should be accelerated for firms by offering tax incentives while encouraging the replacement of equipment and the adoption of new technologies; and second, discounts on interest should be provided for firms pursuing technological transformation by way of subsidies in those localities with access to sufficient financial resources.
Gao Shanwen commented on the near-term future for the capital market and was of the view that the drop in the stock index was part of an automatic reaction on the exchanges. He observed that before the Central Economic Working Conference and loosening of epidemic control and prevention measures, the market had been predicting a strong economic rebound and a shift towards easing anti-epidemic policies, with the market under this bullish forecast having witnessed a nonstop inflow of new funding, leading to a surge in stock prices alongside heavy trading volumes. Once this scenario materialized, the support that had underpinned such trade flows began to more or less dry up, with the market then entering a downtrend of shrinking trading volumes as share prices went into retreat. After this scenario had come to pass, the market’s main concern pivoted to whether or not the recovery in economic activity would be successful in line with the latest policy direction. Only when the economic data began to improve above or in line with expectations would the stock exchanges transition from a focus on anticipating policy decisions to signals of an economic turnaround. With the shift towards reopening, however, the onward transmission of coronavirus and cases of critically ill patients with COVID-19 has generated a gap between expectations and the present unfolding situation, which inevitably means that the market will need to further revise its forecasts to a certain degree for at least the near-term future.
As for external risks to the capital market, over the short-term (i.e., the next one-year period) the direction of U.S. monetary policy will remain the risk of chief concern for the market, including the timetable for peaking interest rate hikes and the expected terminal rate, whether or not the U.S. economy will go into recession in 2023 and the severity of such a downturn, as well as any discrepancies between the Federal Reserve’s forecasts and those coming from Wall Street. Looking to the medium and long-range, the geopolitical situation represents the top risk, with the state of Chinese-U.S. relations at its core. As for how to take both development and security into full consideration in view of these external risks, a two-dimensional coordinate framework can be applied to analyze the impacts at the industry-specific level: wherein the horizontal axis indicates the growth momentum or potential for a given industry, while the vertical axis represents the degree of concern over security and specifically the impacts on a given industry resulting from security-related government interventions. For example, the household electrical appliances industry in the third quadrant shows that the maximum growth value for this industry has been reached while having limited to no influence as a result of national security concerns. The major issue areas arise in the first, second and fourth quadrants, with each quadrant requiring one to take into consideration a different approach. The first quadrant refers primarily to those technology-related industries where China and the U.S. are seen to be in confrontation with one another, while the industries in the fourth quadrant represent areas of competition between the two countries. For instance, new energy vehicles (NEVs) represent an industry with a significant growth potential, though concerns over security remain indeterminate as the industry is presently being driven by privately-owned corporations. For the moment, the most pressing point at issue is how to go about unifying trade rules to both regulate and promote competition and an international division of labor for industries in the fourth quadrant. This is a policy objective that the Chinese government itself will need to pay particularly close attention to in the years ahead.
Qin Hong observed that an important factor for China as it looks to stabilize the real estate market and expand domestic demand will be to satisfy people’s reasonable demand for upgrading to better housing, including by taking the following three approaches: first, each local region should fully implement existing policies supporting the demand for upgrading housing stock as practicable; second, a certain amount of leeway should be maintained to lower costs for home purchases in respect to the reasonable demand for upgrading among existing homeowners and inelastic demand among first-time homebuyers; and third, municipalities should make further adjustments to their policies limiting home purchases and restricting access to home loans, while lowering the threshold for satisfying the demand for upgraded housing. China’s current demand for residential real estate can be divided into three segments—namely, demand from expanding urbanization, demand from replacement (demolition and relocation), and demand from upgrading to better housing. Among these, the proportion of demand arising from people seeking to upgrade their home is increasing at the fastest pace and has the greatest potential to support consumption. In 2022, there were three major factors that impacted demand in the country’s real estate market: downward readjustment in the value of the overall market for property sales; uncertainty among consumers over anticipated incomes as a result of higher unemployment and reduced wages during three years of the COVID-19 pandemic; and, the repeated emergence of insolvency risks on the supply side. At the same time, Hong noted that the default risks facing real estate companies will be drastically lower in 2023 given the recent full-scale introduction of a series of supportive financial measures for the property sector, among which the most distinctive feature is upholding respect for market mechanisms and a return to normalized market conditions.
In general, regulating and reigning in the property market will require achieving the three following tasks: first, the government needs to fulfill its duties such as ensuring the completion of indemnificatory housing construction projects and optimizing the basic institutional framework for the real estate market; second, market mechanisms should be respected to the greatest extent possible; and third, the formation of a new model for real estate companies should be supported as the industry enters a new stage in its development, shifting away from the previous traditional model based on high debt, high leverage and high turnover.
Vincent Tianquan Mo relayed that there have been three defining features that have come to characterize transactions in the real estate market over the past three years. First, while home purchasers still retain considerable purchasing power, their willingness to purchase residential property has diminished considerably, reflecting a general uneasiness about future uncertainties. These uncertainties fall into two categories: one concerns a low level of confidence towards future market pricing and the other concerns a low level of confidence towards real estate developers themselves, including most especially private developers. Second, prices have become another important consideration. According to the China Real Estate Index, prices for newly-built housing units tumbled in 2022 despite remaining essentially flat throughout the year, increasing by the smallest margin since 2015 at an annual growth rate of only 0.06%. Third, the total floor area for completed transactions is also noteworthy. During the period from January to November, the total combined floor area for completed transactions in 100 major cities across the country had declined by 36.8%, amounting to an exceedingly large contraction, with total floor areas for transactions in first, second and third-tier cities shrinking by 24.9%, 38.8% and 36%, respectively. Moving forward, the biggest issue will be how to bolster people’s willingness to purchase residential property, otherwise it will be difficult to capitalize on their genuine capacity to consume.
In addition, Mo stressed the importance of the renewable energy industry. He suggested that renewable energy not only points to the primary direction of development for China’s future economy, but also indicates the broader orientation for the development of the world economy and technology as a whole. China has pledged its “dual carbon” goal to the world—committing itself to peaking carbon dioxide emissions before 2030 and achieving carbon neutrality before 2060—presenting a lengthy road ahead that will nonetheless serve as a long-term undertaking where challenges and opportunities coincide side-by-side. The subsegments of the renewable energy industry form a fully integrated industry chain that touches upon a multifarious range of technologies—from resource extraction, processing and intermediate products, and all the way from lithium carbonate and lithium iron phosphate to electric batteries—which means that the opportunities moving forward are truly endless. However, market competition in this industry has only just begun to emerge, such that any sudden large-scale expansion in growth may result in a number of possible hurdles, such as excess production capacity, the adoption of substandard technologies, and a potential inability to reap a return on investment.
David Qingzhong Pan spoke highly of the report’s analytical overview of China’s economy and its “serious challenges and enormous potential,” having stressed the essential role that the government must play in responding as much as possible to these challenges and realizing the country’s full potential for development. He also introduced findings from his own field visits and research, revealing the key steps that the governments of the United Arab Emirates and Ireland took to jumpstart their respective post-pandemic economic recoveries. For instance, the UAE government relaxed their visa policy while promoting business activity and the free flow movement of people to the maximum extent possible; whereas Ireland put into effect a low tax regime targeting Northern European countries, attracting substantial inward investment while spurring its economic growth. In comparison with these two countries, Pan considered China’s economy to possess stronger advantages and an even greater capacity for development. By taking stock of the discipline of government and economics, China’s economy will certainly be back on track towards making continual long-term and steady improvements, just so long as the initiative of governments at every level can be brought fully to bear and so long as the government and the market build momentum in the same direction.
Liu Peilin stressed that adhering to the principle of seeking truth from facts is of the first order of importance when considering how best to encourage local governments to improve their administrative efficiency and adopt a more pragmatic and proactive approach to implementing central government policies. In the recent Central Economic Work Conference, it was stated that “practice is the criterion for measuring the success of each policy or task,” with this standpoint therefore being of the utmost urgency. Upholding the principle of seeking truth from facts is a constructive way to retain a certain degree of continuity and stability in policymaking. In addition, it provides a means to counteract any potential endogenous shocks and put in place “stable expectations” for the future. Given China’s large population and its significant internal differences, the basic characteristics of the country are such that the central authorities are unable to formulate policies in an “omniscient and omnipotent” manner that conforms to the actual situation in each and every locality. Thus, improving grassroots governance requires that actors at the grassroots level have a certain amount of flexibility and capacity to make decisions of their own accord, including establishing inclusive and prudent mechanisms for directing decision-making as well as encouraging local governments to take action in a way that is at once both decisive and appropriate.
On the question of how best to stimulate domestic demand and promote economic growth in the period after the pandemic, Liu recommended providing subsidies to Chinese residents, such as cash transfers and consumption vouchers. Based on the actual situation come next year, any attempt at “restarting” China’s economic growth will necessarily warrant granting direct subsidies to residents so as to boost their consumption spending.This direct approach is also more effective than handing out subsidies to local governments or specific industries and enterprises. From a more long-range perspective, stimulating domestic demand will require concentrating on ways to increase people’s disposable incomes. In 2021, of the five income quartiles comprising China’s population, the bottom two quartiles comprised a total of 560 million people. With a per capita monthly income amounting to only 1,116 yuan, this segment of the population is hardly able to satisfy even their most basic everyday consumption needs based on their current incomes. Hence, the only way forward to achieve long-term sustainable growth in domestic demand and consumption is to ensure that every single individual can participate and join in on China’s path to modernization.
Yuan Gangming affirmed that while China’s economy has enormous potential, it also continues to face serious challenges. According to the benchmark wherein China is to reach the level of a moderately developed country by 2035, its annual GDP growth would need to be maintained at 6% or higher between 2023 and 2027—a growth target that will in fact prove exceptionally difficult to attain. Consumption has become one of the biggest factors contributing to the deceleration in economic growth. For instance, the total retail sales of consumer goods dropped by 5.9% year-over-over for the month of November, indicating that the situation had become quite grim. The ongoing slump in consumption can mainly be attributed to a decline in disposable incomes; therefore, addressing this problem will mean taking into consideration ways to boost incomes, including making full use of fiscal support measures. During Premier Zhu Rongji’s term in office, China’s economy had similarly faced a period of severe downward pressure, though this difficult situation was later successfully surmounted after adopting measures to hike wages and adjust incomes. In the same way, China now must also intensify its fiscal support measures to bring an end to the continued deterioration in private consumption. One approach, for instance, would be to apply reductions to sales taxes for certain key areas of consumption such as household electrical appliances or other major household purchases, including but not limited to offering subsidies. As for the private sector and the digital economy, which directly rely on consumption demand, policy support should be further enhanced. Meanwhile, monetary and fiscal policies need to be coordinated in support of maintaining a moderate expansionary regime and resolving deep-seated structural problems. Only decisive measures that stimulate consumption demand will be able to promote economic recovery and reignite an upswing towards a virtuous economic cycle.