No. 45 | 2023 Mid-Year Economic Outlook

On June 17, 2023, the 45th Tsinghua University Forum on China and the World Economy was held inside the Weilun Building’s main lecture hall on campus at Tsinghua University’s School of Economics and Management. The biannual event was hosted by Tsinghua University’s Academic Center for Chinese Economic Practice and Thinking (ACCEPT) under the theme of “2023 Mid-Year Economic Outlook.”  Forum participants included Yin Yanlin, Vice Chairman of the Economic Committee for the 14th National Committee of the Chinese People's Political Consultative Conference (CPPCC) and former Deputy Director of the Office of the Central Financial and Economic Affairs Commission; David Daokui Li, Director of Tsinghua ACCEPT and Co-President of the Society for Government and Economics (SAGE); Zhang Bin, Deputy Director of the Institute of World Economics and Politics (IWEP) at the Chinese Academy of Social Sciences; Zhang Ming, Deputy Director of the Institute of Finance and Banking (IFB) at the Chinese Academy of Social Sciences; Francis T. Lui, Professor Emeritus and Adjunct Professor of Economics at the Hong Kong University of Science and Technology’s Department of Economics; Lu Zhengwei, Chief Economist of Industrial Bank; and Li Wenjie, Senior Vice President of Beike Zhaofang and President of the Beike Research Institute. Li Ke’aobo, Executive Deputy Director of Tsinghua ACCEPT, moderated the forum.

In his keynote speech, Yin Yanlin first remarked on the current situation facing China's economic performance: stating that the current trend does not easily lend itself to an optimistic forecast, with downside risks rising and the foundations for the ongoing economic recovery clearly remaining on shaky ground, which is far removed from the overall improvements to the country's economic operations that were proposed at the previous Central Economic Work Conference, especially regarding the requirements for ensuring the stable development of the real estate market. 

The specific manifestations in the broader economy are as follows: in terms of production, most industries have witnessed steady declines recently despite maintaining a relatively stable development trend overall, and with a notable divergence between sectors. The recovery has been uneven, with the service sector bouncing back faster than the industrial sector, larger enterprises faring better than small and medium-sized enterprises, and state-owned enterprises outperforming private enterprises. In terms of demand, total retail sales for consumer goods have decreased year-on-year after an initial resurgence, while the consumption of durable goods and other major household purchases such as home appliances and automobiles has remained sluggish. Moreover, sales of commercial housing properties and fixed investments in productive assets have both decreased year-on-year after tapering off. Real estate development investments, private investments and exports have all declined, while the general employment and price level situations remain quite grim. 

Yin suggested that the main reason for the current weakness in aggregate demand is a result of inadequacies in policy implementation. On the one hand, market expectations in the form of consumer and private investment confidence have not followed a continuous path towards improvement; and on the other hand, there are obstacles preventing policies from being put into full effect, including restrictive policies that are hindering the free flow expansion of consumer demand and the steady development of enterprises. At the same time, there remains a sense of uncertainty regarding any potential signaling towards making policy readjustments. 

In order to address these issues, the scope of policy support must be increased while providing assurances that such measures will be caried out fully and effectively. This will boost market expectations and stabilize market confidence, in this way stimulating the resilience of financial institutions, restoring and expanding demand, and promoting an overall improvement in economic activity. He also specifically pointed out that certain measures need to be introduced to put a decisive stop to the downward spiral in expectations among private enterprises and entrepreneurs: including effectively capitalizing on those policies that can be brought to bear to the greatest extent possible, putting into force any appropriate policies that have yet to be carried out by devising concrete and explicit measures for immediate execution, readjusting those policies incompatible with present needs as soon as possible, and expediting the implementation of those policies that should be strengthened, moving forward with such mesaures decisively and without any hesitation. At the same time, the role of fiscal policy should be actively incorporated to further consolidate expectations and expand domestic demand, which would help enhance the effects of monetary policy while propping up and stimulating market demand. 

He is also of the opinion that it is now necessary to effectively ensure that there is an overall convergence in the steering of public opinion, including attending to any statements, practices or measures associated with local government counterparts that are inconsistent with the requirements of the central government. This involves reinforcing forward-looking guidance and providing society with clear-cut expectations, as well as encouraging a climate of public opinion in which “state-owned enterprises dare to take action, private enterprises dare to forge ahead, and foreign enterprises dare to invest.” 

Next, David Daokui Li, together with three researchers from Tsinghua ACCEPT, Li Bing, Guo Meixin and Lu Lin, jointly released the institute's China Macroeconomic Analysis and Forecast Report for the second half of 2023, entitled “Preventing Overcooling: A Core Task for Macroeconomic Governance in the New Era.” 

The report began by pointing out that the present performance of China's economy has not kept pace with the country’s projected growth rate and with the overall recovery having failed to match expectations, which suggests an urgent need to reverse this decelerating growth trend as early as possible. According to the institute's calculations, in order to achieve the goal of becoming a moderately developed country by 2023 in terms of per capita Gross Domestic Product (GDP), the compound annual growth rate (CAGR) for China's economy during the period from 2023 to 2035 will need to be as high as 4.61%. However, even when setting aside the impacts of the pandemic, the country’s GDP growth rate between 2010 and 2019 was already exhibiting a long-term continuous slowdown, with an average annual decline of 0.33 percentage points. Based on this trendline, therefore, the CAGR for China’s economy will fall below the 4.61% mark as early as 2025. At present, China's domestic demand remains weak overall, with the Consumer Price Index hovering at a low level and the Producer Price Index continuing to contract. The recovery of consumption has stalled alongside a production sector that has fallen into a deflationary downslide. Meanwhile, youth unemployment is steadily rising and import growth is trending downwards. 

Even so, China’s economy still has significant advantages in terms of its national savings rate (K), capacity for scientific and technological innovation (P), and total human resources (L). Although the growth rate underpinning China’s current economic performance has been unable to reach its full potential, the economy still has the capacity to achieve a high level of growth in the future. For instance, China’s aggregate savings rate has been conservatively estimated at 35% of the country’s GDP, which is far higher than that of other major economies around the world, thus reflecting the country’s capacity to further expand investment and tap into an unexploited reserve for spurring on continued economic growth. On top of that, based on real purchasing power, spending on R&D in China has already surpassed that of the United States, and with this amount moreover continuing to rise. Science and engineering graduates account for 41% of the nearly 11 million college graduates in China, more than the rest of the world combined, which constitutes an important pool of talent for propelling future scientific and technological innovation. The total number of healthy and educated individuals active in the workforce has increased steadily, such that if the country’s total proportion of human resources was converted into a population equivalent taking 2020 as a base year, the future proportion would rise to reach 1.64 billion by 2050, representing an improvement of around 15.4%. If China can fully harness its future economic growth potential by leveraging the key advantages outlined above, the projected growth rate for its economy during the periods from 2021-2025, 2026-2030 and 2031-2035 could reach 5.9%, 5.8% and 5.2%, respectively. 

The report indicated that consumption, local debt, the real estate market, private investment, and foreign demand are the five main obstacles hindering China’s ongoing economic recovery. If not properly delt with, the present circumstances may not only impact China’s goal of achieving “a per capita GDP reaching the level of a moderately developed country by 2035,” but also lead to a series of major risks in the process of promoting Chinese-style modernization, such as reduced employment, a potential for greater social instability, a deceleration of industrial upgrading, a reversal in the progress towards “catching up” with developed economies, growing constraints on making continued improvements to the country’s comprehensive national strengths, and a passive stance in the face of increasing international competition. 

The report called attention to the fact that since the period of Reform and Opening-up, the basic orientation for reforming China’s system of national governance has been to streamline administration and delegate more authority to lower levels, with its macroeconomic situation meanwhile having been characterized by repeated rounds of overheating. Over the course of the past decade or so, the country's governance capacity has undergone a significant improvement alongside a pattern of administrative management that has become increasingly standardized and regularized. At the same time, however, contractionary pressures on the macroeconomy have continued to mount. Thus, in looking forward to the new era, the fundamental approach and main task for China's macroeconomic governance must therefore undergo a transformation: shifting from “preventing overheating” to “preventing overcooling.” Apart from making structural and normative policy changes, mechanisms for hedging against these contractionary pressures will need to be established when engaging in overall policy planning. 

Next, the forum embarked on a roundtable discussion, with the moderator Li Ke’aobo engaging in a dialogue with each of the distinguished guests one at a time. 

Zhang Bin argued that the primary contradiction affecting the performance of China’s macroeconomy has shifted from one of “an inclination towards overheating versus overcooling” to one of “an inclination towards overcooling versus overheating,” with insufficient demand having become the most striking contradiction to define China's macroeconomic situation over the past decade. Prior to that, capital-intensive industries had borrowed significant amounts while generating sizeable savings deposits, which flowed into the coffers of enterprises, local residents, and governments alike, underpinning a period of strong and growing overall purchasing power. When these industries passed the peak in their development, the volume of corporate loans began to fall sharply, with individual borrowers and local financing platforms becoming the most important mainstays for driving credit growth, and yet these two channels alone were unable to sustain a sufficient expansion in lending. 

He pointed out that when it comes to resolving the problem of weak demand, the most effective measure would be an appreciable cut to interest rates. The country's borrowers, including individuals, governments and corporations, together hold RMB 330 trillion in debt, such that if interest rates were sufficiently reduced, the amount paid in interest alone on outstanding loans could be decreased by more than RMB 7 trillion. At the same time, these lower interest rates would contribute to higher net asset values, supporting an increase of at least RMB 15 trillion in equity valuations on the stock market. If this more than RMB 20 trillion combined was then made available to businesses, residents and government entities, it would provide a significant boost to overall purchasing power. Hence, he reiterated that there has been calls for a significant reduction in interest rates because they represent the most powerful tool for rebalancing the interrelationship between savings and investment and for reversing waning aggregate demand.  

Some people hold the view that interest rate cuts will increase pressures on capital flows and the RMB exchange rate, but Zhang opined that in fact the most important component for determining China's currency exchange rate involves internal factors. By lowering interest rates enough to the point that it brings an end to the problem of insufficient aggregate demand, we can improve the fundamentals of the domestic economy, which in turn will provide the best guarantee for maintaining the RMB exchange rate.

Zhang Ming observed that the American economy performed better in the first half of the year than had previously been widely forecasted. Although the United States has raised its interest rates ten times since last year, equating to a total of 500 basis points, its economic situation has remained quite promising. This mainly reflects the U.S. government's well-devised and well-timed “post-pandemic” macroeconomic policy: stimulating household consumption with fiscal policies such as tax cuts and subsidies directly targeted at the consumption side, while maintaining market liquidity through monetary policies coupled with lower costs for issuing public debt. Thus, he continues to hold the view that the economic situation in the U.S. is expected to remain stable and in good condition over the short term, with any downward readjustment of interest rates being unlikely for the remainder of the year. 

He considers China's overall export growth to have exceeded expectations during the three years of the global pandemic, with an extra boost from the dislocation caused by the pandemic shock having been the most important driving factor. Since the beginning of the year, China's export market has undergone a structural transformation, with its rate of export growth declining for the European Union and rising for the Association of Southeast Asian Nations (ASEAN). Even so, the total volume of exports to emerging markets in ASEAN is still small compared with that of the European and American markets, with the latter to remain China's most important export markets over the short term. 

In turning to the domestic market situation, Zhang stated that the current pressure on local governments to improve economic growth indicators has become overly burdensome, with the conventional resources at their disposal and room for policy maneuver to promote growth having become increasingly limited. Meanwhile, local officials are struggling to meet performance expectations, all of which is not favorable for sustained long-term development. He said that central and western regions of the country face challenges managing current levels of existing debt on their own, which means that tackling local government debt must rely on the central government taking on greater financial leverage. Therefore, it will be necessary to put into place an institutional framework that is both highly transparent and credible, one that relies on central and local governments working together alongside commercial banks to share out the costs associated with resolving the local debt problem.  

Francis T. Lui commented that Hong Kong's economy performed comparatively poorly last year, with its GDP having contracted by -3.5%, while this year the region’s growth rate is broadly forecasted to reach somewhere between 3% and 3.5%. At present, the labor market in Hong Kong is in short supply, as many young people lack the willingness to actively engage in productive work. Young people's values underwent a shift during the pandemic, choosing to live with and depend on their parents or “lie flat” (i.e., opt out of the rat race) while collecting government benefits, living in a state characterized by low wages and low consumption. Meanwhile, Hong Kong's housing prices remain high, and because people will lose their eligibility to enjoy the benefits of government-subsidized public housing after receiving a wage hike above the stipulated income limit, this has also contributed to a lack of enthusiasm towards work among many of the gainfully employed.  

He noted that the demographic situation in Hong Kong is also a matter of serious concern. Residents living in the region demonstrate a low willingness to have children, with around 40% of 45-year-old women being childfree and with the number of adults without children continually increasing. He claimed that there are two reasons for this trend: first, Hong Kong is geographically small and so housing is expensive, meaning that there is not enough room to adequately house more children; and second, the cost of high-quality education is too expensive. If this trend continues, it will undermine Hong Kong's long-term prospects for economic development. 

However, Lui still believes that Hong Kong is not without its own unique advantages and development opportunities. For example, against the backdrop of the weaponization of the American dollar by the United States, many regions around the world, such as the Middle East, and individuals have reduced their willingness to hold U.S. dollars, while the currency pegging of the Hong Kong dollar to the U.S. dollar has meanwhile presented an enormous risk and has become a problem in search of a solution. As a financial center and the world's largest offshore RMB business hub, Hong Kong accounts for the greatest share of offshore RMB deposits, and is well positioned to increase the volume of RMB transactions as well as introducing new RMB investment products, in this way further enhancing its financial development. Thus, while the pandemic triggered enormous negative shocks, and with these reverberations creating problems for the region's post-pandemic economic recovery, a time of crisis invariably gives rise to fresh possibilities. Hong Kong will therefore need to take advantage of these new opportunities if it is to enhance its economic growth potential moving forward.

Lu Zhengwei underscored that while the performance of China’s real economy has been tolerable in recent months, it certainly cannot be said to be especially good. Entrepreneurs are unable to see what the future has in store, which has contributed to their anxieties and prompted a lack of confidence. As for the main factors defining the present state of China’s economy, the first factor is that the current external and internal environments have undergone significant changes: with the changes to the external environment reflected in a decline in the amount of foreign import demand from Europe and the United States and with the changes to the internal environment reflected in a lack of uniformity in regulations despite continuous improvements to regulatory policies. The second factor is the transformation of the economic structure, which is mainly exemplified in a diminished role for the real estate sector as a driver of China’s economic growth, and with this course correction being irreversible. The third factor is the uncertainty associated with the development of related technologies in the process of achieving the “dual carbon” climate goals, which requires the government to establish the necessary institutional arrangements in a timely manner to provide safeguards. 

As for the asset allocation of local households in China, he asserted that the most important asset allocation in the future will mainly involve fixed income assets and equities, while housing prices on the whole will no longer have the chance to enjoy sharp increases as had previously been the case, and may even be unable to outperform inflation over the longer term. Having said that, if people opt into investing in stocks or equity funds, they will first need to do a good job in preparing themselves by making the necessary psychological readjustments. According to historical data provided by several asset management companies, the surest way to ensure investment returns is to hold onto assets for the long haul. However, only 2% of investors hold onto their assets for more than a duration of 10 years, and with average returns doubling over that period. Normally, all funds will see their net value undergo a dramatic downswing at some point within a 10-year period, so for those unable or unwilling to bear this kind of risk, it may be advisable for them to select an index fund instead. A reasonable expectation for an annualized return on investment in the stock market could be set at 6%, with many of the biggest gains in net asset value typically being made within a 20-day timeframe. Given the challenging economic situation at present, the profitability of companies listed on the Shenzhen Stock Exchange’s ChiNext and the Shanghai Stock Exchange’s STAR Market will be markedly better than the average level for China’s A-share market, with the former therefore proving to be more worthwhile to hold onto moving forward. 

Li Wenjie suggested that public opinion is currently quite divided when it comes to the real estate market, with some believing that the latest market regulations are overly strict, while still others feel that it is necessary to prevent a cycle of endless property speculation. According to surveys and available data, the overall market yielded positive results in the first five months of the year from January to May. At a growth rate of around 7%, sales of market-priced housing units have maintained a positive trajectory, as the broader real estate market showed fairly promising signs of a return to growth compared with last year. The overall market situation for the remainder of the year remains optimistic, and especially for new home sales, which are expected to continue growing at a rate of about 5%. In looking to the medium and long term, however, he expects the demographic situation to become a particularly serious concern. The year 2021 represented the peak for real estate construction in China, with new construction having reached a value of more than RMB 18 trillion, and with this amount projected to decline and stabilize somewhere between RMB 12 trillion and RMB 13 trillion in the future. At the same time, the construction capacity for real estate development will be reduced by approximately one-third in the years ahead, with the process of offloading this capacity anticipated to present certain concomitant risks. 

At present, Li said that there are significant distinctions that can be drawn between different urban areas around the country, with the recovery process being uneven. There are notable variations between third- and fourth-tier cities, upper- and lower-level second-tier cities, and first-tier cities. First-tier and upper-level second-tier cities have had a relatively strong performance, while other second-tier cities have shown slightly more weakness, and with third- and fourth-tier cities recovering at a comparatively slower pace. This reflects an ongoing increase in the concentration of industry and population centers across the country, a continuous trend that will see the gaps between regions keep on widening even further. In the future, real estate development and investment may continue to become increasingly more concentrated in certain key regions and cities, such as the Greater Bay Area and the Yangtze River Delta region. As for changes in the positioning of private versus state-owned enterprises, he mentioned that even as homes sales have been negatively impacted by the debt overhang afflicting large-scale private enterprises, the land acquisition and operations of state-owned enterprises have by comparison remained relatively stable. However, after all the risks are fully exposed and addressed, private enterprises’ share of the overall ratio of home sales is expected to see an uptick in the future. 

At the end of the forum, the roundtable guests also participated in an in-depth and frank exchange with Tsinghua University teachers and students as well as reporters from the media, discussing a variety of hot topics related to China and the world economy, such as the current investment outlook, the demographic situation, special-purpose government bonds, monetary policy changes, the dual carbon peaking and neutrality goals, and developments in the automobile industry, among other topics of interest.