David Daokui Li: Comprehensive deepening of reforms to keep China on track towards high-quality economic development
The following is a summary of David Daokui Li's keynote address at the 47th Tsinghua University Forum of China and the World Economy held at Tsinghua University, Beijing, on July 6, 2024. Li is Director of Tsinghua University's Academic Center for Chinese Economic Practice and Thinking (ACCEPT), Professor at Tsinghua University's School of Economics and Management and Co-President of the Society for Government and Economics (SAGE).
On July 6, 2024, the 47th Tsinghua University Forum of China and the World Economy, hosted by Tsinghua University's Academic Center for Chinese Economic Practice and Thinking (ACCEPT) in partnership with the School of Economics and Management Alumni Center, was held on campus. Director of Tsinghua ACCEPT, Professor at Tsinghua University's School of Economics and Management and Co-President of the Society for Government and Economics (SAGE), David Daokui Li, delivered a keynote address at the forum where he summarized Tsinghua ACCEPT's most recent round of research findings and policy recommendations.
On July 6, 2024, the 47th Tsinghua University Forum of 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 China's 2024 Mid-Year Economic Update. During the forum's proceedings, David Daokui Li, Director of Tsinghua ACCEPT, Professor at Tsinghua University's School of Economics and Management and Co-President of the Society for Government and Economics (SAGE), delivered a keynote address where he summarized Tsinghua ACCEPT's most recent round of research findings and policy recommondations
Tsinghua ACCEPT Director David Daokui Li first discussed the content of the report and emphasized that in the run-up to the Third Plenary Session of the 20th Central Committee of the Communist Party of China, the research team remains fully confident in China's economy and firmly convinced that through the comprehensive deepening of reforms, China's economy will be able to resolve its current problems, return to relatively rapid growth and get back on track towards high-quality development. He then went on to outline some of the report's key takeaways:
First, based on the premise of maintaining confidence, it is necessary to raise one’s awareness and be prepared for unexpected developments, while preventing shorter-term and cyclical factors from evolving into longer-term tendencies as a result of delayed policy responses, which will ultimately have an impact on China’s longer-term GDP growth potential. The public sector must take a more proactive stance to guard against and defuse any systemic risks, including setting up emergency management teams focused on systemic risks and introducing exemptions in order for these teams to perform their duties.
Second, the core factor contributing to China’s current economic woes is not its real estate sector, but instead comes from the ongoing shrinking of the country’s public sector. Generally speaking, the government will collect taxes from households and the private sector, in addition to borrowing money from the banking sector, in order to play a role in supporting economic development, engage in procurement and cover any recurrent expenditures. Over the past four years, overall spending in the public sector has fallen from 41.2% to 37.4% of GDP. Meanwhile, borrowing in the banking sector has slowed down, with much of the financing mainly being used to service debt and with the amount being put to work in the real economy having been significantly reduced. As a major sector of a modern-day market economy, a 3.8 percentage point decline in government spending will inevitably lead to an economic contraction.
Third, in order to solve the current issues facing the economy, it is necessary to further deepen reforms in an all-round way. The most urgent and critical task is to halt the contractionary trend in the public sector while boosting overall government spending. To this end, there are two reform measures that must be immediately put into effect. First, a reset is needed in our thinking regarding the nature of sovereign debt. Instead of forcing local governments to repay their debts, more of this debt burden should be absorbed by the central government, including by replacing these local government debts with central government treasury bonds, so as to reactivate the normal level of economic activity in localities and create a favorable atmosphere for comprehensively deepening reforms within a shorter time horizon. If such measures can be implemented promptly within the short term, it is expected to lead to a faster improvement in the economy’s aggregate demand. Second, from the perspective of longer-term institutional reform, and in order to transform the orientation of the government's overall functional approach, it is now necessary to readjust government incentives by reforming the fiscal and taxation systems as well as the targets used to evaluate the performance of local officials. This means shifting from the current investment and project-based policy direction towards one that focuses on the provision of basic social welfare, which in turn will boost the disposable incomes of Chinese residents and therefore increase overall consumption. In short, the government must transform from an investment-oriented government to become a social welfare service-oriented government.
Li further pointed out that in the second half of 2024, it is essential to seize the opportunity to roll out shorter-term policies to boost consumption and buoy the growth prospects for the overall Chinese economy within the immediate future. For example, the central government can issue consumption vouchers in the order of 1 trillion yuan during the National Day Golden Week to encourage or subsidize people's consumption. Based on the multiplier effect that would result from distributing these consumption vouchers, it is expected that for every yuan offered in the form of a voucher would generate roughly four yuan in consumption. According to Tsinghua ACCEPT's estimates, the issuance of consumption vouchers ultimately would not by and large reduce the central government's revenues, but instead could be traded off for greater consumer confidence, improved market performance and an overall upgrade in the trend line for China's economy. If reform policies are effectively put into place, the research institute’s annual projection for China's GDP growth rate in 2024 currently amounts to 5.1%, with the economy moreover expected to continue stabilizing and rebounding moving forward.
