Source：Beijing Daily Authors: Huang Yiping, Wang Yukai and Wu Jinglian

Editor’s Note

China’s economic development has faced restrictions for the last two years from both resources and environment. Factors that have negative impacts on China’s economic growth are changing in the international economic environment and we are going through the most important phase of economic restructuring yet. Under the combined influence of complex international and domestic environment, China has suffered from slower economic growth than other countries. This has attracted attention and concern both at home and aboard. Different parties hold different opinions when considering China’s economic situation and development; some are pessimistic about China’s future and assert that China has met its economic collapse. How should we evaluate China’s economy objectively? For this purpose, we have invited four economists to give us a professional analysis, as well as answers to our questions, on China’s economic situation, growth patterns, transition and upgrading, development perspective, and reform focuses.

Positive Signals for China’s Growth Pattern Transformation

Although only steady growth can promote reform, the only way to realize restructuring requires tolerating a low growth rate——

Huang Yiping

What are the most outstanding features of China’s past economic growth pattern?

One of the most obvious features of China’s past economic growth pattern is a “high growth rate and extreme imbalances.” For the past decade, an annual growth rate of China’s GDP has reached nearly 10%, amounting to an economic miracle. Meanwhile, an imbalanced economic structure becomes more pronounced, for example, the investment rate has risen from around 25% in the beginning of the reform, to the current 50%, and this increased rate cannot be sustained. The 4 trillion RMB in stimulus policy has safeguarded against a fall in GDP, but it has also caused many structural problems.

However, recent statistics have shown that the economic growth pattern is under transformation. On the one hand, the GDP growth rate has been maintained below 8%, the central government hasn’t intervened arbitrarily and there is currently no problem with unemployment. On the other hand, the rebalancing of the economic structure is just beginning. The proportion of China’s current account surplus to GDP has fallen since 2007 (10.8%) and has remained below 3% during the past two years. The Gini Coefficient released by the National Bureau of Statistics has decreased from 0.491 in 2008 to 0.474 in 2012, showing that the income distribution pattern has begun to improve. In addition, many economists’ studies suggest that official data is likely to under-evaluate service consumption, especially the service consumption of high-income families. 

These changes indicate that China’s growth pattern has changed and that this change has just begun.

What are the reasons that triggered these positive changes in the economic growth pattern?

There are two reasons. Firstly, the central government has begun to tolerate a lower growth rate; secondly, wages have increased by a large margin due to a labor shortage.

One major reason why the results of the previous transformation in economic growth patterns are not obvious is that the central government overemphasized the importance of the economic growth rate. This is known as China’s macro-economic Trilemma: since only two among the three pillars can be chosen, it is easy to give up on restructuring in favor of maintaining the growth rate and avoiding inflation. For example, during the economic recession in 2009, the central government spent all of its effort on maintaining growth, which it realized through government-led investment. In 2010, the growth rate maintained itself while the investment rate grew even higher.

Another factor that led to a high growth rate and an extremely imbalanced structure is an asymmetrical market reform—where the production market is opened almost completely and the factor market is still severely distorted. These distortions have to a great extent depressed prices of inputs such as capital, labor, land, energy and water resources. This means collecting heavy tax from customers to subsidize producers, investors and exporters. The redistribution scheme of transferring income from consumers to businesses is the root cause of the longstanding existence of the past economic growth pattern.

The most significant change during recent period is that central government began to tolerate a moderate slowdown of GDP growth, which avoids the possibility of further deterioration in the economic structure. More importantly, with widespread labor shortages, wages have increased exponentially. This in turn has increased production cost, abated business profits and slowed down production, investment and export activities. Also, the rise in residents’ income, in turn, stimulated consumption. The poor have enjoyed the highest increase in income, which has improved the income distribution pattern.

Are there some approaches to help realize the transformation of China’s economy?

The transformation of the economic growth pattern has just begun and whether China’s economy will get on track with sustainable development still depends on the next-step of economic reform.

Academically summarized as “Li Keqiang’s economic framework”, the accuracy of the framework remains to be seen, as its three pillar policies—i.e. no large-scale stimulation to the economy, moderate deleveraging and comprehensive structural reform—illustrate the direction of the economic policies of the new government. These policies have received welcome from both home and abroad and will be helpful for the transformation of our economy.

First, the policy is no longer to implement massive stimulus to the economy. Of course, this is not to say that we should sacrifice a steady macro economy. Any government would adopt measures to maintain the steady growth that can be achieved by a narrow fiscal and monetary policy.

Maintaining growth rate aims to slow down the growth rate, buffer negative impacts and keep the growth rate around the potential growth point. The goal is to slow down the rate of slowdown, ease the impact, so that the growth rate gradually stabilizes in the vicinity of a potential for growth. This is surely different from the past idea of safeguarding strong growth at any cost.

Second, control financial risks by moderate deleveraging. Since the global financial crisis, the ratio of credit to GDP has surged from 75% to 200%. During the past several months, an increase of non-governmental financing and nominal GDP was further derivate. This means that direct support from finance to real economy has lessened, while opportunistic financial activities are thriving. Therefore, controlling leverage ratio allows debt, but lets financial activities back up the real economy by reducing opportunistic activities and risks.

Third, realize sustainable growth through economic reform. Premier Li has repeatedly stressed the concept that "reform is the biggest bonus". The departments of the central government are currently making reform plans which cover, among other things, the financial system, fiscal policy, land utilization, factor pricing, income distribution, administrative approval and the Hukou system.

Which aspects should we focus on to guarantee a smooth and successful transformation of our economic growth pattern?

The current economic situation is volatile and there are changes in the policy-making system that leads one to wonder where the new government policies will go. It is certain that securing the stable macro economy is important, but the government should give a clear clue as to the direction of its policies. I offer my suggestions in 4 points here:

1) Give moderate tolerance to a low growth rate. The highlight of our economic growth policy should be improving long-term growth potential by improving efficiency, rather than excessively safeguarding the quarterly growth rate. The 7% minimum annual growth rate does not mean we must make sure there is a 7% increase for every quarter. In fact, if we simply take the current situation of the labor market into consideration, this minimum growth rate can be lowered further. Although only a steady growth rate can push reform forward, only in tolerating a low growth rate can restructuring become possible.

2) Marketizing the financial system: To date, the main cost has been distortions in the labor market, but in fact, the capital cost was also distorted. Financial reform covers all aspects, including interest marketization, the exchange rate system, financial institutions, opening a capital account and the like. These reforms can take place in a coordinated fashion, but we should give priority to reform of interest rate and financial institutions, as well as act cautiously towards opening a capital account.

Removing local governments from the sphere of enterprise: Local competition caused by previous reform is one of the great motivators to our economic growth; leaders of each local government were keen in attracting investment and business, therefore blind in pursuing GDP growth. This is the root cause of the structural imbalance, poor efficiency in resource utilization, and even a major source of unfair regulations. One major step in realizing market economy is forcing local governments to withdraw from their direct investment activities and to refocus on providing public services and securing social order. To accomplish this, standards of assessing government officials should be changed, including a direct change in the election process and limits on the soft budget of the local government.

State-owned enterprises (SOEs) should enjoy an equal status: Although many SOEs enjoy rich profits, most of these profits were not gained through fair competition but by some other special means: acquiring millions of cheap inputs from the government disguised as a subsidy, and monopolizing profits by constraining other enterprises entering into the business market. These issues become significant factors in influencing efficiency and fairness. SOEs must have chances to compete with private-owned enterprises and foreign-invested enterprises in order to boost their development. Otherwise, sustainable growth is only a day dream. 

Definition of Deleveraging

“Deleveraging,” means supporting investments and operations by borrowing money and receiving high yields with less capital. Before the global financial crisis, many enterprises and institutions, especially investment banks, adopted this method. After the financial crisis, high leverage risk became known to the public and enterprises and institutions planned to implement a deleveraging policy and reduce debt by selling assets. This process lead to the decrease of asset prices (i.e. stocks, bonds and real estate).

In general, deleveraging is one method for companies and individuals to reduce their use of financial leverage. It is also a trend to return borrowed money through different means.

The key is fostering new economic growth poles.

Eliminating the imbalance between growth and transformation which has formed a seesaw phenomena.

—— Wang Yukai

The new government is conducting some minor adjustments to the administration of the macro economy. A steady increasing pattern of restructuring and promoting reform has currently been formed.

How to understand the occurrence of rising pressures towards China’s economic growth, transformation and reform?

In terms of economic growth, we have seen the pace slowing significantly. There is a debate as to whether this slowdown is rational or if it will turn into a vicious cycle. From the current economic development trend we can see that during the past 33 years our economy has enjoyed a persistently high growth rate with an average annual growth rate of up to 9.9%. Obviously, it is now impossible to maintain such a high growth rate. On the one hand, the economic base has grown. On the other hand, resource and environmental constraints are more prominent. A moderate slow-down is therefore normal and essential.

From an economic transformation viewpoint, I think we have fallen into a dilemma: strengthening economic transformation will curb the growth rate, but solely focusing on growth will jeopardize development. Therefore, to speak metaphorically, growth and transformation has become an economic seesaw. For example, after this round of economic slow-down, especially after the money drought that occurred in July, it is important to consider whether the government should intervene. The central government announced that it wouldn’t get involved but then went back on its word. There are, however, some differences between the approach and degrees of these interventions. The transformation and development of the government is also a current dilemma. Thus, the government is facing heavier pressure for functional transformation.

Economic reform has met its critical point and suffered from various difficulties. What is more worrisome is the value of the reform debate seems increasingly prominent.

This reflects that the reform in general is controversial and facing more pressure.

Facing serious pressure, how can we stimulate economic growth through transformation and reform?

Since pressure has been on the rise, arguments for transformation and reform are escalating. There must be a mid-point currently ignored by both sides. We should first create and foster new strategic growth poles while promoting growth through transformation and reform for the long-term. In my opinion, it's important for the whole of China to maintain a moderately high economic growth rate. For instance, during the past years, we have encountered many tough problems; however, we can still secure steady economic development. One of the reasons is that we have the base for economic growth. A high economic growth rate lays a solid foundation for the resolution of other problems. Therefore, when facing the new challenges of economic growth, the central government seems to have given more emphasis to securing growth, which is reasonable.

Actively promoting steady growth through transformation and reform is of great importance. However, from a long-term point of view, it is crucial to discover and foster a new economic growth pole, which in my opinion is a new urbanization strategy.

Why can new urbanization strategy be considered as a new economic growth pole?

Compared to the traditional concept of urbanization, the main feature of China’s new urbanization strategy is that it’s led by information technology. We have noticed the Report to the 18th National Congress of the CPC taking the past “five modernizations” and transforming them into four categories, which are: industrialization, information technology, urbanization and agricultural modernization. Information technology is not only comprehensive, strategic, globalized it also has strong permeating and integrating ability. These cannot be found in traditional urbanization. With the help of information technology, we can view the development from wireless city into a digital one, and further into a smart city. During the new urbanization process, new industries are emerging which provides more space for the information industry. Related industries, such as information and digital consumption become new consumption hotspots, which then alter the current consumption structure and have a longstanding influence on economic development.

It can be foreseeable that under the leadership of this new urbanization strategy, China’s economic growth will have three major influences. First, gradually-formed city groups will become the first growth pole of China’s economy. For example, Zhejiang Delta Area, Yangtze River Delta, Beijing-Tianjin-Hebei Area, as well as seven other old city groups and 10 new city groups stipulated by the central government will become the future of China’s economic growth. Second, the economy of counties and small-scaled cities will also become an important new growth pole. Vigorous development of small-scale towns and small-to-medium-sized cities is the direction of this new urbanization strategy. Counties and towns are lacking in infrastructure and there are many chances for development. Third, we should internalize those immigrant workers who have entered or are going to enter into cities as local residents because they are also a major economic growth pole in the future urbanization process. Many experts estimate that there are over 250 million immigrant workers. Soon another group of over 200 million immigrant workers will be added to the count. Transforming these immigrant workers into local residents offers great help to improving infrastructure construction and basic public services.

(Written by a professor from the Chinese Academy of Governance)

Preparing for Upcoming Systematic Reforms

A series of major issues faced by economic development requires in-depth research——

Wu Jinglian

Why can it be said that we have not yet completed the transition to a modern market economy?

In the past three decades we have witnessed the reform and gradual opening up of China in its transition from following the economic, social and political patterns of the former Soviet Union into establishing a civilized democracy with Chinese characteristics, generating both prosperity and harmony. The opening up reform policy has helped to promote economic transformation and is hailed as Chairman Xi Jinping’s great new revolution.

We have experienced various ups and downs in the past three decades. Current progress reflects many years of hard work.

Although we have brought some economic reforms to fruition, we have yet to establish a modern economy based on law, for which there are two reasons: the government’s widespread intervention in economic activities and its microeconomic control on society at all levels, and the strengthening of control over Lenin’s “commanding heights” of the national economy. Consequently, it is difficult to shift from an extensive growth pattern led by investment to an intensive growth pattern supported by high efficiency. At the same time, corruption has become rampant as a result of rent-seeking activities born from widespread intervention by administrative powers in microeconomic activities.

In recent years, China’s economy has become unsteady, uncoordinated, imbalanced and unsustainable. Many structural problems still exist and have not been alleviated, which are not only potential threats but have already led to resource shortages, destruction of the environment, intensification of social and economic contradictions, and the hampering of economic development.

In essence, if we cannot push forward major reforms and establish a law-based market economy, China will suffer serious consequences.

How can we prepare for the forthcoming systematic reform?

We are now under the same situation as we were two decades ago and we must prepare for the impending systematic reform. We need to encourage people of a variety of professions to conduct research, discuss and propose their suggestions. In reference to Changes in China: Market Economy in China (original name: How China Became Capitalist), I think we should construct an idea market to provide new concepts, solutions and plans for China’s future reform and development.

The work we have done in the past few years has been, on some level, helping to establish and develop an idea market to contribute to reform. At present, the whole nation is actively preparing for the coming reform revolution and there are countless issues concerning theories and policies waiting for future study.

Here, I want to take six suggestions that need in-depth investigations and research proposed by Chairman Xi Jinping at the Wuhan Symposium as an example to illustrate this issue. The six suggestions are: first, let the market play an essential role in resource allocation and making it an important direction of deepening reform, form an open market system with unity and orderly competition, focus on clearing market barriers and improving economic allocation efficiency. Second, preserving and improving the fundamental economic system, strengthening public-owned economy, especially boosting state-owned economy to encourage, support and guide the development of the non-public economy. Third, effectively handle the relationship between government and market by speeding up the transformation of the government’s function. Fourth, let the society liberate its vitality and activate entrepreneurial activities by way of social institutional reform. Fifth, legally safeguard the people’s rights and interests through institutional arrangements, and “make sure that all people enjoy equal rights and perform their obligations”. Six, further improve the administrative ability of the party.

Obviously, there is a series of major issues about theories and policies to be discussed. For example, to complete the first task which Chairman Xi Jinping proposed, we need to propose a feasible solution and undertake in-depth research on a series of major subjects including how to establish the property system of the market economy, how to realize the marketization of commodity prices and factor prices, how to break widespread administrative monopolies and eliminate the discrimination on ownership, and how to conduct market monitoring in a proper way.

During the past two decades, we have done much conducive work in establishing the market of ideas and discussing theoretical issues concerning opening up and reform. We should play a greater role to smooth the way of reform and achieve success.

From the experience of the past three decades we can see early-stage reform has achieved great economic results. Thus, if we can overcome all difficulties, China will have a brighter future and make more contribution to the world.

(Written by a researcher of Development and Research Center of the State Council)

Achieving moderate economic growth relies on reform

The frequent overshooting of the upper bound of economic growth has led to a situation in which we need to ensure the lower bound. Ensuring the lower bound is passive, achieving moderate growth is proactive.  ——

Liu Shucheng

As early as the 1990s, we suggested the idea of a suitable range of economic growth, with a lower and upper bound. We didn’t consider the minimum growth rate as a problem and the growth rate often went beyond. But the most ideal scenario is to achieve a moderate growth rate, whether by means of regulating macros or economic development.

Where can the necessity of securing a minimum growth rate be seen?  

In 2011, under the backdrop of no more double digit growth after 30 years of emphasizing opening up and reform, we all agreed to restructure, promote reform and transform the growth pattern. At that moment, the public thought it was possible to maintain this growth rate. However, since the first quarter of 2010, while facing the “V” shaped recovery from the international financial crisis, China achieved an 11.9% GDP growth rate, and from this peak, it continually slowed for 10 quarters in a row until the third quarter of 2012. But we didn’t think of it as a serious problem and thought it was the potential growth rate that was decreasing. The GDP growth rate rallied to 7.9% in the fourth quarter last year and we all thought the year of 2013 as a moderate pickup. But unexpectedly, the GDP growth rate decreased further in the first two quarters of this year and stayed at 7.5% in the second quarter. Generally, the GDP growth rate embraced a constant slow-down for 13 quarters in a row from the second quarter of 2010 to the second quarter of 2013. This has raised a question, when will economic growth stop deceasing?

If central government didn’t react and intervene, the GDP growth rate would have continued to decrease during the last 2 quarters and would have broken the lowest annual record of 7.5%. This is the only year since 1998 that the real economic growth rate is lower than the target figure in the “Government Work Report”. Nowadays, because the past economic growth surpassed the upper bound, it now has created a situation in which we must secure a minimum growth rate. High economic growth rate that excesses expected rate has a negative impact on transformation of the economic model and restructuring; however, an economic growth rate that is under the lower bound will also bring a series of problems. It is better for us to maintain economic growth at a moderate rate.

How can we maintain moderate economic growth through reform?

How do we achieve a trend of moderate economic growth? The answer is through reform. Measures meant as minor stimulations are now being adopted to safeguard economic growth. From mid-June to July 31, the standing committee of the State Council has held 6 meetings on the topic of safeguarding economic growth. The first meeting was held on June 19 on the issue of financial support. The second was on June 26 on the issue of accelerating the reconstruction of slums. The third was on July 3, discussing the activation of fiscal stocks. Lastly, the fourth meeting on July 12 addressed energy-preservation, the environmental protection industry and information consumption. On July 24, participants shared their views on tax relief for small businesses. The meeting held on July 31 discussed issues such government procurement of public services and infrastructure construction in urban areas. These topics are certainly important, but I believe that the topic should be more general and comprehensive, and that we should propose a comprehensive solution to promote better reform and development. Plans for reform and economic development should be in line with each other.

Why is it said that plummeting potential economic growth rates are not in line with objective laws?

If we want to combine reform with development (each with its own problems), we need to start by pushing forward the process of urbanization. Urbanization promotes both investment and consumption, and supports both economic development and reform. The process of urbanization itself addresses a whole range of problems related to reform and development.

Statistics show that China’s current urbanization rate is 52%, but I think it actually only reaches 35%. Thus, current economic development and growth shouldn’t fall by large margins. There emerges a problem on the existing economic regime. No matter how the economic growth rate falls, we should be objective and realize that if we can deal well with the process of new urbanization in the next 7-8 years before 2020, economic growth will stay at an optimistic rate within 10%. Just how large is the decrease in the potential growth rate? While it is true that a decrease in potential growth rate is in line with objective laws, “plummeting” of the potential growth rate is not. The total area of Japan, South Korea and Germany combined is still less than China, and their population is also less than China. Thus, China’s urbanization is far from over. Slowing the growth rate, considering China’s situation, is a gradual process, and should not mimic the drastic growth rate drops of Japan, South Korea and Germany.

(Written by a member of the Chinese Academy of Social Sciences)