Exclusive interview of Huang Yiping, Vice President of the National School of Development at Peking University
Source: International Herald Leader
Author: Gu Qianjiang Lou Chen
Huang Yiping, Vice President of the National School of Development at Peking University
Photographed by Lou Chen, our reporter
For several months, a newly-coined word has sparked keen interest and heated discussion on China’s economic policies among investment bankers, scholars, media and the public. That is the newly-coined word “Likonomics”, which was initially proposed in a report of Barclays in England.
However, the coiner of this word — Huang Yiping, former chief economist of emerging Asian markets at Barclays, said, if he had been teaching at Peking University earlier, he would have never used this term to describe the monumental changes currently taking place in China’s economy.
Huang Yiping, who has since left Barclays, has been Vice-President of the National School of Development at Peking University since the beginning of October.
“The task of investment banks is to analyze how policy changes affect the economy,” Huang Yiping said when he was interviewed by journalists from the International Herald Leader. “‘Likonomics’ just satisfies the market’s desire for a new concept.” As far as he is concerned, discontinuing large-scale economic stimulus, financial leverage and structural reforms are the three pillars of “Likonomics”.
There is an underlying reason for the term’s popularity. Huang Yiping said, since China’s new leadership change, there have been many new policies and methods related to economic governance, which lead many to ask, what should be made of them? There is a high demand both domestically and abroad for knowledge surrounding this issue, and so “Likonomics” has provided a timely solution.
The newly-coined word triggered wide and heated discussion, and many experts even attempted to give new explanations. According to Huang Yiping, the common views on “Likonomics” is that China’s economy policy frameworks have changed, and they pay much more emphasis on quality and sustainable growth. He agrees that there can be different interpretations as for what it entails.
There are quite a lot of doubts about it. For example, some foreign analysts are opposed to one of the pillars of “Likonomics” — they say don’t carry out stimulus policies on a large scale. They think that many stimulus policies came out this year, which are not likely to be different from the earlier policies. Huang Yiping pointed out that these measures aimed to achieve “steady” growth rather than “guarantee” growth, the policy several years ago. Furthermore, leadership made it clear that there was no possibility of taking fiscal and monetary methods to forcibly stimulate economy.
Huang Yiping clarified, “Likonomics” was neither the idea of a specific leader nor a strict economics expression, but the description of China’s new economy policy structure. Speaking of Comprehensive Reform of 60, put forward in the Third Plenary Session of the 18th CPC, he thought it revealed much more of China’s “New reform economics” than that of “Likonomics”.
If “new reform economics” also has three pillars as well, Huang Yiping thinks they are top-down promotion; overall marketization and fairness and justice as the priority over efficiency.
“The direction is quite clear; the range is very wide and the force the very large.” Huang Yiping admitted that breakthroughs of the Third Plenary Meeting of the 18th Session of CPC was beyond expectation. He also pointed out that the new reform blueprint was decided. Easier said than done. What is urgently needed is executive power, and “Knowledge as action” is anticipated.
To improve the market economy only requires “a final shot”
The International Herald Leader asked that if China’s new round of reform road map, namely the Decision on comprehensively deepening reform of Third Plenary Meeting of the 18th Session of CPC revealed “new reform economics”, then what do you think is the main idea?
Hung Yiping said, I think there are three aspects. Firstly, reshape the relations between governments and markets, which is a fundamental clause. It allows the market mechanism to play a “decisive” role in resource allocation. That is to say, markets have the final say. Governments only do what markets cannot do well and what they cannot do. The orientation is clear and it means China is bound for a complete market economy.
Secondly, establish a leading sub-committee to comprehensively deepen reform. Even though, the detailed list of members is not published, it is generally recognized that it reflects top-down design and top-down promotion, which has a great significance to achieve all reform goals in the coming 7 years.
Thirdly, focus of reform turned to achieve fairness and justice. Just as some experts explained, Decisions of the Third Plenary Meeting of the 18th Session of CPC only pay attention to reform instead of development. Actually, this aims to achieve reform dividends from the sustainable development of the economy
Generally speaking, if “new reform economics” has three pillars, I think they are top-down promotion, complete marketization and fairness and justice prior to efficiency.
Q: For more than 30 years of reform and opening up, China has created the miracle of rapid economic growth. Also we are faced with serious structural problems. You think the crux lies in “asymmetric marketization”; then, how do you comment on allowing markets to play a decisive role in resources allocation, which is put forward in the Decision of the Third Plenary Meeting of the 18th Session of CPC?
A: That is to say, to improve China’s market economy mechanism only requires a “final shot”. It is in 2020 that China will complete mechanisms of the market economy.
Our past marketization reform has not been symmetrical and complete. More importantly, product markets have been completely opened up, but input such as labor force, capital, energy resources and land or other factor markets are still under control, and this drives the supernormal prosperity of the economy, but also has resulted in increasingly serious structural problems.
Distortion of factor prices artificially raised productive profit, increased returns to investment and strengthened international competitiveness of products, making production, investment and export activities more active, even accelerating steps of economic growth. Meanwhile, the economic growth has excessive dependence on export and investment, and consumption became slightly weak. The Decision of the Third Plenary Meeting of the 18th Session of CPC have clearly proposed that reform of factor market prices should start, which can end up as asymmetric marketization.
From 1994, it has been clearly put forward that China’s reform of marketization has been deepening after the establishment of the socialist market economy. I think now it is the time for a “final shot”. The Decision emphasized that government shouldn’t intervene as long as markets can decide, which is the key for the real market economy. Of course, it means due to the laws of the market economy, there will be more volatility in China’s economy.
There will be few possibilities to feel the way
Q: Why do you consider top-down promotion as one of the pillars of China’s “new reform economics”?
A: When central governments set up a leading sub-committee for comprehensively deepening reform, many reform decisions can be decided by top levels, which is different from past practices of crossing the river by feeling the stones. The reform group and the top-down design solving issues which cannot be fixed is the most prominent feature of “new reform economics”
The following are advantages of top-down design. The first advantage is authority. The second advantage is to help overcome obstacles of sector interests and interest groups. Actually, it reflects there are many more improvements on decisiveness and comprehensiveness in the next-step of reform. From the point of policy decisions, top levels of the Party are responsible for comprehensive reform, with a clear-cut key point and guaranteed authority.
Past reforms just like “crossing the river by feeling the stones”, such as the all-round contract system in the countryside, which had preceded reforms from the bottom up. But there will be few possibilities to feel the way. Reform requires much more top-down design, such as capital account liberation and interest rate marketization. It is necessary for top-down design, because such a reform can hardly be performed from the bottom spontaneously.
In addition, reforms have been in a standstill in recent years. The Decision recently published reflects the will and thoughts of the top level of leadership. Many thoughts, which had been considered as bold and hard to realize, have been written in the document this time, including the reform of the state owned- enterprises and the one-child policy. All of these breakthroughs are beyond expectations of many economists.
Q: China’s new leaders put forward a guideline on economic management, namely “steady growth, structural adjustment and acceleration of reform”. The macro-control set up a bottom-line thinking. In other words, setting upper and lower limits, reforms are carried out in a range of safe areas, instead of stimulating economic growth in a large scale. The Decision reconfirms this way of thought. What significance do you think achieving the dividend of reform is?
A: “Guarantee of an 8% growth rate of GDP”, proposed in the past, means we had to try every means to ensure an 8% growth rate, which is not the conventional phenomenon in market economies. Market economies have obvious economic cycles. When the economy is up, many enterprises will expand; however when the economy is down, projects of low quality will be pushed aside. This is the whole process of improving economy quality. It is just like that people can catch a cold when they become weak, but catching a cold is conducive to building good health. In the past, we aimed to ensure an 8% growth rate; as a result, we had a large quantity of “Greenhouse Enterprises”, which are lacking in competitiveness. I think, it is very normal that there is economic slowdown, which is a blessing in disguise.
“Reform is the biggest dividend.” But we had better not simply think reform means 10% rapid growth as in the past. Actually, as the market economy is stepping into maturity, potential growth rate might go down, which is one of its objective laws.
As far as I am concerned, the biggest dividend of reform is to achieve sustainable growth by means of reform. Some reforms are conducive to improving growth in the short term. For example, financial reforms can change the situation of difficult financing of private enterprises to a great extent and improve gross capital utilization efficiency. As a result, it can help to promote growth. Part of reform measures cannot drive the economic growth in the short term. For example, increasing the ratio of retained earnings returned for the state-owned capital, which can then be used for ensuring and improving people's well-being. This amount of money, used for investment in the past years, now could bring down growth potential. But driving growth down is necessary, because it can help balance the economic structure, and it is beneficial to make a steady society and for the continuous development of economic growth.
Future wages are obviously on the rise.
Q: How do you understand the “economic miracle” and “conventional development”, two terms used to describe trend of changes occurring in China’s economy?
A: It is must admitted that China’s rapid economic growth for the past 30 years cannot be separated into two factors. One is that levels of governments spared no efforts to achieve GDP growth, becoming “productive governments”. Second is to put price under surveillance in factor markets. Production costs are depressed artificially, which leads to high levels of investment and exports. As we can see, it was rational in this stage, but it also led to many problems, such as structural imbalance, low efficiency, unfair allocation and environmental pressure.
A new round of reform is now clear. It will change ways of government’s excessive pursuit of rapid growth, at the same time achieving the marketization of production factors. If these changes can be realized, China’s economy will step into a brand-new and conventional stage of development, in which the growth rate will slow down a bit, but quality will be much higher, the structure will be more balanced, and growth will be more continuous.
To be specific, reforms can bring six aspects of changes to China’s economy. Firstly, the growth rate of the economy will go down slowly, but the medium-and-high growth rate between 6% and 8% will be maintained. Secondly, inflationary pressure is on the rise, because the price of production factors, which was always under control, will have the pressure of appreciation, and costs will be on the rise, but the prices on the rise will not completely shift to final production prices. Thirdly, income distribution will be improved a bit. One case in point is that wages are obviously on the rise. Fourthly, the economic structure will change, namely consumption will constitute a larger proportion and the services industry will have a great development. Fifthly, industrial upgrading continues to accelerate. When the cost was low in the past, some industries such as the apparel industry, tourism, and the toy industry were very competitive. Now as the cost increases, merchants are forced to come up with a value chain. Sixthly, the economic cycles will be more and more obvious.
Q: Why does the economic cycle become more and more obvious?
A: There are two major factors that could lead to a longer and longer economic cycle in the future.
In the first place, with wages on the rise, and the reforms in finance and factor prices, the enterprises will experiences a sharp increase in production costs and it will be tougher and tougher for them. Some industries with immense investment and production capacity expanding quickly, such as some areas of steel, aluminum oxide and cement will go through a process of “de-productivity”. This is beneficial for structural optimization and also can bring downward pressure to economic growth.
Secondly, the Decision stresses the decisive role of the market in resource allocation. It means the ability of the government to intervene the economy will be weaker and weaker. The government should not do what the market can do and should only step in when the market fails. China's market economic system will be very close to the one in the countries of mature market economies, which means that the economic cycle will become more and more obvious. That is the law of market economy.
