On 11th January, 2014, the second lecture of MBA “National Development” lecture series was held in Langrun Garden, which was also the first lecture in the Western New Year.
Last October, Professor Justin Yifu Lin, honorary president of NSD and famous economist, gave the first lecture in the “National Development” lecture series, giving a macro perspective for students. The second lecture was held by Professor Yiping Huang, vice-president of NSD in Peking University. He interpreted the changes that Third Plenary Session of the 18th CPC Central Committee has brought about to China and the world from the financial point of view.
The direction of reform: the government and market should perform their own functions.
Yiping Huang first interpreted important signals that Third Plenary Session of the 18th CPC Central Committee passed on. The government and market should perform their own functions. He pointed out that over the 35 years of the reform, China mainly transformed from a planned economy to a market economy. But during this transformation, the reform of goods market was successful, while the reform of factor markets has not been carried out.
The Third Plenary Session of the 18th CPC Central Committee pointed out that the government will no longer intervene in the areas which markets play the role in the allocation of resources; market will play a "decisive" role, rather than the "fundamental" role mentioned in the past. The government will continue to play an active role only in fields of products and service with externality, such as the construction of the legal system, public services, etc. where market failure is obvious.
In the past, in transition from a planned economy to a market economy, society was more concerned about government failures. Today, the market failure is more prominent. In addition, government also should play a role in environmental problems which are becoming serious. The government can adjust the behaviors of economic agents through some mechanisms, such as imposing carbon tax. At the same time, it is difficult to internalize the external costs of environmental issues only relying on markets.
Breakthrough of reform: solve distortion of factor markets
Next, Huang Yiping analyzed the problems and underlying causes of China's economic growth pattern.
He noted that over the past thirty-five years, China’s economy achieved the economic miracle of high growth, but the growth pattern was unbalanced, unsustainable, had low efficiency and low quality. Economic growth in the past was driven by exports and investment. If there is a lot of investment with less consumption, the products will have no markets and economic growth is not sustainable. The reason for the imbalance lies in the fact that the factor markets are not fully open. Goods markets have been fully liberalized, such as agricultural markets, industrial and service markets. But there are distortions in the factor markets, for example labor mobility is restricted by the household registration system, the controls of capital, and difficulties of land transfer and distortions of energy price.
Huang Yiping explained that the distortion of factor markets was achieved in order to support rapid economic growth. In order to attract foreign investment, the government offered preferential treatment to foreign capital, such as tax exemption, while building many special economic zones in Shenzhen, giving advantages to some companies, which is equivalent to a subsidy for investors, producers and exporters in disguise. But family benefits are lost, making the ordinary people bear more tax.
In addition, the binary plan allows large companies with easy financing, but small businesses have difficulty obtaining loans. In fact, small businesses also subsidize large companies. Rapid growth leads to an imbalance of structures and inequality between market entities. In the past two years, China's economic growth has begun to slow down.
Opportunities of reform: the pressure to pursue high growth is weakened
Now does the economy still need to maintain high growth? Huang Yiping answered that the pressure of pursuing high growth has diminished.
In the past, only high economic growth could bring more employment opportunities, and meet the demands of the huge workforce and maintain social stability. But now, due to the increasingly prominent issue of aging, the net labor force growth has slowed down and the employment pressure of the government is weakened; Meanwhile, the income distribution structure has changed. According to the study, from 2003 to 2008, China's Gini coefficient was high and income distribution was relatively unequal. But after 2008, the Gini coefficient has declined and income distribution tends to be more equal, namely, narrowing the gap between rich and poor, which is conducive to social stability.
The challenge of reform: labor is changing from surplus to shortage
Huang Yiping said that the root cause of China's economic changes lies in the labor markets. Now the Lewis turning point has appeared, namely "turning from a surplus of labor to shortage of labor."
Back in 2004, he proposed that the "era of labor shortages will come". Because on the demand side, China's economic growth has been very fast and there is a great demand for labor. But on the supply side, due to the family planning policy, the labor supply is shrinking. The rapid increase of labor wages lead to rising production costs, and thus exports are less competitive, reducing the return on investment. Low-income families rely mainly on wages and rising wages also promotes their consumption, so that the pattern of income distribution changes.
The future of economy: say goodbye to miracles and return to normal
After the analysis of internal laws of the economy, Huang Yiping cast his sights on the future.
He pointed out that after the Third Plenary Session of the 18th CPC Central Committee, reform will be carried out in finance, land and energy sectors, while the reform of the financial markets is particularly critical, including the reform of interest rates, exchange rates, financial regulation and so on. China is shifting from an economic miracle to an economic entity with normal development. China's economic growth will slow down in the future; rising wages will further promote inflation; rising interest rates will change the pattern of income distribution (in the last, with a low deposit rate and a high lending rate, the poor actually subsidize the rich, because the poor deposit money and the rich lend money as an investment), the government will pay more attention to the social security system; in the past, economy was driven by exports and investment and in the future, the consumer market will be more active; rapid growth of costs will promote industrial upgrading.
In the next two decades, China will have a significant influence on world GDP. A recession in China’s economy will lead to a world economic recession. The interaction between China's economy and the world economy is strengthening, and China’s future upgrading in the industry chain will have a significant impact on the world economy.
Recommendations to MBA students
At last, Huang Yiping put forward his suggestions on future development directions for MBA students
He admitted that there is no need to be over-pessimistic for China’s economy and overestimate risks in economy. Some people fear the existence of Shadow Banking system, bubbles of real estate and large quantities of debts in local governments which could make China’s economy collapse.
However, Huang Yiping said there is always risk. If risk is overestimated, investment opportunities will be lost and it is important to manage risks; there will be great changes in the financial sectors and the government will promote the development of direct financing; state-owned enterprises will experience great changes. Government will change its role, from managing personnel appointment in state-owned enterprises and specific business to managing state-owned capital, because the government will pay more attention to return on investment, and more return on investment will be used to build a social security system. In the past, state-owned enterprises relying on subsidies and protection of monopoly had a bleak outlook. Rapid growth will appear in consumer markets and the services industries and industrial upgrading will be realized in China.
After the speech, Huang Yiping also had a cordial interaction with MBA students attending. He answered questions and discussed with students issues of deposit insurance, bank bankruptcies and SOE reform. Students said that they benefited a lot from this seminar and had a more clear, comprehensive and thorough understanding of the future changes of China’s economy.
About the "National Development" course series
The "National Development" course series is a high-profile course, particularly launched for MBA students of BiMBA in NSD. Famous teachers in NSD, such as Yifu Justin Lin, Zhou Qiren, Song Guoqing, Huang Yiping, gave speeches one by one, “standing on the heights” of national development, and imparting knowledge to MBA students, in order to help them better understand the world economic situation, as well as patterns and trends in China's development. It also demonstrates the most unique advantages of the MBA program of NSD in Peking University.
