3rd Plenum Pulse: What to Expect (2)

David Daokui Li says China's decision makers have finally come around to stimulating domestic consumption rather than investment, and for that Beijing will provide more welfare.

Jun 15, 2024

The Communist Party of China has said the upcoming Third Plenary Session of its current 20th Central Committee will focus on “deepening comprehensive reform to advance Chinese modernization.” Based on past practice and some recent public reports, Beijing is drafting its agenda now, but details are hard to come by.

David Daokui Li last Friday (June 7) told guests at a luncheon hosted by the Center for China and Globalization (CCG) that “a huge and super important central Party committee conference will come in July…I'm sure major policies and major policy directions will be announced.”

Li, professor of economics at Tsinghua University, Director of its Academic Center for Chinese Economic Practice and Thinking (ACCEPT), says he wasn’t citing any inside sources in his elaboration, but the former member of the Monetary Policy Committee of China’s central bank insists that after years of emphasizing the domestic investment part of domestic demand, Beijing has finally come around to the conclusion that domestic consumption is the key to stimulate domestic demand.

Li says that Chinese leader Xi Jinping’s recent vow to make sure that the population can benefit directly from the measures that will be rolled out in the Third Plenary Session of the Communist Party of China’s 20th Central Committee means Beijing will provide more welfare to its citizens.

Xi had said in a symposium in Jinan, Shandong in late May

Economic system reform should start from meeting realistic needs and tackling the most urgent matters, and should advance theoretical and institutional innovation in the process of solving practical problems, he added.
"The Chinese people's aspiration for a better life is the goal we have been striving for, and the ultimate purpose of advancing reform and promoting development is to improve the livelihood of the people," Xi said.
He emphasized the need to identify the key areas of reform and achieve breakthroughs based on the pressing concerns and aspirations of the general public, including employment, income growth, education, healthcare, housing, government services, childcare, elderly care, personal safety, and property security.

Below are what Li said at the luncheon

So what are the likely and tangible policies put in place to deal with all three problems? Well, let's talk about them one by one.
For the property market, the key is twofold.
1. Get rid of the restrictions on housing purchases.
Under the previous restrictions on housing purchase, you are not allowed to buy a piece of property in Beijing as a foreigner, or as a resident from other cities. These kinds of things were useful 12 years ago, in 2012 when the property market was super hot. I argued for that. I supported the policy of housing restrictions. I was blamed and even hated by my fellow economists.
But today's situation is totally different. China is getting rid of housing purchasing restrictions city by city, Hangzhou, Xi'an. In Shenzhen, I think the large apartments are now free to trade. This is number one: to lift restrictions on housing demand. As I said, still, 50% of the population will have to buy a new piece of property to live in cities.
2. Provide direct financial support for the headquarters of developers
The other policy which I'm confident will be put in place -- actually already now -- and more in the coming, is to provide direct financial support for the headquarters of developers. Some of the developers themselves that may be perceived to be criminals -- I have no opinion on this -- may have done very bad things. However, don't punish us by not providing liquidity to the developers so that the company will default and therefore, the credit rating will come down. Provide necessary liquidity to the headquarters of developers to make sure they can stay and be restructured later on. Don't let these companies gain new troubles for the Chinese economy. So that's the first area of tangible policies I look for.
The second area of tangible policies is for restructuring local debt, which I take tremendous interest in. I'm working very hard on this. I've been arguing this for the past 10 years. There is no other way to deal with this. The only way to deal with this and a very good, desirable way to deal with local debt issues is for the central government to issue a tremendous amount of new sovereign debt as high as 30%-50% of GDP and use that to restructure the local debt, meaning swap out local debt. Why is the only one? Because the central government is the solventist. I argue without any question. Chinese central government is the richest central government in the world with shares of 3 mobile operators and 6 highly profitable central government-owned commercial banks. China Merchants Group, China Resources, Ltd., used to be, I think still is, the world's most profitable nonfinancial conglomerate.
Why not? The central government is only holding 20% of public debt. What are they doing? And you know the recent (statistics), 12% of the Chinese Ministry of Finance debt that is held by other central banks. It's almost the last point of Ronnie's. The Chinese central government debt is in high demand, not enough of it because central banks want to hedge. What if the US Treasury bond is not doing as well as the hedging, right? We're not doing that. That's the only way to do it. Once we do that, once the Chinese economy can do that, local governments will be freed. Local governments will come back to their vitality. They should have. I think the direction is already articulated, but the pace is too slow. I'm working hard. I'm working hard inside China to push for this.
The third area of reform I very much look for is determining the incentives of local governments from production to consumption, possibly by leaving some of the tax collected from local enterprises to regions and cities where cars, motorcycles, bicycles, and electronic products are sold. If your region is able to generate a smooth consumption, fine, the VAT and the tax associated with the consumption should go to you. We should change the incentive. I think this is coming now.
My final word. Why is this? What's my evidence? Why am I so confident? Well, a couple of weeks ago, President Xi Jinping held a very important, and I think, quite interesting session with ten entrepreneurs and economists. I was not there. I can talk freely. I have no national secrets in my mind. At the end of the seminar, President Xi said several things. Two things stay in my mind. He said, now let's rejuvenate our [economy] before by focusing on the most urgent and burning issues. Let's work on the problem now. Not just rhetorics. Let's talk about real solutions. The other point is that let's restart our reform by making sure citizens can see the benefit.
So what are the things the seminar was looking for? Consumption and also income. So I strongly believe the next round of reforms is coming and these reforms will not only solve urgent issues that are preventing the Chinese economy from reaching its potential but also generate consumption and generate disposable income for people on the street.

When pushed by Steven Jiang of CNN in a Q&A

David Daokui Li answered

The economy is running still 3.9% nominal terms in China Q1. In real price terms, it's 5.3%, whether it's accurate or not. But in nominal terms, this is first quarter GDP in current price compared to last year, 3.9%. And this economy is still turning up new innovative products. This economy is still generating new companies. This economy is still having lots of demand for your lunch boxes, Meituan. People are going tourism on the coming three-day weekend; lots of tourist spots will be congested. There's no sign [the Chinese economy is] collapsing.
It's not running as well as it should be. It's running below potential. I'm being very accurate. That's true. That's already recognized. By the way, the U.S. is running above its potential, causing inflation problems, which is not sustainable. Let's not get get into it. The two economies, the U.S. and China, are always mirror images of each other. Watch out any feature of the U.S. economy, turn it around, and it's the Chinese economy; vice versa. As an economist, I honestly disagree with his assessment. I'm being very honest, very frank. The economy is not running as well as it should be; it's running below its potential, but it's not collapsing.
Most importantly, the Party General Secretary Xi Jinping said last December one very important line. In Chinese, it's 发展是硬道理, economic development is still Job 1. This hasn't been said for many years. Now finally coming back, this gives me confidence as an economist. 发展是硬道理, Deng Xiaoping's line.

Ted Plafker, another veteran China correspondent of The Economist, really wanted to get to the bottom

Professor Li, your recommendation that there be a shift away from production and towards more consumption and you seem confident that at the Third Plenum may be this. I've been hearing it for a very, very long time. I remember in 1998, it must have been, Premier Zhu Rongji was at his press conference and he said something like 刺激内需 [stimulate internal demand] and I had to look up 内需 in my dictionary -- internal demand. Stephen Roach has been coming here for years and years, saying we have to rebalance, less fixed asset investment, more consumption, encouraging consumption.
Everyone's agreed it should be done and it just hasn't been done for all these years. There are obstacles. As you said, policy makers are rational. There are good reasons why things do or don't happen. So I wonder now if you have more confidence that it might happen now. And if so, why has it not happened all these years and what is different that will allow it to happen now?

David Daokui Li answered

My brief answer is this: when you talk about internal demand over the years since Zhu Rongji 内需. Usually, policy makers refer to domestic investment because in China, 内需 is domestic investment plus domestic consumption, relative to exporting.
But to answer the question why policy makers have not been forthcoming with the policies that you allude to -- basic social welfare provision, public housing, so on and so forth, there's one fundamental belief which is now changing. That is, if the government provides too much social welfare, the population will become lazy. I'll put it in brutal language. I'm sorry, it's not diplomatic. We should avoid getting into the problem of the British disease. I'm sorry for people from Britain. In economics, we call it British disease…The British disease is that the government provides too much social welfare, therefore people don't look look for jobs.
So China, somewhere, somehow or the past 40 years, when the incumbent policy makers were getting their college education like myself, we were educated by what we call Western economics, which talk about the British disease. This is the Mrs. Thatcher and the Reagon era. So our mentality is framed by that. We're supposed to say, okay, the government should work hard on the supply side; don't worry about demand side; too much social welfare will kill the enthusiasm of the population for working hard.
So I think we were wrong. At least we were pushing too hard in this direction. The Chinese people, in my view, are genetically -- I hope you agree, Mr. Wang Xing -- genetically programmed to work too hard. We should relax. I'm criticizing myself. I'm not criticizing anybody else. I can make jokes on our people, right? I'm not politically incorrect. So we're not relaxed enough. So much so that the little bit extra welfare programs for us, for our population, will not make us lazy. We won't become lazy.
I think my friends in the policy making community are coming to this realization. They're coming to this. So I really felt excited when I watched Chinese 7 p.m. Evening News on CCTV where President Xi said, okay, let's do reforms to make sure the population can really feel it. I'm excited. I'm confident he refers to this. Next stage, we need reforms to provide more welfare.
Let just give one example to make things concrete. When young ladies deliver a baby, you know what is the most difficult thing for Chinese families? Take care of her in the first month. We have a tradition that the first month after a baby's birth, the most important thing is her life. So tremendous energy is spent in the first month we call 坐月子, the first month's care. Now many families are worried about this okay anticipating the huge cost of the first-month-of-the-baby caring. They wouldn't want the second baby or not even the first baby. So I've been proposing that why not give 10,000 RMB to any family having a new baby to take the first one month (care)? Not a big deal...If you calculate it, it's a small amount of money in public finance. So I think my proposal is gaining popularity. We'll do that. We can do that. There are lots of interesting things we can do.
Also, from age 3 to age 6, preschool education should be free for everybody. Our population is not growing as fast as before. So there are many, many reforms which are not expensive from the public finance perspective, which will be popular, and which will relieve people of the burden of daily life so they can consume more. I think this is a win-win. Things are slow but I'm confident. They are coming. They are coming along.