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China must prevent an "overcooling" economy, Tsinghua ACCEPT report says
David Daokui Li et al. call for recognizing private businesses politically, unilateral/asymmetric opening-up to promote foreign investment, & resolving local govt debt with central govt resources.
On June 17, 2023, the 45th China and World Economy Forum with the theme "Analysis of the Economic Situation in the First Half of 2023" was held inthe School of Economics and Management at Tsinghua University. The forum was organized by the Academic Center For Chinese Economic Practice And Thinking (ACCEPT) at Tsinghua University. A full video recording is available.
David Daokui Li, founding Dean of ACCEPT, along with researchers Li Bing, Guo Meixin, and Lu Lin, jointly released the report 防过冷是新时期宏观经济治理基础性任务 Preventing Overcooling: A Foundational Task for Macroeconomic Governance in the New Era on China's economic development in the second half of 2023.
I’ve learned that the full report is in the final review process but ACCEPT has kindly shared their Chinese-language presentation of the report in the forum, which I’ve uploaded to Google Drive.
Yin Yanlin, former Deputy Director of the Office of the Central Financial and Economic Affairs Commission, spoke at the forum. His speech is available in The East is Read.
The following is a translation of the WeChat blog post by ACCEPT summarizing their presentation.
The report first pointed out that the current state of the Chinese economy is below its potential growth rate, and the overall recovery is not as expected. It is necessary to quickly reverse the downward trend in the growth rate.
According to calculations by ACCEPT, in order to achieve the goal of reaching the per capita GDP of a moderately developed country by 2035, the average annual compound growth rate of the Chinese economy from 2023 to 2035 needs to reach 4.61%. However, even without considering the impact of the pandemic, China's GDP growth rate from 2010 to 2019 has already shown a monotonically decreasing trend, with an average annual decline of 0.33 percentage points. If this downward trend continues, the compound growth rate will be below 4.61% by 2025.
Currently, there is a general lack of domestic demand in China, with the CPI (Consumer Price Index) hovering at a low level, the PPI (Producer Price Index) experiencing continuous negative growth, the production sector facing deflation, slow consumption recovery, a continuous rise in the youth unemployment rate, and a declining trend in import growth rate. Therefore, in order to achieve high-quality development and the 2035 goals, it is necessary to revitalize growth and reverse the downward trend in the GDP growth rate over the past years.
The report emphasizes that the Chinese economy has significant advantages in terms of the national saving rate (K), technological innovation capability (P), and total labor force (L). Although the current economy is below the potential growth rate, the future Chinese economy still has high growth potential.
Among them, China's macro savings rate is conservatively estimated to account for 35% of GDP, far ahead of other major economies in the world, and it has the potential to further expand investment and unleash economic growth vitality. Research and development (R&D) expenditure and real purchasing power have surpassed that of the United States and are still increasing. STEM (Science, Technology, Engineering, and Mathematics) graduates account for 41% of nearly 11 million college graduates in China, exceeding the total number in other countries combined, and they constitute an important talent reserve for future technological innovation. The total of healthy and educated human resources continues to rise. If the future total human resources are converted into population equivalent based on the year 2020, it will reach 1.64 billion by 2050, an increase of approximately 15.4%. Anxiety over population should be discarded.
The latest research by ACCEPT estimates that if the above advantages can be fully utilized to stimulate future economic growth potential, the potential growth rates of the Chinese economy for the periods 2021-2025, 2026-2030, and 2031-2035 will reach 5.9%, 5.8%, and 5.2% respectively.
The report provides an in-depth analysis of the major problems hindering economic recovery from five aspects: consumption, local government debt, real estate market, private investment, and external demand:
First, the consumption growth rate has been declining over an extended period of time, and residents’ willingness to consume has decreased. Due to concerns about future economic growth and uncertainty in household income, Chinese residents' consumption confidence has been negatively impacted significantly. Ultimately, that leads to insufficient utilization of industrial capacity and higher unemployment rates, creating a vicious cycle.
Second, local government debt is high, severely overdrawing the power and capacity of local governments to develop the economy. The increased pressure on local-level finances and the decrease in land transfer revenue have led to a decline in the growth rate of the overall financial capacity of local governments. The gap between financial capacity and debt is widening, and local governments lack sufficient funds to pay interest or repay debts. If the central government does not intervene, local government debt will be difficult to sustain.
Third, the real estate market showed a temporary recovery in terms of volume and prices in the first quarter of this year, but it experienced a year-on-year decline in the second quarter. The significant fluctuations in housing prices have affected residents' expectations of purchasing homes, resulting in a serious negative impact on investment and expectations in the real estate industry and its related sectors. Currently, real estate enterprises still face difficulties in financing, and the report concludes that the long-term turning point in the proportion of the real estate market to the national economy has arrived.
Fourth, there have been attacks on private enterprises in public opinion, leading to collective anxiety among private businesses. At the same time, enterprises face challenges in transformation and upgrading, and the succession of second-generation private entrepreneurs has not yet been completed. These factors have resulted in a continuous decline in the growth rate of private investment and insufficient vitality in the private economy.
Fifth, in terms of the international economic situation, the growth rate of China's export and actual utilization of foreign investment has shown a declining trend in the past decade, reducing the contribution of external demand to China's economic growth. This is partly due to China's gradually increasing economic size and a relative decline in the proportion of foreign trade, and it is also closely related to slow global economic growth and high instability in international financial markets.
The report points out that if the above problems are not resolved, the long-term downward trend in the economy will not only affect the realization of the goal of “achieving a moderately developed country's per capita GDP by 2035”, but also lead to insufficient employment, social instability, a slowdown in industrial upgrading and a reversal of catch-up trend, constraints on comprehensive national strength, and a passive position in international competition. These pose significant risks to the process of advancing the Chinese path to modernization.
Since the reform and opening-up, the basic direction of governance reform in China has been streamlining administration and delegating power, which has manifested as repeated overheating in the macroeconomy. In recent years, as the capacity for national governance has significantly improved and the governance structure has become more standardized, there have been some contraction effects in the macroeconomy. The report believes that in the New Era, the basic thinking structure and tasks of macroeconomic governance in China must shift from "preventing overheating" to "preventing overcooling." While implementing structural and regulatory policies, it is necessary to establish countermeasures in macroeconomic policies to mitigate the contraction effects.
The report recommends multiple measures to stabilize the economy in the short term, focusing on consumption, the real estate market, local government debt, the private economy, and foreign investment:
First, revive consumption growth and build a new mechanism to drive economic growth through consumption. In the short term, the central government should introduce consumption subsidy policies and provide subsidies to consumers at the payment stage. The distribution of value-added tax revenue should shift from being based on the principle of production location to partially based on the principle of consumption location, promoting a shift in the mindset of local governments from focusing on production to promoting consumption. A sound medium- to long-term mechanism for automobile consumption should be established; China should announce that future emission standards for fuel vehicles will not affect consumers who have already purchased gasoline vehicles and encourage major and large cities to implement license plate reform measures to encourage car buying.
Second, the stock of local government debt should be resolved through joint efforts of the central and local governments. This report recommends piloting in regions burdened by heavy debt, where the central government issues special national bonds to replace local government debt, and at the same time, establish a debt restructuring fund, drawing on the experience of restructuring the four major state-owned banks to resolve bad debts item by item. For current and future incremental debts, a new borrowing mechanism should be established, a national infrastructure investment company should be established, a multidimensional and long-term evaluation system for local officials should be created, and state-owned enterprise reforms should be deepened.
Third, in the real estate market, multiple measures should be taken to stabilize the expectations and confidence of homebuyers and real estate companies. In the short term, it should be made clear in policies that a national property tax will not be imposed, avoiding the uncertainty surrounding the timing of property tax implementation. While adhering to the principle of "housing is for living, not for profit," further targeted policies should be implemented to reduce restrictions on genuine demand. At the same time, support for reasonable financing should be increased.
Fourth, the political status of private businesses should be clarified to stabilize confidence in the private sector. It is recommended that Beijing formally adopts the position that the private economy, like the state-owned economy, is the economic foundation for the long-term governance of the Communist Party of China. As a starter to restore confidence, one or two private enterprises should be allowed to enter difficult industries to nurture one or two emerging industries, to promote large-scale investments by the private economy.
Fifth, greater efforts should be made to stabilize foreign investment and foreign trade. The more others restrict us from going out, the more we should encourage them to come in and implement an asymmetric proactive opening up. The report suggests simplifying the visa process for foreign investors, flexibly handling visa issues, shortening the negative list for foreign investment, and accelerating the implementation of the Regional Comprehensive Economic Partnership (RCEP).