Ex-NDRC official's comprehensive review of China's economy & reform

Rare, in-depth analysis from Xu Lin, currently chairman of the China-U.S. Green Fund.

Xu Lin joined the former Long-term Planning Department of the State Development Planning Commission in 1989 and later served as Director General of the Department of Fiscal and Financial Affairs and the Department of Development Planning of the National Development and Reform Commission (NDRC), Director of China Center for Urban Development, and Chairman (Associate) of the China-U.S. Green Investment Management Co., Ltd., among others.

Xu is currently Chairman of the China-U.S. Green Fund, a market-based, commercially-run private equity investment fund, jointly initiated by Chinese and U.S. political and business leaders.

Xu, on May 20, gave a two-hour speech at Xinzhuang/Xin Village Classroom, a platform organized by Professor Zhang Weiying, Boya Chair Professor of Economics, National School of Development, Peking University. Zhang was Assistant President of PKU (2002-2013) and Dean of its Guanghua School of Management (2006-2010). Xinzhuang/Xin Village Classroom published his speech in its WeChat blog on June 7.

NDRC has long and widely been seen as the most important government ministry and it’s rare to see a former DG-level NDRC official elaborates so comprehensively on China’s economic development and reform. And the speech is just so good that I’ve discarded the 2,700-word condensed version that we had prepared.

The following speech is insanely long but if you have the ambition and the time, I strongly recommend you go through it. - Zichen

Throughout my career, I dedicated 29 years to the State Planning Commission and (its successor) the National Development and Reform Commission, primarily working within the Development Planning Department. My role involved researching and crafting national medium to long-term plans and industrial policies. To an outsider, this department might appear as a massive and somewhat enigmatic entity. We occasionally encountered grievances from local governments and other departments, given our significant power and responsibilities. However, our day-to-day actions, thoughts, and methods may not always be apparent to those outside our sphere. Therefore, today I aim to shed light on our work philosophies and methodologies. How did we, as government employees, approach China's economic development issues? Aside from six years spent as the director of finance, the remainder of my tenure was in the Planning Department, responsible for crafting China's five-year plans and industrial policy formulation. Each time we crafted a five-year plan, we undertook strategic research. Hence, today's discussion, to some extent, provides insight into the mindset during my time at the National Development and Reform Commission, facilitating a clearer understanding. Hence, the validity of my views today is not of utmost importance; everyone is entitled to their perspectives and critiques. I merely wish to explain our thought process.

In August 1989, after graduating from Nankai University Graduate School, I commenced my career at the State Planning Commission. The personnel department provided pre-job training for newly recruited civil servants. I distinctly remember an older director's advice. He said, "When you join the State Planning Commission to tackle any issue, don't perceive yourself as merely one officer. You must envision yourself as the Premier. You are solving this issue for the Premier." After years at the National Development and Reform Commission, this statement's profound meaning became increasingly clear: we who work at the State Development and Reform Commission must consider issues from a national perspective, not merely one department's viewpoint. I have never forgotten the old director's wise words, and I hope this helps everyone understand why we dare to contemplate such big topics.

i. Firstly, China's economy is encountering structural deceleration pressure.

I believe China's economy is currently experiencing structural slowdown, which is not cyclical. Our economic growth inevitably faces cyclical fluctuations: periods of surging economy and inflation interspersed with low economic growth and even deflation. However, these are cyclical fluctuations. Structural deceleration, on the other hand, follows a specific trend that is much harder to alter. Solutions to these issues are mostly structural. Consequently, our economy is under the stress of a structural slowdown, which I attribute to the following factors.

1. Deterioration of Factor Conditions

The most evident change is that China's degree of aging is consistently increasing. We now have a population over 65 years old that accounts for nearly 15% of the total population, and the population over 60 years old accounts for 19% of the total population, which will soon reach 20%.

The rapid aging of the population will lead to a shift in the relationship between labor supply and demand. China's working-age population, referring to those aged 15-60, is decreasing every year. Over the past decade, the average annual decrease has been about 3 million. Since last year, the total population of China has also begun to see a net decrease. Consequently, the country's dependency ratio has rapidly increased, and the burden of providing for the elderly on young people continues to rise.

This change in the relationship between labor supply and demand first and foremost results in continuously rising labor costs. I recall reading a statistical report that, in the past ten years, labor costs in China have increased by about 12% on average every year. This trend causes some of our traditional labor-intensive industries to gradually lose their advantages, leading many industries in our country to migrate to neighboring countries and regions with lower labor costs. This shift has actually been taking place for almost 10 years.

The second problem is that, with the degree of aging increasing, the overall savings rate of the country exhibits a downward trend. China's savings rate peaked at 50%. China has always been a country with a high savings rate globally. Now it has dropped to a level of 43%, and I believe it will fall further. However, if we compare China's savings rate with that of the United States and countries like Japan, our savings rate remains high, but it is declining compared to our own past.

Therefore, the supply of labor and capital as factors of production are indeed weakening or even deteriorating.

2. Decline in Labor Productivity Growth

When factor conditions become unfavorable, an increase in factor allocation efficiency could potentially offset these adverse changes, thereby minimizing their negative impact on economic growth. Unfortunately, as per relevant research literature and our own calculations, the growth rate of factor allocation efficiency in our country has been on a downward trend for the past decade. Similarly, labor productivity growth has also decreased in the past ten years. We calculated these figures during our study of the 13th Five-Year Plan, where both all-factor productivity growth and labor productivity growth showed a decline. The conditions for factor supply are deteriorating, and the growth rate of factor allocation efficiency is also dropping. Applying a straightforward neoclassical growth model for estimation would suggest that the economic growth rate will also decrease. This can be comprehended even without advanced economic knowledge.

3. Deterioration of External Environment due to China-US Tensions

Ever since the administrations of Trump and Biden took power, Sino-US relations have remained tense. This tension has triggered substantial changes in the overall external international environment, and a trend of decoupling from Western economies has begun to appear. Since the United States and other Western countries are not only the main sources of our trade surplus but also the primary sources of advanced technology and equipment, the potential negative impacts of these developments are concerning. Even under the current circumstances, the trade surplus in goods we obtain from the United States annually still rounds to about 300 billion US dollars.

I recall when compiling the 13th Five-Year Plan, and as the Prime Minister was listening to suggestions from all walks of life regarding the 13th Five-Year Plan outline, Lu Guanqiu, an entrepreneur from Zhejiang Province, not only put forward all the regular suggestions but also added a special one, stating that we must not damage our relationship with the United States. This is because the core technologies of many industries in China are controlled by the United States. If the relationship deteriorates, it would significantly affect our country's industrial upgrading. In 2015, when he voiced these concerns, most people lacked a deep understanding of them, as Sino-US relations had not yet deteriorated to the current level. They also lacked a realistic understanding of the fact that the technology of many Chinese industries came from the United States and was even dependent on them. In retrospect, Lu Guanqiu's words were very prescient, rooted in an entrepreneur's extensive and profound understanding of China's industrial technology. The current shifts in Sino-US relations, particularly the United States' anxiety over China's rise, are eroding the already limited mutual trust between China and the United States, leading to political extremes in the United States concerning China's issues. These shifts are promoting a trend of desensitization of the U.S.-dominated global industrial and technology chains. Although such changes will stimulate China's efforts to enhance self-reliance, they will have a significant adverse impact on China. In this process, the international trade order based on WTO rules is also deteriorating. The free trade system on which we rely may be marginalized in the future and replaced by a new regional high-standard free trade system.

If you pay attention to a recent speech by US National Security Advisor Jake Sullivan at a US think tank, you'll note that he's criticizing the past Washington Consensus and putting forward new ideas. According to his perspective, the United States should build its own industrial system and a safer industrial chain, promote the resurgence of the manufacturing industry, move away from a growth model that relies heavily on the financial industry, maintain the competitive advantage of the United States' industry, particularly its technological edge, and implement trade policies centered on the working class. If the Americans can genuinely make this move, the United States won't be able to implement the past free trade system, because the U.S. manufacturing industry can't be competitive without trade protection. This is also the primary reason why the U.S. has been actively advocating for fair trade instead of simple free trade since the G20 Summit in Germany.

The trend of decoupling and breaking the supply chain, implemented by the United States to draw some countries away from China, is just beginning. It will take time to observe how the relevant countries respond, how they will affect the international trade system, what kind of international dynamics they will eventually shape, and how we will address them. However, once these changes take root, they may significantly impede our economic growth, particularly the external demand that previously fueled our robust growth.

4. "Carbon Peaking and Carbon Neutrality Goals," Opportunities and Challenges Coexist

Our country has set a timetable for achieving the Carbon Peaking and Carbon Neutrality Goals and has implemented stricter environmental protection restrictions in recent years. Indeed, these new restrictions put enormous pressure on some of China's traditional industries with relatively high emissions or energy consumption, leading to their transformation pressure. Consequently, some small and medium-sized enterprises have been shut down by the government. This transformation pressure implies that industries like steel, cement, building materials, non-ferrous smelting, and chemical enterprises need to increase costs and undergo new technological transformations to meet emission reduction requirements. I once participated in a discussion led by the Japan Office of the United Nations Industrial Development Organization on global industrial carbon emission reduction. I distinctly recall the representative of a German industry association stating simply: "The problem is whether our industries can accept the increase in costs." This issue applies to many Chinese industrial enterprises – whether they can bear the cost increase caused by the transformation.

For some industries and enterprises, increased transformation costs may compromise their competitiveness in the international market. Furthermore, the EU has proposed implementing a carbon border tax, with legislative procedures already completed. Ultimately, this will increase the cost of our enterprises because products with a high carbon footprint will face a higher carbon border tax when exported to the EU.

That being said, the Carbon Peaking and Carbon Neutrality Goals also present numerous opportunities, along with its challenges. If China's energy industries aim to implement a green, low-carbon transformation, we must replace fossil energy with clean energy. This change is an innovation pressure and requirement, opening many opportunities for innovation and investment. This field represents a substantial, continuous, and deep investment track. As the China-US Green Fund mainly invests in this field, I am particularly interested in the innovative opportunities and technologies of various innovative products here. This includes the innovation, production, and service of material technology and electronic power technology, and the investment and development of green, low-carbon energy infrastructure. Some experts have estimated that achieving net-zero emissions by 2060 will require an investment of nearly 500 trillion yuan RMB. This investment scale will unquestionably act as a sustained driving force for economic growth. In the future, addressing the weakening of external demand will be crucial for expanding domestic demand. In fact, China has already taken the lead in the world in this field.

5. Prospects for Potential Economic Growth in the Next Ten Years

After considering all the above factors, I estimate the potential economic growth rate for the next ten years to be between 4% and 5%. This potential growth rate is almost 2% lower than the estimate when we formulated the 13th Five-Year Plan. The potential economic growth rate we estimated then was about 6%, but the actual and clear economic growth target in our 13th Five-Year Plan was an average annual growth rate of 6.5%, slightly higher than our estimated potential growth rate. This disparity arose because the 18th National Congress of our Party set a goal to double the 2020 figures compared with 2010. Thus, if the annual growth rate in the 13th Five-Year Plan fell below 6.5%, we wouldn't achieve the target set by the 18th National Congress. We were under such pressure, yet we faced significant challenges in achieving an average annual growth of 6.5% during the 13th Five-Year Plan period. At the end of the 13th Five-Year Plan, our actual average annual economic growth was slightly below 6.5%. The reason being, there was COVID-19 in 2020 and the economic activities were disrupted due to epidemic prevention and control measures, causing economic growth to decline that year. This was due to the influence of unforeseeable exogenous factors.

This structural deceleration pressure poses significant challenges to national planning and policy formulation. If you've been following this topic area, you'll notice that China's "14th Five-Year Plan" does not set an expected target for average annual economic growth. Having participated in many five-year plans from the "Eighth Five-Year Plan" to the "Thirteenth Five-Year Plan" with the State Planning Commission and (later) the National Development and Reform Commission, I've observed that it's the first time that a  "Five-Year Plan" does not propose a specific economic growth target. Instead, it suggests that the economic growth target be determined by the annual plan. This approach overturns the previous planning logic that used the five-year plan to provide the basis and guidance for the annual plan. Personally, I suspect that this change reflects the difficulty planners face in setting a clear five-year average annual growth target amid many uncertainties. They may also worry that once a target is set, there will be a significant gap between its achievement and the targets set, constituting a potential embarrassing dilemma. Thus, they have made such an adjustment.

Candidly speaking, I personally believe it's acceptable if the proposed goal isn't achieved, because China's five-year plan isn't a mandatory plan but a strategically guiding one. We're not implementing a planning system but a market economy system. Under the market economy system, it's normal for the planning objectives to deviate from the actual results. If the planning objectives aren't met, the existing planning evaluation and adjustment mechanism can suggest adjustments based on the actual situation during the five-year plan's midterm evaluation and present them to the National People's Congress for approval. Even if the target isn't achieved over the five years, one can explain the main reasons to the National People's Congress. There's no problem of not meeting the planning target or being blamed.

What I'm trying to convey is that, under the pressure of structural slowdown and the increasing uncertainty of the external environment, it's challenging for the government to set a clear growth target in its planning. The annual plan approved by the National People's Congress in 2022 sets an annual growth target of 5.5%, but China only achieved a 3% growth. This shows that even short-term growth expectations can be significantly affected by uncertain factors. This year, the economic growth will likely hover around 6%, owing to the recovery from last year's low base. The economic growth next year will likely return to the potential growth range of around 4%.

ii. Keeping China's Economic Growth Momentum: All-round Innovation

Since our country's factor conditions are deteriorating and the efficiency of factor allocation is also declining, how can we keep the momentum of economic growth from weakening? In fact, economics has standard answers. If you ask ChatGPT about this question, if a country's factor conditions are deteriorating and its factor allocation efficiency is not high, how can the country maintain the momentum of economic growth, it will give you a very standard answer. There is no exception for China, and it is difficult to have a different path because the conclusions formed by economics in the past were not generated out of thin air. They were put forward on the basis of many countries' experiences and numerous scholars' research, which have general theoretical and guiding significance. In fact, they are the same for China. The way out is to increase the allocation efficiency of factors through innovation, and to express it in our discourse system is to innovate the ability to drive growth through all-round innovation.

1. A Long Period of Good Economic Fundamentals

Let's consider the future of China's economy. Our government frequently states, "The fundamental outlook of China's economy for long-term improvement remains unchanged." This assertion undoubtedly seeks to bolster confidence. However, how many people have truly contemplated the long-term fundamentals of China's economy? Different individuals may have varying understandings and views on these fundamentals. From my perspective, since starting my investment journey, I've interacted with numerous enterprises, entrepreneurs, and regular workers. My understanding of these fundamentals has subsequently become more lucid and profound. I believe that Chinese entrepreneurs and ordinary Chinese citizens, who are relentlessly learning, working hard, continually innovating, and striving to prosper, are the most significant fundamentals of the Chinese economy, and form the most essential drive of China's economic growth.

In my opinion, it is rare to see people anywhere in the world as hard working as China's ordinary citizens and entrepreneurs, especially private entrepreneurs, who can innovate technology, products, and services with such diligence. They provide China and the world with good-quality and affordable products and services, and strive to maximize their profits. Europeans are comfortable with their lifestyles and the Japanese are less likely to work as hard as they used to. While similarities between the United States and China exist, I think Americans are not as industrious as the Chinese. As long as there's money to be earned, the Chinese are willing to endure whatever is necessary. I believe these are the fundamentals that we should be most proud of and need to safeguard vigorously. In this regard, I recall that Elon Musk has offered praise.

The government should efficiently utilize and protect these fundamentals and effectively manage its entrepreneurial and labor resources.

Another standard solution is that efforts should be made to enhance the quality of the labor force, particularly as the labor force population tends to decrease. This can be achieved by strengthening training and education to make more efficient use of China's talent resources and reduce talent waste. Indeed, we have been undertaking these tasks for many years. The scale and standard of education are continuously increasing. Recently, the government has also emphasized the need for high-quality population development. At present, the use of retired talents in the system merits attention. According to current regulations, numerous competent retired talents in the system, although they still have room for contribution, are restricted by overly simplistic and rigid regulations. This is a wastage of talent. Looking at the long term, robots will more efficiently replace labor in the future, and fewer young people will be willing to work on manufacturing production lines.

Therefore, if we can value and fully utilize this foundation, China's economy has tremendous potential. I have little doubt about the competitiveness of China's economy and industry because Chinese entrepreneurs will put their utmost effort into innovation and cost control. This is also the primary reason for the success of China's manufacturing industry in the international market. I remember that Professor Zhou Qiren of the National Development Institute at Peking University has conducted extensive and continuous research on some manufacturing industries in Foshan, Guangdong. I believe his research corroborates this reality.

2. Market-oriented System and Mechanism Innovation

To expedite the reform and innovation of a market-oriented system and mechanism, and to derive new momentum for economic growth through innovation, such innovation must be comprehensive for China. The term "comprehensive" signifies that the general public believes that it is crucial to initially promote the innovation of the system and mechanism, given the close relationship between the system and economic growth. This perspective can also be addressed in a standardized manner via ChatGPT.

Our experience indicates that market-oriented reform and opening-up has spurred China's rapid economic growth, the prosperity of its citizens, and the country's overall development for over 40 years. In this context, the documents of the Communist Party of China provide conclusive affirmations. The documents issued since the 18th National Congress of the Communist Party of China consistently express the importance of reform and innovation of the system and mechanism, shifting from merely giving full play to the basic role of the market in the allocation of resources to granting it a decisive role. This consensus is shared by the entire party. We realize that only by advancing market-oriented reform can we improve the efficiency of resource allocation. The efficiency of resource or factor allocation is not optimal because the market-oriented reform is not fully realized. If the proportion of resources allocated by the government or state-owned enterprises is too high, the overall efficiency of the country's resource allocation will decrease. Many economists have empirically demonstrated this, making it an objective conclusion rather than a subjective one based on preconceived notions.

Compared to a mature market economy, we still have room for improvement. Currently, government intervention and the scale of state-owned enterprises in the allocation of resources have not decreased over the years, but increased. This hampers the efficiency of resource allocation, impedes the growth rate of the economy, and is not aligned with the requirement of high-quality development, since the core of high-quality development is enhancing the efficiency of resource allocation.

To foster the innovation of the market-oriented system and mechanism, it is necessary to protect the country's unified large market. Our Party’s Central Committee has issued specific documents to promote the development of a unified large market. However, achieving this goes beyond mere proclamations and requires genuine reforms. I believe that there are a few steps China must take.

First, the system of dividing urban and rural areas into regions should be abolished as soon as possible. Regrettably, despite over 40 years of reform and opening up, we have not yet accomplished this. Concerning the Hukou (household registration) system and social security differences based on Hukou, urban and rural areas remain divided. Mega-cities have not relaxed household registration control but have instead tightened it. In the past, our university graduates could register their permanent residence if they secured a job. Nowadays, many graduates cannot register their permanent residence even after obtaining a job, which hinders their work-life. As long as these conditions persist, local protectionism will thrive. When local protectionism is in place, resource allocation cannot be efficient.

Let's consider a nearby example: the taxi services in different cities. I have observed that taxis in Beijing are inferior to those in Shenzhen and Shanghai. In Beijing, local cars like Beijing Automotive Group Co., Ltd (BAIC) - Hyundai are predominantly used, which is a form of local protectionism. Why is the local government doing this? Because we all know that when attracting investment and introducing whole vehicle enterprises, many places offer substantial financial subsidies. Since a significant amount of money is spent on subsidizing these automotive enterprises, it is natural to use their vehicles to support their sales, which also benefits local tax revenue. Of course, if BAIC's Hyundai cars were of excellent quality, they would not give people such an impression, but unfortunately, reality is not like that. In Shenzhen, many taxis, including Didi limousines, are made by local manufacturers like BYD or Guangzhou Auto's Ai 'an. These cars are of superior quality, but they might also have some protection behind them.

Most people believe that Beijing, an international metropolis and China's capital, should maintain superior taxi services compared to Shenzhen and Shanghai. Shanghai may also have its protective measures; they predominantly use cars from Shanghai General Motors or Shanghai Volkswagen, but these cars appear superior in quality. This example might be contentious, but it is representative of the issues prevalent in China.

Currently, many places are implementing subsidies for new energy vehicles, and in many cases, local production lines must be established in order to qualify for these subsidies. This common practice is frequently linked to local protectionism and typically supports outdated and over-capacity industries. However, even so, I am confident that after the restructuring of China's new energy vehicle industry, a number of businesses will eventually go bankrupt, leading to a significant waste of resources.

Therefore, building a unified market system is far from simple and requires a series of profound reforms. Such reforms often touch upon the foundations of China's economic and social systems. It's impossible to genuinely establish a unified large market unless these fundamental aspects are addressed and reformed. The unification of a large market is crucial to China's market economy system and constitutes one of China's key advantages. Many things that small economies can't do due to the limited market size and lack of economies of scale can be achieved by larger economies with larger markets. Economies of scale lead to a more refined division of labor, higher efficiency, and stronger competitiveness. This is a fundamental principle of economics. The reason why China can establish a relatively complete industrial system and remain competitive is also due to the advantages of a large-scale economy. We cannot let the benefits and efficiencies of a large-scale market be compromised due to regional divisions and urban-rural disparities.

Moreover, the protection of property rights, particularly private property rights, is also vital. Without robust property rights protection, there won't be substantial innovation and long-term investment. This is because all forms of innovation, especially those initiated by private entrepreneurs, require sustained investment over a long period. When the innovative achievements are commercialized, it's not just the intellectual property generated by innovation that needs protection, but also the enterprise property rights that form when the scale of the enterprise expands after innovation. This type of private property rights protection, grounded in the rule of law, provides entrepreneurs with the confidence and institutional foundation necessary to invest in and expand innovation over an extended period.

If property rights protection is insufficient, entrepreneurs will not make risky, long-term investments in innovation, nor will they develop a long-term vision for building century-old enterprises. This will inevitably lead to a cascade of problems for the economy and society. For instance, in the Chinese stock market, if property rights protection is inadequate, investors will not make long-term plans and the stock market's micro-foundation will not be stable. After many business owners take their companies public, they may seek ways to cash out a portion of their assets and transfer some money abroad as a precautionary measure. As long as the business owners have the motivation, taking such actions under current conditions is not difficult. Therefore, I believe that a property rights protection system based on the rule of law is a crucial institutional foundation for a country's long-term development and innovation. If the micro-foundation of a country's capital market is unstable, the entire country's social security assets, insurance assets, and investors' asset allocation in the capital market will be filled with risks. Consequently, the wealth accumulation effect and the financing function of the stock market will be adversely affected.

In addition, we must further decrease government intervention in resource allocation, reduce the proportion of state-owned enterprises in resource allocation, and continuously increase the role of the private economy. I need not stress the importance of the private economy. The numerous contributions of private enterprises can be quantified, demonstrating their significance and the need for a stable development environment. In reality, the government has a lot to do to promote these reforms. If we establish a sound system and environment, there won't be a need to generate countless documents. As far as I can recall, the State Council has issued at least two documents promoting the development of private enterprises, especially small and medium-sized ones. This does not include various speeches made by top leaders of the Party and the nation. The reason for this repetitive emphasis lies in the unease felt by business owners. The root cause of this unease is the unstable policies and the lack of predictable, stable legal governance.

3. Continue to invest in scientific and technological innovation

Continuously increasing investment in scientific research and innovation on the basis of system and mechanism innovation is another wing of comprehensive innovation. It's worth mentioning that our country has paid significant attention to investment in scientific and technological innovation for many years, so we have now achieved a level of 2.55% of total GDP in our society. The total expenditure on research and development is the second-highest in the world, surpassed only by the United States, and exceeds the combined total of all EU countries.

Due to this investment and effort, the results of China's innovation are consistently emerging. If measured by registered patents, the number of newly registered patents in each of the past five or six years has ranked first in the world. Some may argue that the quality of China's patents is not very high, and this is indeed the case, but I believe that the quality of patents is continuously improving, and reaching the level of global advancement is a gradual process. In this process, which involves increasing investment in innovation, the proportion of government investment in our country's structure is still lower than that of the United States. In other words, the government's role in R&D investment is not as prominent as in the United States. The U.S. government accounts for about 30% of research and development investment, while in China, it has gradually risen to reach a level of about 24%.

Considering that the government's research and development investment is mostly for basic research and original research, one can conclude that the Chinese government's investment in basic research in the past is not as high as that of the U.S. government. If we take into account that the U.S. government has been doing this for many years, we can understand why there is a significant gap between China and the U.S. in basic research and original research, and this gap cannot be bridged in a few years. This is the result of continuously increasing investment.

When examining the cost expenditure of the Chinese Academy of Sciences for one year, last year it was about 170 billion yuan, which is already a slight increase, but it is only a bit higher than the research and development investment of Huawei, a single enterprise. I remember that two years ago, they were roughly equivalent. The entire Chinese Academy of Sciences system spends only slightly more than Huawei in a year. I perceive that China's investment in basic research may be relatively insufficient. Therefore, in the future, enterprises should not only be encouraged to increase their research and development investment, but the government's research and development investment should also be further strengthened. Sound basic research and original research form an important foundation for enterprise technological innovation.

Of course, the results and efficiency of innovation are not just a matter of investment but are also closely related to the innovation system.

In terms of models involving innovative systems, the “new system for mobilizing the resources nationwide to achieve breakthroughs in core technologies in key fields” has been frequently discussed recently. Why is there a new system? It is because we had the old system. What problems did the old national system solve? The problem of “two bombs and one satellite” was solved. This approach was effective. Now we are facing some big technology problems, some of which are “chokehold” problems. Especially after the Western countries, led by the United States, tightened their technology and equipment exports to China, many people think that we still need to set up some national systems to solve some technology problems with national efforts. However, the old system cannot be put into use once again. After all, the old system is a product of a mandatory planned economy. Now we are implementing a market economy, so we need to develop a new system. The question is, where is the new national system? At present, there is no official complete explanation. Personally, I think the innovation system is very important. I advocate that the government should better encourage scientific research institutions and enterprises to augment their research and development efforts with government support. The government should place a greater emphasis on basic and original research. A new national system is unlikely to address the extensive needs of scientific and technological innovation, which are vast in quantity, broad in scope, and numerous. The increasingly intricate issues of scientific and technological research and development innovation, diversified across different industries, are primarily resolved by enterprises. A new system ccould only pool resources and address a limited number of widely-impactful, chokehold  problems of strategic national importance. However, it's challenging to solve all chokehold problems, because China is actually confronting numerous such problems, not only in semiconductor equipment or technologies and equipment in certain fields, but also in various areas, from laboratory equipment to material technology, key raw materials, and software components.

Another important aspect is that we cannot disregard international cooperation. While self-reliance is inevitable when facing blockades, relying solely on ourselves, nonetheless, reverts back to the system prior to the reform and opening up. The lesson that the closed system taught us is that the gap between China and the international advanced countries only widens. Therefore, China cannot return to the old way. Even if the United States is so advanced in its scientific research capacity, it cannot achieve full autonomy. Therefore, our new national system can have its own priorities, but the entire system must not be closed and should be diverse and open. The government should strive to maintain a relatively friendly external environment and create conditions for international cooperation and division of labor in scientific and technological innovation.

Through continuous scientific and technological innovation, a steady stream of new growth momentum can be formed, including disruptive innovation and momentum. In this journey, entrepreneurship plays a critical role, because entrepreneurship is fundamentally the spirit that dares to take risks and innovate.

4. Promoting High-Level Opening to the Outside World with Institutional Opening

A high level of opening to the outside world is crucial for future growth. For a country, the biggest advantage of transitioning from closure to opening is the ability to expand the market boundary or space for resource acquisition and allocation. What is stated in microeconomics textbooks is to expand the production possibility frontier. The past opening up of our country, especially the effect after China's accession to the World Trade Organization, has fully proved this point, which has a consistent view in academic circles at home and abroad. Now our official statement is to open to the outside world at a high level, but what exactly is a high level of opening to the outside world, it seems that the discussion is not very clear and sufficient. Our opening to the outside world in the new period must be systematic. When we talked about expanding the opening in the past, we said more about opening up the market and lowering tariffs. Now it seems that the existing international environment is unlikely to accept this. It turned out that when I took part in China's WTO accession negotiations, I mainly talked about two issues. One is the market access negotiation, which mainly reduces tariffs and relaxes market access; the other is related to system opening. I am responsible for discussing industrial policies and industrial subsidies, which involve an economic management mechanism and system. We must abide by relevant WTO rules in this respect because it involves the market system and fair competition.

At present, some western countries, led by the United States, have some criticisms and complaints against us, mostly concentrated in these areas. They are of the opinion that industrial policies and industrial subsidies violate WTO rules, resulting in unfair competition and unfair trade. Since industrial policies and subsidies are not China's inventions or unique to China, all countries have industrial policies and implemented them to varying degrees, including countries like the United States, China does not easily accept their criticism.

However, in general, China's opening up in the future must be based on an increased standard of opening up. On the one hand, we must insist on allocating resources from a global perspective. In this way, our enterprises will have larger market frontiers, higher efficiency, and fuller competition. This is very important for the development of Chinese enterprises. On the other hand, it is necessary to create more reliable and predictable international rules and systems for the global operation of Chinese enterprises.

Allocating resources from a global perspective will shape our national interests in different countries around the world. These national interests must be effectively protected. In the past, when national interests were damaged or not protected, the military could be used. It was a barbaric era when big powers were rampant - whoever affected my interests, the military could be used without negotiation. The Sino-British Opium War was such an act. Under today's modern international order and modern civilization system, of course, this cannot be done. Even a superpower like the United States will not easily use force to settle trade disputes. In the future, it will be more necessary to establish a set of widely accepted international systems to protect our overseas interests with systems based on international rules. China's overseas interests are now quite large, probably around 10 trillion US dollars, with a wide distribution in space and countries. Without such a set of international rules to provide protection, Chinese enterprises will face many risks and uncertainties in their global operations. It is the duty of the government to create a good global business environment for enterprise development.

Through globalization, we have gained a lot of benefits in the past. After China's accession to the WTO, as the environment for enterprises to engage in international trade and investment has greatly improved, the trade surplus from the United States and the European Union alone has amounted to nearly 6 trillion US dollars over the past 20 years. The trade surplus has helped us accumulate a lot of wealth. When did China begin to get rich? Bluntly, since China joined the WTO. The release of the Chinese currency associated with the 6 trillion US dollars amounts to more than 40 trillion RMB, that’s the wealth of Chinese enterprises, the people, and the country itself.

Therefore, under the modern, civilized economic system, a trade surplus serves as an important means for a country to accumulate wealth, although governments seldom openly acknowledge this fact. If openly stated, others may accuse us of being mercantilist countries. While the United States possesses the unique advantage of being able to sustain continuous trade deficits by bridging the balance of payments gap through printing the U.S. dollars, China, lacking the same conditions, can still engage in free trade based on fair competition. It is crucial to have confidence in Chinese entrepreneurs, as they will play a pivotal role in global competition and contribute to the country's wealth creation through international free trade.

Hence, the future of China's development relies heavily on institutional openness. It is imperative to have a comprehensive understanding of what institutional openness entails. Currently, some countries, including some developing nations, have complaints about China. They believe that many Chinese practices undermine the principles of fair trade. Personally, I think these complaints may somewhat be excuses or attempts to create trouble, and some even consider them as attempts to smear China's reputation. However, we should still take their accusations and complaints seriously. For instance, they criticize China for providing various subsidies to domestic companies or specific industries through government financial support and state-owned enterprises. They view this as non-market economy practices and unfair competition. In reality, if we evaluate it based on the WTO Agreement on Subsidies and Countervailing Measures, China's central and local governments currently provide significant special subsidies to specific industries. With the challenges of technological blockade and other obstacles, there has been an increase in subsidies for import substitution. Some of these subsidies can be classified as prohibited subsidies, such as import substitution subsidies, while most of them are specific actionable subsidies. These subsidies can easily lead to countervailing or anti-dumping litigation. Although providing industrial subsidies is within the rules of the WTO, different countries offer varying degrees of subsidy support and programs. Therefore, the WTO requires member countries to provide all subsidy programs and explanations in accordance with transparency requirements, facilitating the judgment of member countries. Why does our country's subsidies attract more attention? I believe there are two main reasons.  Firstly, China is still considered a non-market economy with a significant number of state-owned enterprises in competitive sectors, which undoubtedly raises concerns about fair competition. Secondly, China is a major trading nation and has a sustained trade surplus in goods, meaning that any non-compliant behavior by a major trading nation will have systemic impacts. If China were a small country like Singapore, even if they had some non-compliant practices, it would not generate significant global systemic effects, thus not attracting much attention and complaints. However, China is different; as a major nation, it is always expected to be a role model. Disputes and negotiations often arise between major nations regarding subsidy issues. For instance, the United States and the European Union have had ongoing anti-subsidy disputes and negotiations concerning civil aircraft.

China's future development cannot be separated from its integration with the international system, nor can it be completely independent from the support of international system. In the current geopolitical landscape, where the global system is constantly impacted by geopolitics and existing systems face fragmentation, it is crucial to understand how China can be accepted and embraced by the global system. Active participation in building new global and regional systems is necessary. China must work alongside other countries, particularly its major trading partners, to establish a higher-level global trading system based on rules through institutional openness. It is likely that this system will undergo restructuring and changes in the future. China faces numerous challenges, and a comprehensive review and understanding of its approach to integration into different international systems are essential. I contend that China needs to undertake reforms and changes in order to actively and proactively integrate into different international systems.

I remember studying the basic principles of the 13th Five-Year Plan in 2014, during which the TPP was under negotiation. At that time, there were discussions in China regarding whether to join as a founding member. We were hesitant due to our reservations about certain provisions concerning environmental and labor standards. Consequently, we did not display any willingness or motivation to join. Subsequently, the Trump administration announced the withdrawal of the United States, leading to the formation of the CPTPP, which is primarily dominated by Japan. The Chinese government has now officially declared its intentions to join. However, the process of joining this system now entails higher and more rigorous technical requirements compared to when we joined the WTO, alongside the original geopolitical complications. These heightened standards may also be more meticulous, insofar as industrial subsidies, industrial policies, state-owned enterprises, labor standards, environmental protection standards, data governance, and more may all require higher benchmarks than those set by the WTO. To meet these conditions, we must rely on our own institutional reforms to address these challenges, aligning ourselves with internationally accepted standards. When we initially joined the WTO, we revised thousands of domestic laws and regulations to comply with the relevant provisions. During that time, we frequently encountered speeches and government documents emphasizing the need to align with international rules and practices. Although such sentiments are less common today, they remain crucial. Otherwise, other countries will be reluctant to engage with us.

Presently, the United States is attempting to form alliances everywhere, proposing new sets of international rules under the guise of shared values, with the aim of excluding China. The pretext for such actions implies that China does not abide by the rules and poses a challenge to the international order. Many countries are likely aware of the United States' intentions. After all, China possesses a large market and has historically not been a misbehaving participant in the international system. I find it hard to believe that multinational companies would forfeit the opportunity to engage with the Chinese market and do business in China. Furthermore, if the United States intends to successfully win over other countries to exclude China, it would need to continue "generously" providing these countries with a sufficiently large trade market through its persistent trade deficit. Whether the policy adjustments of the new/current U.S. government, which claims to prioritize the working class, can achieve this outcome remains to be seen. For China, further expansion and opening up will inevitably involve a free trade system with higher standards and new rules. This will undoubtedly present challenges for us. Are we willing to implement new reforms to prevent institutional decoupling? Are we prepared to open up our media to allow investors, researchers, and market participants to have more convenient and comprehensive access to global market information and scientific and technological documents? These are difficult reform issues that encompass politics, economy, and technology. In my view, institutional decoupling, once established, may have more profound and detrimental effects on China than the decoupling of industrial supply chains.

iii. Aim at the Main Track of Innovation and Growth

Having discussed the significance and institutional mechanism of the innovation drive extensively, some may wonder about the main track and direction of China's future innovation. In reality, for an economy as vast as China's, innovation permeates various aspects, encompassing both emerging and traditional industries. Nevertheless, the main track for future scientific and technological innovation remains clear.

1. Digital and Intelligent Transformation

The report of the 19th National Congress of the Communist Party of China explicitly emphasized the deep integration of digital technology with all facets of economic and social development. This recognition indicates an understanding of the trend and sets forth distinct directions and requirements.

However, the digital economy encompasses an extensive and intricate domain. China holds a comparative advantage over the United States in this realm, primarily due to its large market. This advantage facilitates the development of numerous platform economies in China following the advent of the internet and digital technologies. While many of these technologies may not be original but rather imitations, the Chinese have found success by leveraging their advantage of a substantial consumer base. Even if China were to solely rely on the domestic market without international exposure, various sectors would generate economies of scale, thereby propelling the development of highly specialized platform economies. Consequently, a multitude of internet-based platforms and applications (APPs) exhibit exceptional specialization and refinement. This specialization is a result of innovation-driven division of labor, which is more easily achieved within a large market. Small countries often struggle to accomplish this feat, and even Japan cannot rival China's unique advantage in this regard. Prominent Chinese companies such as Alibaba, TikTok (Douyin), Tencent, Pinduoduo/Temu, Didi, and Shein exemplify this prowess. Once Chinese APPs go global, they have a natural appeal to international users, leaving ample room for further expansion. The platform economy has created numerous entrepreneurial and employment opportunities, granting farmers in remote areas greater access to affordable and convenient consumer goods and services with distinctive characteristics.

Yu Minhong, facing difficulties, turned to live broadcasts to promote his products. By leveraging the Douyin platform, he harnessed his vast celebrity following to facilitate his rapid transformation. After all, a lot of people in China, including myself, used to be a student of Xin Dong Fang/New Oriental Education, the education company founded by Yu. Moreover, in China's internet market, esteemed professors like Mr. Zhang Weiying possess a strong follower base that enables them to sell live classes and merchandise. Such endeavors can bring substantial financial gains, showcasing the benefits of leveraging internet-based celebrity status.

The digital economy and artificial intelligence span various fields, encompassing innovations in the chip industry chain, materials, manufacturing equipment, and design service software. With the United States, Japan, and the Netherlands collaborating, China faces significant challenges and difficulties in the development of advanced process chips. Addressing this issue requires extensive and sustained efforts, involving a broad range of innovations. This scenario was difficult to envision a few years ago.

In the field of blockchain, numerous innovations and applications have emerged in China. Notably, China possesses reputable foundational technology companies engaged in blockchain research, development, and services. China's technological advancements in this area have garnered attention, even leading to hearings in the U.S. Congress. If Chinese companies take the lead in blockchain technology service networks, they will essentially influence the equivalent of HTTP sub-directory technology on the internet.

The digitalization and intellectualization of industries are key trends for the future. During investment research, we discovered that if traditional industries undergo digitalization and embrace intelligence throughout their production and management systems, not only will efficiency significantly increase, but customized consumer demands can be better met through precise and fine production. This approach also reduces waste, inventory, energy consumption (by around 30%), and carbon dioxide emissions (by 30%). In the future, we can expect to witness more flexible production, precise customization, and systems integration, including the industrial internet, digital twin technology, and intelligent energy utilization. These advancements will undoubtedly lower costs and enhance competitiveness.

Additionally, the development and popularization of intelligent new energy systems and digital energy are crucial. To meet the government's Carbon Peak and Carbon Neutrality Goals, China has outlined plans to build a new power system centered around renewable energy. Given the intermittent nature of renewable energy generation, the main power system must be a digital energy system that integrates sources, grids, loads, and intelligent storage. This approach effectively addresses the challenges posed by wind and solar power to the power load and grid. The combination of wind and solar power generation, energy storage, and smart grids will form the backbone of the renewable energy-based power system, with distributed smart power systems gaining traction. Notably, Huawei has established a dedicated digital energy company, recognizing the future potential of China's energy system. Huawei's expertise in digital technology positions it advantageously in this field. Their inverters, for example, are regarded as the best and can command higher prices than those of other manufacturers, leading to successful sales.

Furthermore, the development and deployment of smart cities, smart communities, and smart homes are gaining momentum. In terms of physical systems, intelligent social governance is already prevalent, with camera monitoring terminals scattered throughout the country. These physical systems must be connected to highly digital and intelligent background systems. However, intelligent social governance extends beyond physical systems and encompasses the efficient provision of various public services. By leveraging intelligent systems, the accuracy and efficiency of public services can be significantly improved. Consequently, smart city construction has been prioritized nationwide. During my work at the Urban Center of the National Development and Reform Commission, I was involved in assisting a city in planning and implementing the construction of a smart city. Additionally, a smart city alliance was established, fostering collaboration among relevant enterprises and institutions. Future digital construction will manifest as a pattern of digital nations, digital cities, digital communities, digital enterprises, and digital households. This transformation will integrate technologies such as big data, cloud computing, and artificial intelligence. Achieving this requires addressing various issues, including hardware and software technology support, chip semiconductor research and development, and manufacturing, as well as the accumulation and management of data resources. To address these challenges, the National Data Bureau was established to facilitate the standardized and effective use of data as a production factor, ultimately realizing the industrialization of digital applications. The recent popularity of the artificial intelligence OpenAI learning model, ChatGPT, is also a testament to the computing models based on big data. In the future, artificial intelligence will permeate all aspects of the economy and society, potentially revolutionizing production, service, and research and development models. The effective standardization, management, and potential replacement of human resources in this context present challenges to existing cognitive and management systems. These problems require continuous exploration, construction, and breakthroughs in technology and systems.

 International cooperation in the field of digital technology is of paramount importance. China shares industrial chain interdependencies with other countries worldwide, particularly in advanced chips, and has certain external dependencies. In the face of foreign technology blockades, China must strengthen independent research and development and achieve technological self-reliance. However, uncertainties persist. Success may narrow the gap, while failure may widen it. Nonetheless, this does not imply that China should isolate itself. The recently held two-track dialogue on digital economic cooperation between China and the legal community in the United States addresses how the two countries can avoid comprehensive digital technology security concerns, which may lead to decoupling in the digital economy field. Moreover, efforts are being made to reduce U.S. export restrictions on China's advanced technologies and products in the consumer electronics sector. The standardized and secure cross-border flow and application of data between China and the United States is also an area of focus. Exaggerating security in digital economy security exists in both China and the United States, hindering cross-border data flow and application. However, cross-border data flow can yield significant benefits. For instance, the flow of data related to medical biology can drive breakthroughs in medical research and innovative drug development, addressing the needs of both China and the United States. Similarly, in areas such as cloud services, foreign companies should have the opportunity to provide direct services in China. Promoting cross-border data flow and application in the financial sector, while ensuring financial security and fostering stable international cooperation, is instrumental in combating cross-border money laundering and terrorist financing. Unfortunately, the current geopolitical atmosphere between China and the United States makes it challenging to establish the necessary mutual trust and engage in rational and professional discussions. Nevertheless, this should not hinder China from forming essential cooperative relationships and modes of cooperation with other countries. It is noteworthy that future mutual opening in the digital economy field is likely to be promoted based on reciprocal arrangements. China must carefully study and make institutional arrangements in response. Failure to do so may result in reciprocal market access restrictions imposed on Chinese social media platform companies and various APPs by other countries.

In China, we still face certain fundamental institutional challenges, such as data sharing barriers across departments, regions, enterprises, and institutions, as well as the protection of data privacy. These challenges require the National Data Bureau, recently established, to diligently address them. Careful observation, analysis, and learning are needed, especially regarding legislation, which should not be rushed.

I firmly believe that the digital economy and digital technology constitute significant global tracks and trends. The U.S. government has made its intentions clear, and China is no exception. With its advantage of a large market, China can excel in various specialized areas, performing with greater precision and on a larger scale than other countries.

2. Green and Low Carbon Transformation

The proposal of the Chinese government's Carbon Peak and Carbon Neutrality Goals has introduced a new constraint on resource allocation and has far-reaching implications. This was evident in our participation in two photovoltaic circuit events last year, both located in Qinghai. Initially, we did not anticipate investing in Qinghai. However, when discussing with the enterprise's manager, they explained that their products would be exported in the future. As a high-energy-consuming enterprise, they had to seek places with clean energy sources to ensure low carbon footprints for their products. By doing so, they could avoid facing high carbon tariffs when exporting to Europe and other countries. This demonstrates the influence of carbon emission reduction on the spatial distribution of resource allocation.

The Carbon Peak and Carbon Neutrality Goals can significantly impact the regional distribution of China's economy, which was difficult to imagine in the past. We observe that many new energy enterprises are located in western regions such as Yunnan, Sichuan, and Qinghai, which are abundant in new energy resources. Sichuan, in particular, has become an important base for the development of new energy enterprises due to its rich hydropower resources, a form of green electricity.

For China, achieving carbon neutrality hinges on energy transformation, which requires substantial investments and represents a significant growth trajectory. Approximately 80% of China's total carbon emissions stem from energy consumption. The power sector, including heating production, accounts for about 50% of carbon dioxide emissions in the energy production sector, while the manufacturing sector contributes nearly 30%, and transportation around 10%. In the construction industry, carbon emissions from buildings themselves account for approximately 30% through energy consumption. When considering the entire construction industry chain, nevertheless, carbon emissions in the construction field reach about 50%. Agriculture, on the other hand, produces nitric oxide through grain, food, and fertilizer, with one ton of nitric oxide greenhouse gas being equivalent to the greenhouse gas effect produced by 256 tons of carbon dioxide. Methane emissions from animal breeding, such as pig farming, cattle rearing, and chicken raising, have a significant impact as well, with one ton of methane equivalent to the greenhouse gas effect produced by 80 tons of carbon dioxide. Therefore, reducing greenhouse gas emissions from agriculture in China involves strategies such as reducing the use of chemical fertilizers and promoting the consumption of less emission-intensive protein alternatives, such as artificial meat. Artificial meat is gaining popularity in Western countries. I have had contact with the CEO of Impossible Foods, an American company that produces plant-based meat, in Beijing. During our conversation, the CEO discussed not only business matters but also topics related to carbon dioxide emissions and climate change. We discussed values. We also talked about how substituting meat with plant-based alternatives can reduce greenhouse gas emissions and decrease the need for farmland used to cultivate animal feed. The land saved could be utilized for tree planting, which would contribute to carbon sequestration. China, as a populous country, must accelerate the transition towards vegetable-based meat substitutes. 

In terms of the new energy revolution, China's green electricity substitution primarily includes wind power, photovoltaic power, hydropower, nuclear power, and a small portion of biomass energy. As of the end of the first quarter of this year, clean power generation capacity accounted for over 50% of the total installed capacity. The total installed capacity of power generation is 2.62 billion kilowatts, with new energy accounting for approximately 1.33 billion kilowatts, surpassing the 50% mark. However, new energy only accounts for 33% of electricity generation due to the lower number of wind and solar power generation hours compared to thermal power, nuclear power, and hydropower. While China's nuclear power accounts for less than 3% of total capacity, some countries, like Germany, have started phasing out nuclear power. Nevertheless, China still needs to continue developing and increasing the proportion of nuclear power in its energy mix. With the ongoing improvements in the conversion efficiency of wind and solar power generation and the decreasing costs, the proportion of wind and solar power generation is expected to further increase in the future. Notably, the potential for increasing the conversion efficiency of photovoltaic power generation is larger than that of wind power generation.

Currently, the mass-produced photovoltaic cells in China have a conversion efficiency of about 25%, with some enterprises already announcing technologies reaching 30%. Based on my interactions with these enterprises, I believe that the conversion efficiency of photovoltaic power generation in China will reach approximately 30% within the next five to six years. This means that the cost per kilowatt-hour of photovoltaic power generation will be below 20 cents of yuan in the future. When combined with the current cost per kilowatt-hour of energy storage (around 30 cents of yuan), the cost per kilowatt-hour of photovoltaic plus energy storage will be approximately 50 cents. Such a cost will make it competitive with thermal power generation.

In this scenario, the "photovoltaic + energy storage + smart grid" model for clean energy substitution can eliminate the need for government subsidies in the future. Consequently, large-scale wind and solar power generation projects can achieve an internal rate of return (IRR) of 5% to 6%. As a form of green infrastructure, such investments are worthwhile for the government. As the economy experiences sluggishness and weak consumption and investment demand, there is increasing discussion about expanding domestic demand, even among proponents of new supply economics. The question arises as to where the government should invest to stimulate domestic demand. Personally, I do not advocate investing heavily in high-speed rail and other public utility projects, as these projects typically do not generate profits and may accumulate significant government debt. Instead, it is preferable to invest in more green and low-carbon power generation projects, which will not only avoid losses but also contribute to the achievement of the double-carbon target.

Of course, this field involves various technological innovations, such as material technology, electronic power, semiconductor devices, and intelligent technology. CATL, through successive generations of battery technology innovation, has achieved a world-leading position in power battery and energy storage battery production. Although the original scientific innovations in electrochemistry came from the United States and Japan, China has been at the forefront in industrial application. In discussions with Robin Yuqun Zeng , the CEO of CATL, it was revealed that they were about 20 months ahead of Japanese and Korean enterprises. They continue to develop new technologies, maintaining their technological advantages while navigating the increasingly complex international situation through overseas expansion to further increase overseas market share. The next focus of research and development appears to be solid-state batteries, which offer enhanced safety features. Overall, battery technology needs to strike a balance between energy density, safety, service life, and cost reduction.

Another area of interest is controlled nuclear fusion, which involves significant investment and lengthy research. Both China and the United States are making substantial investments in this field. Once this technology achieves a breakthrough and becomes commercially viable, it will disrupt other new energy technologies. However, this breakthrough is expected to take decades. China and the United States are currently leading the way, with domestic investment organizations beginning to establish a presence in this field. Additionally, carbon capture, utilization, and storage (CCUS) technology, particularly carbon dioxide capture and utilization, is an area worthy of attention for innovation and investment.

Experts estimate that for China to achieve carbon neutrality, at least 80% of electricity production must come from green sources. This entails investments on a scale of hundreds of billions of dollars, with significant implications for sustained economic growth. Moreover, if society as a whole transitions to green electricity, it will reduce China's dependence on foreign energy sources. Presently, China imports a substantial amount of oil, with an oil import dependency of 73% and dependency on inported natural gas of over 40%. By driving electric vehicles and hydrogen-fueled vehicles based on wind power, photovoltaics, and other new energy sources, China can significantly reduce the dependence on imported oil and gas, which holds strategic significance for China's energy security. It is worth noting that vehicles running on electricity generated primarily from thermal power cannot be considered true new energy vehicles. Only by relying on green electricity can they truly be classified as such.

Lastly, there is the concept of ecological civilization transformation. Industrial civilization, which emerged from the use of steam engines powered by burning fossil fuels like coal, oil, and natural gas, resulted in the emission of carbon dioxide. However, with the replacement of fossil energy by green electricity, it will be possible to obtain energy without the need for combustion. All power generation will be achieved through the conversion of natural energy sources. This transition marks the birth of ecological civilization. Former chairman of Sinopec Capital, Huang Wensheng, an alumnus of Nankai University, eloquently articulated this view. Ecological civilization represents a significant leap forward from traditional industrial civilization, and the key signifier lies in the way energy and power are obtained. While Xi Jinping and other leaders have advocated for ecological civilization, it is crucial to understand that true ecological civilization encompasses more than just environmental improvements. Obtaining sustained power for the entire economy and society through the conversion of natural energy sources represents the essence of ecological civilization's significance.

3. Life Sciences and Synthetic Biology

This field is gaining increasing attention from major countries, including the United States, which recently released a special report on the topic. The Chinese government has also emphasized the importance of synthetic biotechnology and issued a dedicated plan for the biotechnology industry. Plus, the US is ascertained that synthetic biotechnology is poised to become a significant area of competition between China and the United States in the future. There are three key aspects that highlight the significance of synthetic biotechnology.

Firstly, it holds significant potential in the energy and chemical materials sector. By replacing traditional chemical products with biotech alternatives, which are greener and have a lower carbon footprint, synthetic biotechnology contributes to sustainable production. For instance, investing in enterprises that utilize synthetic technology to produce fine chemical products like dyes and cosmetic raw materials can greatly reduce pollution. Synthetic biotechnology can also be employed in oil extraction processes, utilizing microorganisms to carry out catalytic reactions and enhance the rate of oil and mineral extraction. Additionally, there are Chinese companies leveraging synthetic biotechnology to develop fully degradable plastics, reducing environmental pollution associated with plastic use.

However, challenges remain in moving more technologies from laboratories to industrialization, ensuring technological stability, and controlling costs after engineering amplification. Entrepreneurs and scientists are constantly exploring and striving to address these challenges, but the prospects for synthetic biotechnology are promising.

Secondly, synthetic biotechnology has significant implications in agriculture, forestry, and food production. For example, synthetic biotechnology can be used to produce artificial meat, including fish. While adapting artificial meat to suit Chinese cooking styles may present some challenges, it has proven successful in products like hamburgers, which have a similar taste to real meat. By transforming agricultural production and reducing emissions, synthetic biotechnology has great potential for promoting green and low-carbon practices in the food industry.

The third area where synthetic biotechnology holds promise is in biomedicine, including disease detection, treatment services, drug development, medical care, and combatting aging. This field presents ongoing market expansion opportunities, and China currently possesses advantages in this area due to the significant number of Chinese students who studied biology in the United States and subsequently returned home to establish successful businesses. However, there is a need to address the country's reliance on imported laboratory instruments and equipment. Maintaining a conducive environment for international cooperation and research and development is crucial for the future development of synthetic biotechnology in China and the overall industrial landscape.

iv. Urbanization and Real Estate are still the driving forces

There is a strong connection between the development of the real estate industry and urbanization. Currently, China's urbanization rate stands at around 66%, meaning that approximately 66% of the total population resides in cities. In the future, I believe China's urbanization rate will surpass 80%. Some individuals argue that China and the United States have entered an era of anti-urbanization, but I disagree with this viewpoint. Urbanization is driven by the income gap and disparities in public services between rural and urban areas. The greater the income gap, the stronger the impetus for urbanization. Currently, China's agricultural labor productivity is approximately one-fourth that of non-agricultural industries, and the income gap between urban and rural areas is around 2.5:1, with urban residents earning roughly 2.5 times more than rural residents.

When considering urban and rural public services, the gap is even wider than the income gap. For instance, the quality of education and medical services in rural areas, such as Professor Zhang Weiying's hometown of Xinzhuang village, is not comparable to that of cities. Given these significant disparities, it is erroneous to suggest that the driving force behind urbanization has waned.

As long as the income of urban residents remains at least twice that of rural residents, the motive for urbanization will persist. In regions like Zhejiang Province and Jiangsu Province, where the income and public service gaps are relatively smaller, the relationship between urban and rural areas has remained stable. In fact, many rural residents in these areas have lifestyles similar to urban dwellers, even though they continue to reside in villages located within densely populated metropolitan areas or urban clusters.

Considering the prevailing disparities between urban and rural areas, I anticipate that the rural population will continue to shift towards non-agricultural industries. The income from agriculture significantly lags behind that of non-agricultural sectors. For example, farmers earn approximately 1,000 yuan per mu of land annually from grain cultivation, whereas they can earn at least 3,000 yuan per month by working in cities like Beijing. Thus, I firmly believe that the driving force behind this shift has not diminished. I expect China's urbanization rate to surpass 80% by 2035, leading to further expansion of urban space and population.

As urbanization progresses, the real estate industry will naturally continue to develop. There are criticisms of the real estate market, with some arguing that it is wrong for China to view real estate as a pillar of the economy. However, whether an industry is considered a pillar industry is determined by its contribution to GDP rather than by the will of the government. If the added value of an industry accounts for more than 5% of GDP, it is considered a pillar industry. By this criterion, real estate is undoubtedly a pillar industry in China, although there are multiple pillar industries.

Nevertheless, the era of robust growth and sustained price increases in the real estate market has passed. The per capita housing area in urban areas has reached approximately 40 square meters, and it is even higher in rural areas. Additionally, the aging population and a decrease in the total population will impact real estate demand. Consequently, it is unlikely that real estate prices will experience the same level of appreciation in the next 20 years. Personal experiences, such as purchasing affordable housing in Beijing in 2003, may not be replicated with such substantial price increases in the future. Therefore, if one intends to invest in real estate, careful consideration is advised. It may not be the optimal choice for maximizing yield.

Despite the challenges and concerns surrounding the real estate industry, I believe it will continue to provide steady and sustainable economic support in the future. Even in mature economies like the United States, real estate remains a crucial driver of the country's economy, and the prosperity level of the real estate market often serves as an indicator of overall economic health.

However, due to the significant price increases in real estate, some cities are facing issues related to the high cost of living. There is a widely held belief that speculation has driven the continuous rise in prices, and strict control measures are needed. The central government has emphasized that "houses are used for living, not for speculation" and has implemented four restrictions on the real estate industry, namely purchase restrictions, sale restrictions, price restrictions, and loan restrictions. The central government also summons local officials in areas where house prices are rising too rapidly in an attempt to control price increases. These administrative control measures have had a substantial impact on the real estate industry and have resulted in the failure of many real estate enterprises. The industry as a whole has entered a state of depression, which has had a significant negative impact on the macroeconomic. Personally, I do not fully agree with this approach. I believe there are many aspects that need to be reviewed, summarized, and improved.

There are diverse opinions on how to regulate the real estate industry. Some propose increasing real estate taxes as a means to control house prices. The United States, for example, has a property tax system, and real estate prices still experience fluctuations. Property tax is a local tax in the U.S. and serves as a crucial source of revenue for local governments to provide public services. Property tax is levied based on the ownership of a house, as it signifies that an individual lives in a particular area and benefits from the public services provided by the local government. About one-third of local government revenue in the U.S. comes from property taxes. Consequently, there can be disparities in public services between different communities. Wealthier areas generally have better services because higher housing prices lead to increased tax revenues, enabling local governments to provide high-quality services. On the other hand, areas where lower-income individuals reside typically have lower housing prices, resulting in relatively lower tax revenues and poorer public service quality. Thus, income disparity is often visible in different communities within the U.S. Even if a poor person were given a house in an affluent area, he might still not be able to afford the property tax. That's the function and impact of property tax. Income tax (on the other hand) is a kind of adjustment tax that can be used for transfer payments. Therefore, property tax should not be considered as a tax for regulating the real estate market.

China faces certain technical challenges in implementing a property tax system. The ownership of the houses we live in does not represent full property rights, as we only have 70 years of property usage rights. Additionally, when developers purchase land, they have already paid a one-time land-use fee. This raises questions about the justification for implementing a property tax in China. The issue has been widely discussed, and there are obstacles that have not been fully addressed. During my time working in the finance department of the National Development and Reform Commission, I studied property tax collection plans. The Ministry of Finance and State Taxation Administration once submitted a plan to the State Council, but it was not adopted in the end. The main reason was the significant problems involved and the potential impact on the interests of residents, which could lead to social unrest.

There are alternative taxation methods that could be more effective in regulating the operation of the real estate market. In particular, I believe a yield tax could be a more targeted approach to addressing the issue of property appreciation driven by speculation. By imposing a higher yield tax on short-term property transactions, especially those driven by speculation, it would make speculators reconsider the cost-effectiveness of investing in real estate compared to other areas such as the stock market. Currently, only a 20% investment income tax is levied on stock speculation. Through a combination of such taxes and well-designed tax rates, it would be possible to regulate trading behavior in the real estate market more effectively. The artificial restrictions that have been imposed in the past, such as the "four limits," have proven to be too restrictive and can have a negative impact on the industry as a whole.

Looking ahead, investment in China's real estate market will continue, encompassing not only new construction but also the renovation of old buildings, including energy-saving renovations. China has a total construction area of approximately 60 billion square meters, with urban areas accounting for slightly over 50%. However, many buildings are not energy-efficient, much less zero-carbon structures. As we mentioned earlier, carbon dioxide emissions from building energy consumption account for about 30%. Therefore, implementing better energy-saving renovations for urban and rural buildings can improve living standards and significantly reduce carbon emissions. Cities of the future will prioritize renovation, energy-saving upgrades, and improving residential quality. Additionally, efforts can be made to promote the concept of "urban mining" in construction, where buildings are constructed using steel structures. This approach allows for quick conversion of scrap steel into new steel when buildings are demolished. The concept of urban mines is of great significance, particularly for resource-poor countries, and can drive continuous investment and consumption in the real estate sector. As the aging population increases, there is a need to accelerate the adaptation of residential buildings to meet the needs of elderly individuals, such as installing elevators in buildings without them.

Another significant issue in this field is the large number of idle houses and homesteads in rural areas. In the past, Chongqing implemented a system that linked land reclamation and land “tickets” to efficiently allocate idle construction land assets in rural areas. However, this approach was not widely encouraged. Exploring effective ways to utilize idle houses and homesteads in rural areas surrounding cities is worth continued exploration and experimentation. It would be beneficial to revitalize the usage rights of these properties through investments from urban residents or those who have a preference for living in rural areas, while maintaining unchanged ownership. Many city dwellers may be interested in living in a courtyard-style home in the countryside or spending weekends on vacations, but the current property rights system presents risks and uncertainties for such investment behavior. Finding solutions to this problem would facilitate the efficient use of rural land resources and generate significant investment and consumption needs, ultimately contributing to the modernization of rural areas.

The land property rights system is a sensitive topic in China. However, empirical studies, as well as legal and economic studies in many countries, indicate that the privatization of land property rights is conducive to improving land quality. When land is publicly owned, there is often a lack of long-term perspective and investment in land quality. On the other hand, private ownership encourages sustainable improvement and investment in the surrounding environment. The decline in the quality of cultivated land and the deterioration of the ecological environment in certain areas in China are closely related to the land property rights system. While many people, including prominent leaders, criticize the uniformity and monotony of urban construction in China, few consider the underlying causes systematically. I sometimes think wildly - it is possible that the land system plays a role in shaping the urban landscape. In countries where land property rights are privatized, it is challenging for the government to demolish privately owned buildings, which promotes diversity and individuality in the urban environment. However, in China, where land property rights are publicly owned, the government has the authority to easily demolish and rebuild buildings in areas targeted for planning and transformation. This leads to a uniformity in the buildings constructed, often using the same design templates and resulting in a lack of diversity in the cityscape.

I had the opportunity to visit Hanoi, Vietnam, in 2006 for an international conference organized by the World Bank and relevant United Nations agencies, with representatives from over 100 countries. During my visit, I noticed that Hanoi's urban landscape exhibited more diversity compared to many Chinese cities. Many private homes in Hanoi were preserved, likely due to the challenges faced by the government in demolishing privately owned buildings. While I cannot confirm the exact protection system for private buildings in Hanoi, it was evident that their appearance in the market was quite favorable. This observation leads me to believe that the banal pattern and appearance of Chinese cities, characterized by uniformity, may be partially attributed to specific land property rights rather than the aesthetic judgment of certain city planners or local officials. I share these insights not to advocate for private ownership of land but rather to highlight the unreasonable phenomena we observe. The root cause can be traced back to the existing system. As long as the system remains unchanged, the associated phenomena are unlikely to change.

The development of the service industry is closely intertwined with urbanization. Traditionally, service industries were concentrated in cities due to the simultaneous production, supply, and consumption of services within a physical space. However, the advent of the network economy has changed this dynamic, allowing for the separation of production and consumption through platforms and logistics. For instance, the rise of food delivery services has enabled consumers to enjoy meals at home, decoupling the traditional model of in-person dining. While this represents a significant shift, the concentration of service industries in cities remains advantageous. Cities provide the necessary population density and consumer base to sustain and support service providers. The larger the city, the more developed the service industry tends to be, as there is a higher concentration of potential customers. However, city governments and leaders in China often express concerns about the management challenges associated with big cities. They tend to focus on urban issues and may seek to control city size through various measures. Similar concerns can be found in other countries as well. Yet, experiences from around the world have shown that attempts to control the size or growth of cities have rarely been successful. In fact, large cities tend to grow larger over time. Currently, China already has six cities with urban populations exceeding 10 million, and this number is likely to increase in the future.

Big cities are attractive and competitive for several reasons. They are more culturally open and inclusive, which makes them appealing to talent. Additionally, they provide better conditions for realizing economies of scale, enabling professional specialization and fostering successful entrepreneurship. Large cities often exhibit higher efficiency and stronger competitiveness. Furthermore, through the radiating influence of big cities within urban agglomerations and metropolitan areas, it becomes easier to establish a pattern of coordinated development with a rational division of labor between large, medium, and small cities, as well as small towns. Harvard University's economics professor Edward Glaeser wrote a book in 2011 called Triumph of the City. Interestingly, there is also a theoretical physicist from the United Kingdom, Professor Geoffrey West, who wrote a book called Scale that discusses the benefits of urban scale. Economists and physicists have conducted parallel analyses on the issue of urban scale, and their views are consistent: the larger the city, the higher the efficiency, the more specialized the division of labor, the more developed the service industry, and the stronger the competitiveness.

The development of the urban service industry plays a critical role in employment in China. We should let the urban service industry develop as much as possible. As economic growth faces the challenge of slowing down, it is important not to neglect the service industry. While the real economy encompasses manufacturing and other sectors facing difficulties, it is the service industry that has a significant impact on employment and income distribution. In particular, the growth of small-scale service industries directly serving urban residents can have positive effects on improving income distribution. For example, in my personal experience, I rarely have breakfast outside my home in Beijing due to the limited availability of decent breakfast options. However, when I return to Chengdu, I often choose to eat out because there are many small restaurants in the area offering diverse and appealing breakfast choices. This demonstrates the positive impact of a well-developed urban service sector, as it encourages increased consumer spending, leading to income redistribution among service providers.

Therefore, when addressing the current economic slowdown, it may be more effective to focus on structural reforms on the supply side rather than solely relying on expanding domestic demand. By establishing a system that facilitates the convenient interaction between supply and demand, supply-side reforms can lead to the automatic creation of demand. This approach emphasizes the importance of reform and innovation in driving sustained economic growth. Implementing such a system would alleviate concerns about the economy's failure and reduce the need for excessive government intervention, due to the Chinese people’s attitude towards wealth and their ability to create it.

China's economy is facing the challenges of an aging population, and while the country may not handle it as smoothly as Japan due to cultural and institutional differences, it is crucial to create an environment that fosters a harmonious relationship between supply and demand. This means focusing on comprehensive structural reforms that address the root of the problem. Although the central government has recognized the importance of supply-side structural reform, there is still work to be done in advancing and completing the reform agenda. The achievements so far are not many.

There is considerable domestic demand in China, but the supply side does not always respond effectively. When income-supported demand cannot be met domestically due to supply constraints, consumers may either save their money or seek opportunities for consumption in other countries. To retain the spending power of affluent individuals, it is important to encourage domestic consumption. For instance, some of the people I know like to play golf, but China restricts golf courses, so they go abroad to play golf. It would be better if we could have these rich people spend the money domestically. The State Council had a plan to develop general aviation because they saw the potential for a large market in the future. The number of people interested in flying airplanes has been increasing, and there are more people who can afford to buy aircraft. Additionally, domestically produced aircraft have become more affordable. From the perspective of production and supply, the two-seater aircraft produced by China Aviation Industry Corporation can be purchased for 2 million Chinese yuan. I have seen two-seater civilian aircraft produced by Shenyang Aircraft Corporation for export, with an export price of $250,000. There should be many people in China who can afford them. In sparsely populated and vast regions like Ningxia, Gansu, Qinghai, Inner Mongolia, and other areas in northwest China, there is great potential to establish aviation clubs where aviation enthusiasts can enjoy flying. This would also stimulate related industries and services. However, China's low-altitude airspace control is strictly managed by the military, making it difficult to fly even if one owns an aircraft. Therefore, despite the existence of such plans, the general aviation industry in China has not yet developed significantly. The United States has over 20,000 general aviation airports, while China's goal, as stated in its general aviation plan, is 500 airports. This indicates the potential for significant development in the industry.

In summary, to address the structural economic slowdown in China, it is not necessary to solely rely on expanding domestic demand. Stimulating government investment through fiscal stimulus is not sustainable, considering the increasing debt burden of local governments and the limited room for further borrowing. Instead, focusing on supply-side structural reforms, such as addressing regulations in the real estate sector and promoting long-term public rental housing, while encouraging innovation and entrepreneurship, can lead to more efficient and sustainable economic growth. These reforms can also foster the development of new industries, technologies, products, and services. Emphasizing market-oriented reforms, rule-of-law governance, property rights protection, inclusivity, openness, and innovation and entrepreneurship will contribute to overcoming the current economic challenges, aligning with the original intent of China's reform and opening-up policy initiated in 1978. We must unswervingly stick to that route.

The above is the presentation in a little over two hours. Many of the viewpoints are based on personal thinking and observation, so there must be errors. They are provided for discussion and criticism. (Enditem)

Former senior econ official calls for urgent action on Chinese economy