Liu Shijin calls for "breakthrough" in Party theory to allow structural reform for economy

Entrepreneurs are NOT "exploiters" and China must abolish the distinction between state-owned enterprises and private ones, says former Vice President of the State Council Development Research Center.

Liu Shijin is a Former Vice President (Vice Minister) and Research Fellow of the Development Research Center (DRC), a comprehensive policy research and consulting institution directly under the State Council, the central government of the People's Republic of China.

Recently, Liu’s public speeches, including 以新一轮结构性改革短期稳增长中长期促转型 Promoting Short-term Stable Growth through a New Round of Structural Reforms and Facilitating Long-term Transformation at a China Development Research Foundation meeting published in late July, was widely hailed for not only identifying one of the root causes of the discrimination suffered by private businesses but also advocating one key solution: China must stop treating companies differently based on their ownership - the distinction between state-owned and private enterprises should be abolished.

It could be argued that a fundamental reason for feeling “unsafe” as private entrepreneurs in the Communist Party-led “socialist” country is the tension in reconciling Marxism with China’s socialist market economy. That is, entrepreneurs are exploiters according to Karl Marx, and theoretically should be got rid of - if not now, then someday.

But the fact since 1978 is that their role and contribution have been gradually recognized by the CPC after China’s reform and opening up, through the CPC’s “development” of its theories - in Beijing’s words, adapting the 马克思主义基本原理 basic tenets of Marxism to China’s realities, with the emphasis on basic, and in more blunt terms drifting away from the exact words in the Manifesto of the Communist Party and Das Kapital while retaining their “spirit” such as social justice.

Liu, quite boldly, said it’s now high time for another “breakthrough” in the CPC theories. He argued, creatively, that private entrepreneurs must not be seen as exploiters.

As the majority of ongoing Chinese discussions focus on monetary and fiscal policies, Liu also injected a badly-needed perspective that reform-minded commentators might agree: the room for easing credit and increasing public spending is already limited and their effects are questionable at best, but there is still a lot of structural reforms China could - and should - implement.

Below is a translation of Liu’s speech at a recent meeting of the China Development Research Foundation, where he had been a Vice Chairman. All emphasis is mine. - Zichen

(Liu Shijin at a Center for China and Globalization event. Credit: CCG.)

以新一轮结构性改革短期稳增长中长期促转型

Promoting Short-term Stable Growth through a New Round of Structural Reforms and Facilitating Long-term Transformation

I. How to view the current economic situation

Ever since the transition to high-to-moderate economic growth, starting in 2010, the current stage of China’s economy is the most complex and confusing. On one hand, the economy has entered a recovery trajectory, but the growth rate is lower than expected, and there is weak demand. More importantly, the conventional methods for stabilizing growth are no longer effective, and there seems to be a state of confusion about what the new approaches should be. Over the past decade, the main driving forces behind the high-speed growth period have been infrastructure, real estate, and exports. During economic downturns in the past, focusing on these areas has been effective. However, this time, real estate has experienced prolonged negative growth, and sustaining infrastructure investment has become difficult, while exports are also in a downward trend. From the domestic basic background, the economy is still in a transition period from high-speed to moderate growth or from high-speed growth to high-quality development. The previous driving forces have hit the bottom, and some have even experienced "over-adjustment." Long-standing structural contradictions have become evident, and there is a disconnection between old and new growth drivers. Additionally, policy responses have been improved.

On the demand side, significant durable goods consumption, real estate, and infrastructure have all reached historical peak demand and are entering a deceleration phase. Survival-oriented consumption is stabilizing, while development-oriented consumption is driving the upgrading of consumption structures, leading to significant changes in demand patterns. Attention should shift from survival-oriented consumption to development-oriented consumption, which must now deserve enough attention. Development-oriented consumption is directly related to the equalization of basic public services provided by the government. The most prominent issue in this regard is the inadequate provision of affordable housing, healthcare, education, and social security for nearly 300 million migrant workers who have moved to cities. There is also a significant structural demand gap between the four hundred million middle-income population and the nine hundred million low-to-middle-income population.

From the supply side, affected by the deceleration of demand, traditional industries are entering a downward trend, and a group of high-tech and high-value-added new leading industries are needed to drive industrial replacement and upgrading. However, the rapid and deep decline in the real estate sector has triggered a systemic impact. Unstable expectations and a lack of confidence among entrepreneurs are constraining innovation activities and the growth of new leading industries.

Issues related to the balance sheet have recently been widely discussed. Under the dual impact of demand and supply, the balance sheets of the government, enterprises, and individuals are all undergoing a transformation from quantity expansion to efficiency orientation. This transformation is not easy and often occurs passively and is driven by crisis. A balance sheet recession would be just a temporary phenomenon after falling into a predicament or crisis. The key issue is why this phenomenon would occur and how to address it.

Since high-speed growth is not sustainable, especially in sectors where excessive demand has led to rapid growth, a cliff-like decline in growth is likely to occur. The existing high-debt, high-turnover, and high-risk models of industries like real estate are difficult to maintain. Many sectors are still leveraging up, but they are only "borrowing new to repay old," and a large number of assets lack cash flow, leading to a kind of Ponzi structure. At some point, it will become unsustainable and may even lead to a credit collapse. Therefore, fundamentally, it is a problem of the transformation of the asset and liability model after economic growth has transitioned from high-speed to moderate.

II. Under the Context of a Limited Macro Policy Space, Shift Focus to a New Round of Structural Reforms

Over the past three years, macro policies have been stretched to their limits and are showing signs of fatigue due to the pandemic. In the last year or so, the M2 money supply maintained a growth rate of around 12%, while the average GDP growth rate was less than 5%. Interest rates are at historically low levels, and the spread between Chinese Yuan and US Dollar interest rates has widened, resulting in an inversion of rates and very limited room for further ease of monetary policy.

Fiscal tax cuts have been substantial, and government finances at various levels are already tight. The only remaining space is for central government debt issuance, which, if not utilized appropriately, may exacerbate rather than alleviate the difficulties in economic transformation. If the focus continues to be on stabilizing growth through macro policies, the side effects will be amplified, and more importantly, another opportunity for structural reforms will be missed.

It is important to clarify that not only macro policies can have immediate effects, but structural reforms with expansion effects can also produce immediate results. The focus of the new round of structural reforms should include three aspects: demand-side structural reforms centered on equalizing basic public services for rural populations entering the urban area; supply-side structural reforms focusing on stabilizing existing pillar industries such as real estate and stimulating entrepreneurship to thus develop new leading industries; and asset-liability-side reforms centered on expanding effective demand, transforming asset-liability patterns, and resolving risk control.

At the current stage, China has two major growth engines: the horizontal demand space and the vertical upgrading momentum. Horizontally, there is still significant room for expanding demand by promoting the equalization of basic public services, accelerating development-driven consumption, expanding the middle-income group, and substantially increasing demand for existing pillar industries. Improving the basic public service level for low-income groups, especially rural migrant workers, can unleash considerable demand potential.

One assessment says that rural migrant workers' entry into cities can boost consumption growth by 30%, and with adequate basic public services, it could grow another 30%. If the income level of nearly 900 million middle and low-income groups reaches that of the middle-income group, it will generate significant demand for existing industries.

Vertically, stability in expectations and confidence, along with improvements in the business and development environment, will encourage entrepreneurship, innovation, and the development of new leading industries, thus driving economic and social transformation and upgrading.

III. To stabilize expectations and confidence, and promoting the development and growth of the private economy require going back to the fundamentals, keeping pace with the times, and making significant theoretical breakthroughs

Recently, the Communist Party of China (CPC) Central Committee and the State Council issued the 31-point policy on promoting the development and growth of the private economy, which received strong responses from various sectors of society, expecting these policy suggestions to play an important guiding and stimulating role in the development of the private economy.

China’s reform and opening up began with rectification and reorganization. Several major milestones and breakthroughs in thinking and [CPC] theory have played crucial roles. In the late 1970s, the focus shifted from class struggle to economic construction. In the early 1990s, the direction of socialist market economy reform was established. In the early 21st century, China joined the WTO and integrated into the global economic system. These are all based on 解放思想 freeing the mind, 实事求是 seeking truth from facts, and breaking away from outdated [CPC] theories, greatly unleashing the productive forces and driving China's economy to new heights. Currently, there is an urgent need for significant [CPC] theoretical breakthroughs concerning the development of the private economy, which will provide an important [CPC] theoretical basis for China's economy to shift from factor-driven to innovation-driven and achieve modernization by 2035, reaching the level of moderately developed countries.

It is necessary to further clarify the nature and status of private enterprises both theoretically and politically, making three differentiations: distinguishing between private enterprises in the early stage of the industrial revolution from the socialist market economy-based private enterprises that rely on entrepreneurial talent and optimize resource allocation, differentiating entrepreneurs from capitalists, and distinguishing the special contributions and values of entrepreneurs from the exploitation of labor.

During the early stage of the industrial revolution, capital providers and entrepreneurs were often one. Due to the relative scarcity of capital, there were cases of leveraging the scarcity of capital to monopolize laborers' benefits through the exploitation of labor.

As the economy develops and the market economy matures, there is a separation of functions among capital providers, entrepreneurs, and managers. Capital providers are no longer few but numerous and have become socialized investors, forming a large-scale capital market. Entrepreneurs, on the other hand, possess entrepreneurial talents. They have qualities such as curiosity, vision, insight, risk-taking, exploration, perseverance, organizational coordination, and execution. Their main function is to combine and utilize various resources, making themselves the scarcest resource. Entrepreneurs are different from capitalists; they are two different types of people, with distinct functions, and should not be conflated.

Since the reform and opening up, the development of private enterprises in China has been driven by entrepreneurs who identify and seize opportunities for China's economic development, organize various resources, and establish vibrant and innovative enterprises. They usually start from scratch and do not have much capital. Investors are interested in their entrepreneurial talents and provide them with capital for more efficient allocation and utilization. In a competitive factor market, entrepreneurs receive incomes based on their entrepreneurial contributions, which is not the traditional sense of exploitation. Entrepreneurs are also equivalent to general managers; what the latter lacks is precisely entrepreneurial talents.

To promote the Chinese path to modernization, surpass the middle-income trap, and rely more on innovation, entrepreneurial spirit is needed more than ever before. We must understand the enterprises established by private entrepreneurs in this sense. Entrepreneurial spirit, in short, is the spirit of innovation, which is not only needed by private enterprises but also by state-owned and foreign-funded enterprises. Moreover, it is necessary for officials at all levels of government, especially the key leaders. This is a common and significant characteristic for China to become an innovative country.

In political terms, it can be explicitly stated that entrepreneurial talent is a scarce and valuable resource in the socialist market economy. Various types of enterprises relying on entrepreneurial talent are integral components of China's socialist modernization construction. They form the economic and social foundation that enables the CPC to govern for the long term and lead the entire nation in achieving the great rejuvenation of the Chinese nation.

The immediate task is to effectively implement the 31-point policy of the CPC Central Committee to promote the development and growth of private enterprises. At the same time, exploration of new measures can be carried out.

First, enterprises should no longer be classified based on ownership, and the distinction between state-owned and private enterprises should be abolished. Instead, enterprises should be categorized based on characteristics such as scale, industry, and technology, relevant policies should be formulated accordingly. Enterprises are organizational forms centered on entrepreneurs. The capital provided by investors is just one of the factors invested in enterprises. In addition to capital, there are other factors such as labor, land, technology, and data. Defining the nature of enterprises solely based on their capital is overly simplistic.

Furthermore, with the development and maturation of the market economy, the diversification and integration of capital owners have become the norm. In reality, it is increasingly difficult to find purely state-owned or purely privately-owned enterprises. State-owned enterprises often have a large number of individual investors, while private enterprises may also have some state-owned shareholders. Defining enterprise types based on the type of capital owners has become severely divorced from reality.

On the other hand, investors can be classified based on their types, such as central state-owned investors, local state-owned investors, institutional investors, individual investors, overseas investors, etc.

Second, substantial progress should be made in correcting ownership discrimination, changing the unwritten rules that contradict fair competition in aspects such as industry access, project bidding, funding acquisition, and national security. This should be an important part of building a business-friendly environment. The quality of the business environment in different regions should be measured based on this aspect.

Third, the Central Committee's documents on equal treatment and fair competition for enterprises must be effectively implemented and not merely a formality. More importantly, they should be transformed into laws and regulations, making sure there are clear legal guidelines to follow and strict enforcement of penalties for violations, establishing a system of safeguards in areas such as administrative inspections, societal supervision, and legal proceedings.

IV. Important Policy Measures

Implement the construction of affordable housing projects for rural migrants entering cities. This may also involve acquiring surplus housing inventory and converting it into housing for migrant workers.

Implement a three-year plan to achieve equal access to basic public services, with a focus on nearly 300 million rural migrant workers. After the three-year poverty alleviation campaign, this plan can be seen as an upgraded version of poverty alleviation efforts. The recently released "Zhejiang Province's Implementation Plan for Promoting the Orderly Advancement of the Provision of Basic Public Services to Permanent Residents and Facilitating the Urbanization of Agricultural Migrant Population (2023-2027)" integrated the making rural, agriculture-based people urban residents with the "Seven Enjoyments" project for public services, proposing specific goals and tasks. Zhejiang has taken the lead once again, setting a good example, and we expect this to have an important guiding role across the country.

Remove restrictions on the purchase and pricing of real estate, including first-tier cities, with only several exceptions. It is necessary to adapt our mindset with the times, as the likelihood of a sharp increase in housing prices after the removal of COVID restrictions is minimal, and the market should play a more significant role. If there are regions experiencing rapid property price increases, pilot programs for levying real estate taxes can be implemented. This is something that should have been done a decade ago.

In urban-rural integrated areas such as urban agglomerations and metropolitan regions, allow 农村集体建设用地 “land for rural collectives’ construction” to enter the market on an equal footing with state-owned land and at the same price; allow farmers' 宅基地 rural homesteads to be transferred, mortgaged, and used as collateral outside rural collectives. This opening up in this area can be widened as it has been proven by pilot regions that this could bring far more benefits than drawbacks. Currently, urban residents can trade houses built on state-owned land, while farmers either cannot build houses on collective land or, if they do, they cannot freely trade them. In a market economy, the tradability of the same item can severely impact the estimated value of the item, and this is one of the significant reasons for the low property income of farmers.

Concerns have been raised in the past about potential social issues if farmers sell their houses and have nowhere to live. To address this, my advice is that the income generated [from trading rural land] should prioritize improving social security for relevant individuals, including affordable housing. This would create a more reliable and efficient modern security system than China’s existing land-based social security system for rural residents. As a result, it will increase land use efficiency, enhance farmers' income, and improve social security capabilities, achieving multiple benefits at the same time.

Allow and encourage two-way mobility and homeownership for urban and rural residents to improve living conditions and upgrade consumption patterns while increasing residents' property income.

Accelerate the development of new leading industries, including new industries or "future industries" driven by new technologies, such as the development of numerous new application scenarios driven by generative artificial intelligence. This also includes high-tech and value-added industries in mature industries, such as IT manufacturing and services, pharmaceuticals, precision manufacturing, etc. Additionally, the high-tech content and value-added parts of traditional industries, such as research and development and high-end manufacturing, should be promoted. Other areas include new industries driven by the industrialization of digital technology, new industries driven by the green transformation, new industries formed by independent research and development to overcome “chokepoints” and high-tech industries with international competitive advantages and export orientation.

Allow and encourage platform enterprises and major large-scale technology enterprises to make bold investments and innovations and participate in key national projects, implementing regularized supervision with a negative list as the main approach.

V. Explore and Create a Relaxed Environment for Local Grassroots Enterprises

In the new era of reform and opening up, and innovative development, we still need to “cross the river by feeling the stones.” Some may ask if it is still necessary after more than forty years of reform and opening up. The answer is affirmative because different periods require different solutions to various problems. In the early days of reform and opening up, we faced issues such as whether the Household responsibility system and economic special zones could work. At the current stage, the challenge lies in how to construct a high-standard market economy and achieve high-quality and sustainable economic and social development. This endeavor will encounter numerous unknowns and uncertainties, and solutions cannot be solely found within the confines of a Beijing office.

The second meeting of the Central Commission for Comprehensively Deepening Reforms recently proposed combining top-level design with grassroots exploration, allowing and encouraging different regions to explore solutions that fit their local conditions, being good at discovering and summarizing grassroots practices and innovations, and providing timely support for the difficulties encountered during the exploration and innovation period.

This is not only a scientific summary of China's historical experience in reform and opening up but also holds important guiding significance for promoting further structural reforms in the next step. Under the precondition of top-level national planning to set direction and establish boundaries, it is essential to organically combine market-oriented, rule-of-law governance with encouraging the initiative and creativity of local grassroots enterprises. This can be achieved by allowing room for trial and error, permitting more autonomy, and creating a relaxed environment for innovative-minded officials and various talented individuals at all levels.

Under the premise of overall stability in monetary and fiscal policies, structural monetary tools can be used to support the new round of structural reforms. On the fiscal policy side, a certain amount of long-term government bonds can be issued, but they should not be used to fill fiscal deficits. Instead, they should primarily support the structural reforms on the demand side, such as the construction of affordable housing for rural migrants entering cities, so as to expand effective demand, and quickly propel the economy into an expansionary trajectory. (Enditem)

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