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Reform is Fundamental for Economic Quality and Efficiency
By Li Wei
In the first half of the year, China’s economic growth continued a declining performance since the first quarter of 2010. As the structural reform on the supply side goes further and the fiscal and monetary policies are strengthened, people’s expectations have improved to some extent, some indicators have presented certain positive changes, the CPI has remained generally stable, the PPI decrease for manufactured goods has continued to narrow year on year, the profits of enterprises above designated scale have made a turnaround and begun to rally up, real estate sales and investment growth have increased, and destocking is making headway. However, the conditions for maintaining a stable economic growth are not adequate and since the second quarter, the economic growth has slowed down, showing a relatively obvious downward pressure. Great attention should be given to the prominent challenges such as the declining investment efficiency, the swift expansion of debt scale, slump private investment, difficulty in reducing overcapacity in the short term, the skyrocketing land and housing prices in some cities, stagnant structure transformation in some regions, and the tortuous global economic recovery. We should continue to further the structural reform on the supply side so as to create more favorable conditions for a sustainable economic growth with a mid-to-high speed.
I. Major problems in current economic performance
1. Affected by multiple factors, private investment lacks the impetus to grow. Since the beginning of the year, growth rate of private investment has continued to slow down, lagging further behind the growth of total fixed asset investment. This is caused by the following factors: first, with the implementation of the policies of “reducing overcapacity and destocking”, private investment in some industries with overcapacity has dropped sharply; second, the mismatch of loan resources has led to high financing costs; third, due to RMB depreciation expectations, private enterprises have increased overseas investment, while reducing investment at home; fourth, inadequate reform measures have weakened the motivation of private investors.
2. Main real estate indicators have presented a skyrocketing performance before declining. Despite some positive results made in reducing unsold homes in the housing market, regional differences are becoming more evident. In some cities, prices for land deals have risen largely, adding up to follow-up risks in the market. In the short run, “destocking” through “deleveraging process” might speed up investment faster, but it implies huge risks in the long run.
3. The reduction of overcapacity is a hard nut to crack and so far no substantial progress has been made. The issue of overcapacity is most serious with coal, iron and steel and some other heavy chemistry industries. China’s problem of overcapacity seems to be caused by domestic production capacity overriding market demand, but in essence it is a profound reflection and concentrated expression of economic structure imbalance as China’s economic development has entered a state of new normal. There are mainly two reasons leading to overcapacity: one is the cyclical overcapacity caused by sluggish global economic growth, and the other is the absolute overcapacity spawned by the major transition in China’s economic structure.
4. Debt leverages are piling up rapidly, and traditional growth models are impeded for further progress. For a long time, stable growth has relied on stable investment. As China’s economy has entered a state of new normal, economic growth has continued to slow down and returns on investment have gradually declined. This kind of traditional development model depending on production factor inputs and scale expansion is facing the challenge of high leverage ratio and relevant challenges include: first, the total debt has grown relatively fast in recent years; second, debt pressure is unevenly distributed, with significant different leverage ratios in different sectors; third, investment efficiency has weakened; fourth, debt risks are further revealed.
5. Regional economic development is retaking shape in a diversified manner. With the national economic transformation, regional economies also present some new changes, which are featured by “divergence” and “convergence”. “Divergence” means the difference of economic growth between provinces is expanding. First, in some provinces the heavy-chemistry industries heavily relying on energy have witnessed economic decline in recent years; second, in some provinces of the western region, the economy grows with a fast speed; third, some eastern coastal provinces boast a sound momentum in structure transformation. “Convergence” means the difference of economic growth between the eastern, central and western regions is becoming narrowed.
6. Due to the sluggish global economic performance, it is difficult for China to increase export volume. In the first few months of this year, as the US dollar continued to depreciate and oil price bounced back slightly, the pressure on capital outflow from emerging market is becoming eased, and the global economy, including emerging economies, have witnessed a short-term recovery in business performance. However, since May, global economic indicators have plunged down again. In the second half of the year, the world economy would still be vulnerable, the economic growth prospects of Europe, Japan and the United States would remain subdued, and the emerging economies would maintain a stable economic growth in varying degrees. In light of the sluggish global economic performance, the world trade is expected to remain depressed.
Generally speaking, with increased variables and added concerns in world economy, recovery will be a harsh process. China will have daunting tasks relating to economic transformation and structural adjustment and face mounted pressure in securing a stable growth.
II. Internal and external environment during the 13th Five-Year Plan period
In view of the internal and external environment, we have made the following four judgments. First, the trend of globalization will not be reversed, but reframing of investment and trade rules will exert an impact on China. Second, China’s domestic market demand has great potential while the external demand might remain weak for a relatively long time. Third, new growth drivers are growing and accumulating, but it takes time to replace old growth drivers. Fourth, China’s overall national strength has been strengthened remarkably, but problems and challenges in the years ahead are obviously getting mounted as well.
As for the main targets, the National People's Congress on the Outline of the Thirteenth Five-Year Plan for National Economic and Social Development (referred to as “Outline” in the following text) brought up 12 anticipated targets and 13 obligatory targets, involving four aspects such as economic development, innovation-driven economy, people’s welfare, and resources and environment. In the 25 targets, economic growth marks the fundamental one, concerning the material basis for the building of an overall well-off society. The Outline, according to the requirement of doubling GDP by 2020 compared with that of 2010, points out that GDP must keep an average annual growth of over 6.5%. To double GDP within one decade, the growth must reach 7.2%. Since the GDP average annual growth had reached 7.8% during the 12th Five-Year Plan period, the set target will be fulfilled as long as 6.5% of growth is achieved during the 13th Five-Year Plan period.
Reviewing the fulfillment of the past Five-Year Plans since the implementation of the 8th Five-Year Plan (1991-1995), the 13th Five-Year Plan has made the lowest anticipated growth target. This target is set as such not simply because the doubling of GDP can be realized if economy follows a growth of 6.5%; more importantly, it is because after economic growth entered a state of new normal, the basis, environment and main problems relating to development have all changed greatly, and factors supporting the supply and demand sides of growth are also different from previous periods. Fundamentally, it is an inevitable rule for growth to go down after accomplishing the pursuant development goals during the initial and middle periods of industrialization.
China has the potential and conditions to achieve the growth of 6.5% and above during the 13th Five-Year Plan period, but it is more difficult than ever to realize such a target. Therefore, we need to make extraordinary efforts.
III. Major tasks during the 13thFive-Year Plan period
1. We need to carry out poverty alleviation projects in a steady manner. Facing the formidable tasks and complex situations of poverty alleviation in the new era, the Outline takes lifting poor rural residents out of poverty as an obligatory target. The completion of this task does not mean to push forward the projects at an accelerated speed, or to give orders level by level or to cut the number of “poor people” for a mere period. Instead, after the people shake off poverty, they should be able to maintain a sustainable development of economy. The key is to enhance poor areas’capability to resist risks and pursue self-development, so that the poor can literally create better lives by taking part in the projects against poverty. Only by strengthening the innate impetus of poverty-stricken areas for development can we achieve poverty alleviation in a real and durable manner.
2. We need to foster a concept of shared development. Shared development does not only mean to bring development benefits to all, but more importantly to make benefits be shared more fairly. To realize shared development, we must make more efforts to narrow the gap in development and income. To promote shared development during the 13th Five-Year Plan period, it is necessary to advance coordinated urban and rural development, implement the overall national strategy for regional development, but it is more critical to create conditions for all to participate in development.
3. We need to pursue green development. Currently, China’s energy consumption and pollutant emissions have obviously been cut down, but the challenge of energy consumption and environmental pollution still remains severe. First, the total amount of energy consumption and pollutant emissions are still massive and keep growing. Second, soil pollution has gradually become a public concern. Third, water resource shortage and water pollution are coexisting. Therefore, the fundamental approach to advancing green development is to establish and improve related systems. The obligatory system, the incentive system and the system for public participation must be set up and improved.
4. We need to construct a new system of open economy. China is now the largest goods trader, the second largest service trader and the third largest overseas investor and China ranks top in terms of the utilization of foreign capital. The reason why China needs to implement a reform and opening-up policy is that in the new era of development, both domestic and international environments have greatly changed, making it more necessary and more mature to further implement an opening-up policy. First, the transformation and upgrading for manufacturing industry is very urgent; second, the development of service sector remains at a low level; third, we have inadequate capabilities to protect overseas investment. Therefore, to construct an open economy-based new system, we need to fulfill the following tasks. First, we need to implement across the board the pre-establishment national treatment system with the negative list to attract and introduce high-end factors; second, we need to accelerate reform of the system for managing overseas investment and give strong support to China’s enterprises in making resource allocation in global market; third, we need to establish a financial system consistent with the overall opening-up progress.
IV. Ways for further economic reform across the board
Reform is the fundamental way to improve economic growth quality and benefits. Viewing from the long-term and fundamental perspectives, we need to deepen reform to resolve the current conflict between supply and demand, and to fulfill the development goal in the next five years. Last year, the central government put forward the goal of promoting the structural reform on the supply side, focusing on the fulfillment of five major tasks including “reducing overcapacity, destocking, deleveraging, lowering costs and strengthening weak links”, the purpose of which is to get the 13th Five-Year Plan off to a good start and to address prominent challenges in economic operation such as overcapacity in some sectors, super-high housing inventories in some areas, super-fast piling up of debts of non-financial enterprises, high operation costs for companies, and inadequate capabilities to make innovation and provide effective public services.
China’s prominent problems in economic operation are concentrated on the supply side for the current period. To promote the structural reform on the supply side, we need to start with improving quality, adjust the structure through reform, rectify distorted factor allocation, expand effective supply, make supply more adaptable and flexible in response to demand changes, and improve quality and benefits of economic operation. The key to supply-side structural reform is to leverage the decisive role of market in resource allocation. By further conducting market reform and improving the market mechanism, we will change the inefficient factor allocation mode of excessive dependence on administrative means; and by adjusting various improper policies and institutional arrangements, we will stimulate market entities’ vitality, accelerate market clearing, resolve structural conflicts and further improve the market economic system.
The supply-side structural reform is inseparable from proactive support through demand management. We emphasize the promotion of the structural reform from the supply side, but it does not mean the denying of demand management, or the tightening of market demand. Rather, we need to moderately increase the overall demand, continue to implement the proactive fiscal policy and prudent monetary policy, strengthen supply-side structural reform, and make Endeavour to improve supply-demand balance from a low level to a higher level.
Reform measures should not only address current problems, but also future ones. Apart from the main problems in current economic operation, reform measures should also resolve the deep-seated institutional problems and vitalize the economy, so as to maintain a sustainable mid-to-high growth speed. Centering around the three strategic tasks of breaking the bottleneck restrictions in economic and social development, practically resolving major problems concerning people’s immediate benefits, and promoting governments’ self-reform, the local governments and relevant departments have introduced a host of significant and strong reform plans. Reform has been further carried out across the board, and some positive progress has been made in certain sectors and some areas.
As for the future reform, we need to do well in the following aspects. First, we need to improve the quality of reform plans, make proper arrangements for reform design, and enlarge the coverage of reform plans. Second, we need to give prominence to major issues and solve problems in order of priority. Third, we need to stimulate the enthusiasm of local governments. Fourth, we need to properly deal with the relations between stakeholders and ensure that the results of reform are tangible and the people could gain a greater sense of benefits. Fifth, we need to offer actual guarantee for reform through scientific assessment.
Note: Li Wei, research fellow and Minister of the Development Research Center of the State Council This article was carried in NO. 7, New Economy Weekly, 2016
