Current economic conditions in China can be evaluated according to three time frames. In the long run, the potential growth rate of the Chinese economy is certain to drop. In the medium term, the economy can continue to flourish. China has experienced three major cycles in 40 years of reform and opening-up. When economic crises loom, there are always new ways of thinking that propel further reform and opening-up. In the short term, economic statistics are composed by three components – consumption, investment and net exports.
Consumption has been slowing down in China. Public expenditures have decreased, while household spending has not seen an increase. Household consumption in China is mainly driven by young people’s excessive, debt-driven spending. To make it worse, the growth rate of tax income has surpassed the growth of household income. Total disposable income is flattening in Chinese households.
Companies are reluctant to invest. Foreign companies won’t invest because the business climate is weak. Private companies in China are also hesitating since policies have been giving off mixed signals. State-owned enterprises can’t invest either due to their high leverage ratios.
Exports aren’t performing well. China has been expanding imports while the US has provoked a trade war that has harmed exports.
Going back to the three time frames, a conclusion can be reached about the state of the Chinese economy.
The potential growth rate is indeed dropping. Reform will help boost that rate. One reason the growth rate is going down is the efficiency of investment is declining. If more capital is channeled into private companies, which are more efficient, investment efficiency will be promoted and hence the potential growth rate will rise.
It is highly possible that the real GDP growth rate in China is already below the potential rate. This means unemployment will soon become an issue impacting social stability. This kind of threat takes different forms in different countries. Jobless young people in many Western countries wander around. But in China, most unemployed youngsters stay home and browse the internet, so any online rumors can be perilous. If people are busy at work, it is hard for them to make a fuss about tiny things online, such as the principal of Peking University pronouncing a word wrong.
The positive side is that China is moving to address the economic situation, in several ways.
First, macroeconomic policy has been adjusted. In dealing with the current economic situation, the question is whether to stimulate the economy or whether to conduct institutional reform.
Some believe that China does not need either stimulation or reform since the Chinese economy has entered a new normal era. There are also those who acknowledge the downward pressure, but prefer to deal with it via traditional stimulation methods by launching new projects. Another view is that reform can steer the country out of the problem. Then there are those who hope to pursue reform and stimulation at the same time.
Chinese policymakers have been calling for the “six stabilities.” This is the first time the stability of employment has been put in first place by the current government.
Nominal tax rates have been cut, but enforcement of tax collections has become stronger. Thus, the true taxation burden has turned out to be heavier.
Fiscal and monetary policies should be balanced. The worst thing would be for tax burdens to curb economic growth while monetary policy creates inflation – a combination known as stagnation. In a situation like that, macroeconomic regulations are powerless. The relationship between macroeconomic control and institutional reform needs to be carefully managed.
Without reform, the space for macroeconomic control to work will be smaller. The relationship of institutional reform and opening-up should also be borne in mind. The condition that opening-up forces reform has changed. Reform has to be accelerated.
Second, the government has improved policies for private companies. But those policies need to be put into practice. Private entrepreneurs worry about property protection and human rights guarantees. Equal protection of various forms of property rights must be written in the constitution.
Third, financial market opening is speeding up. The new economic era is characterized by digitalization, intelligence and globalization. China cannot isolate itself in this new era. New measures of financial opening have been adopted and an updated negative list has been released.
Fourth, industrial policy transformation has accelerated. The policies must be more flexible, shifting from vertical to horizontal, from selective to functional, from preferential to competitive, and from national or local interest centered to international rules centered.
Every time there is economic difficulty, new ideas arise to drive reform and opening-up. If China can take the 40th anniversary of reform and opening-up as an opportunity to launch a new round of ideological emancipation, another round of reform and opening-up will occur, spurring new economic growth.
The Chinese economy can maintain a medium-high growth rate, move toward the middle-to-high end, and achieve modernization.
The article was compiled based on a speech by the author