David Daokui Li cites over-regulation as cause of decade-long economic contraction, urges shift to high-level development

Prior policy priorities of "strategic resolve" and "economic stability" need immediate revamp following downward trend in 2009-2019, said senior economist at Tsinghua.

From 2009 to 2019, China's economy faced a notable downturn, with dwindling growth rates and low domestic demand, notes Professor David Daokui Li, yet the recent Central Economic Work Conference might mark a critical turning point due to its focus on high-quality development. The effectiveness of this new direction depends on local governments quickly adapting from a narrow emphasis on stability to embracing these more comprehensive objectives. Previous stability-focused policies, including regulation of for-profit tutoring and internet platforms, as well as measures in environmental protection and urban planning, have been significant drivers behind the economic contraction, explained Li.

Prof. David Daokui Li is the Mansfield Freeman Chair Professor of the Department of Finance of the School of Economics and Management of Tsinghua University. He is also the director of the Academic Center for Chinese Economic Practice and Thinking ACCEPT.

The East is Read has recently published a three-part series of Prof. Li's lecture on local government debt in China. Below is the link to the first part:

The following speech was originally delivered at the 79th session of the Macronomic Hotspot Seminar hosted by the China Macroeconomy Forum (CMF). The Chinese transcript is available on the CMF official WeChat account.

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"We must Adhere to high-quality development as the hard truth of the new era" is the most important message from the Central Economic Work Conference

The recently concluded Central Economic Work Conference [Dec. 11-12, 2023], arguably the most significant in over a decade, reflects a pivotal shift in China's fundamental policy direction. [The following translations are sourced from Ginger River Review.]

The central theme of the conference was that "we must adhere to high-quality development as the hard truth of the new era." High-quality development is vital for achieving numerous critical goals. Building on this approach, the conference further emphasized "we must adhere to the principle of seeking progress while maintaining stability, promoting stability through progress, and establishing the new before abolishing the old," "we have coordinated development and security," and "incorporating non-economic policies into the assessment of macroeconomic policy consistency." These logocally coherent strategies underscore the conference's core principle: prioritizing high-quality development in the new era.

From 2009 to 2019, China's economy exhibited a general cooling trend, marked by a slowing growth rate and persistently inadequate domestic demand. During this period, infrastructure development, propelled by government investment, emerged as a crucial tactic for macroeconomic stabilization. This approach was particularly favored due to its cost-effectiveness during economic downturns. Despite these efforts, it is evident that the overall economic growth has been waning and failing to match the potential GDP growth.

An fundamental factor contributing to China's prolonged economic slowdown is the increasing focus on regulation and order, addressing issues of irregularity and chaos. The Report to the 20th National Congress of the Communist Party of China (CPC) highlighted various issues, notably corruption and haphazard development.

Inside the Party, there were many issues with respect to upholding the Party’s leadership, including a lack of clear understanding and effective action as well as a slide toward weak, hollow, and watered-down Party leadership in practice. Some Party members and officials were wavering in their political conviction. Despite repeated warnings, pointless formalities, bureaucratism, hedonism, and extravagance persisted in some localities and departments. Privilege-seeking mindsets and practices posed a serious problem, and some deeply shocking cases of corruption had been uncovered.

China's economy was beset by acute structural and institutional problems. Development was imbalanced, uncoordinated, and unsustainable, and the traditional development model could no longer keep us moving forward. Some deep-seated problems in institutions and barriers built by vested interests were becoming more and more apparent.

Some people lacked confidence in the socialist political system with Chinese characteristics, and, all too often, we saw laws being ignored or not being strictly enforced.

Misguided patterns of thinking such as money worship, hedonism, egocentricity, and historical nihilism were common, and online discourse was rife with disorder. All this had a grave impact on people’s thinking and the public opinion environment.

Our work to ensure the people’s wellbeing was fraught with weak links. Tightening resource and environmental constraints and environmental pollution were pronounced. 

The systems for safeguarding national security were inadequate, and our capacity for responding to various major risks was insufficient. Many shortcomings were affecting the modernization of national defense and the military.

The institutions and mechanisms for implementing the policy of One Country, Two Systems in Hong Kong and Macao were not well-developed, and China faced grave challenges to its national security.

—Report to the 20th National Congress of the Communist Party of China (CPC), Oct. 16, 2022

To address the issues of haphazard development, corrective measures have been implemented, including regulating for-profit tutoring and internet platform companies, emphasizing environmental protection, and moderating urban expansion. These initiatives, aimed at introducing "regulation and order," have led to a consistent impact on the macroeconomic environment, characterized by continual contraction, hence the persistent economic sluggishness and the ongoing decline in the growth rate.

Contrasting with global economic growth trends, China's declining Producer Price Index (PPI) and Consumer Price Index (CPI) suggest an underlying economic weakness. Consumers are reluctant to spend and investors are hesitant to invest, further exacerbating the economic challenges.

In this scenario, the Central Economic Work Conference represents a critical turning point. It placed a strong emphasis on high-quality development "as the hard truth of the new era" and introduced various corresponding measures to support this goal.

Suggestions for implementing the spirit of the Central Economic Work Conference

Minimizing System Regulation Delays and Reorienting Habitual Thinking of Local Governments

There is a noticeable delay in conveying the essence of the Central Economic Work Conference from the central to local levels, especially at the municipal and county levels. Local government officials, particularly those in charge of economic matters, may not promptly understand the core messages and policy shifts discussed in the conference. Their focus often remains on specific tactics like cross-cycle macroeconomic adjustments and proactive fiscal policies, rather than embracing the broader strategic vision. Additionally, local governments tend to adhere to their established approaches, emphasizing "strategic resolve" and "economic stability" at the expense of prioritizing economic development.

Given these challenges, the implementation of the conference's spirit in the next year's economic activities may not be immediately evident, particularly in the first quarter. To address this, a more robust promotion of the conference's spirit is necessary. This involves emphasizing the key themes while ensuring a comprehensive understanding of the conference's resolutions. Reducing systemic regulatory delays and altering the entrenched mindset of local governments will be crucial steps in this process.

Further exploration into implementation methods of the spirit of the Central Economic Work Conference

The essence of the Central Economic Work Conference is highly summarized, necessitating further exploration into details by specialized entities such as central government ministries, economic-focused bodies, and pertinent local government authorities. Below are three key areas:

Addressing Local Debt Resolution

The conference underscored the need to enhance local governments' motivation to manage debt. However, given the complexity of this task, it's impractical for local authorities to tackle it independently. The central government, possessing significant financial resources and benefiting from a relatively low national debt-to-GDP ratio, should not overlook this issue. A coordinated approach between the central and local governments is crucial for effective debt resolution.

Coordinating Rural Revitalization and New-Type Urbanization

Nearly 40% of China's population still lives in rural areas, and a significant portion of those who have migrated to cities have not fully integrated into urban life [due to household registration/hukou barriers]. The concept of new-type urbanization, broad and lacking specific measures, needs to be further developed. This process should be guided by the principles of the Central Economic Work Conference.

Mitigating Risks in the Real Estate Market

The Central Financial Work Conference already proposed "equal treatment for different types of real estate enterprises in meeting their reasonable financing needs." And yet the practical implementation requires further consideration. Given that the financial sector has yet to conduct in-depth research on this matter, it is advisable to convene a meeting with the top 15 to 20 real estate developers in the country. This would allow them to express their concerns directly, enabling financial departments to conduct immediate research and address issues without delay.