Part I of NSD Q&A: challenges confronting the 5% growth ambition
Justin Yifu Lin, Xu Gao, Luo Zhiheng & Lu Feng gather at Peking University, offering assessments of China's economic landscape and visions for future development.
On March 13, 2024, the National School of Development (NSD), Peking University, in collaboration with Baidu Economic & Financial News, held the 68th session of the China Economic Observation event and launched the 30th-anniversary celebration of the NSD.
The NSD also hosted Janet Yellen, the U.S. Secretary of the Treasury last Sunday.
Previously, The East is Read and its sister newsletter, Pekingnology, have highlighted speeches by China's leading economists from the event. In today's newsletter, we will present their Q&A session covering a range of topics, including China’s GDP target for 2024, the real estate sector, geopolitical challenges, fiscal capabilities, industrial capacity expansion, and the capital market. The panelists are:
Justin Yifu LIN, Dean of the Institute of New Structural Economics, Dean of the Institute of South-South Cooperation and Development, and Professor and Honorary Dean of the NSD, Peking University.
Xu Gao, Chief Economist and Assistant President of Bank of China International Co. Ltd., leading the research department and sales and trading department of the company, and an adjunct professor of the NSD at Peking University.
Luo Zhiheng, Chief Economist and President of the Research Institute at Yuekai Securities.
Lu Feng, Emeritus Professor of Economics and Director of the China Macroeconomic Research Center at the NSD and former Deputy Dean of the NSD, Peking University.
Please note that Justin Yifu Lin participated in a Q&A session immediately following his speech, while Xu Gao, Luo Zhiheng, and Lu Feng engaged in a collective Q&A at the event’s conclusion, moderated by Wang Xianqing, Director of the Communications Center at the NSD.
The original video recording of the speech is available on the NSD's official WeChat blog, with the Chinese transcript published in another blog post. Due to limited space, this is only the first half of the panel, the latter half will be released shortly.
Q1:
Prof. Lin, your new book touches upon new productive forces and strategic support for them, emphasizing the utilization of comparative advantages to achieve high-quality development. How can China explore and exploit comparative advantages against the current macroeconomic backdrop? Also, could you elaborate on the connotations of "new productive forces"?
Justin Yifu Lin:
This is a very good question. Attending the panel discussion of the Jiangsu province delegation during the "two sessions", President Xi explained that the development of new productive forces consists of two parts: innovation of new technologies and transformation of traditional industries. Both aspects need to be promoted in accordance with the comparative advantages of various regions and tailored to local conditions. This is highly consistent with the concept of New Structural Economics (NSE), which emphasizes the utilization of comparative advantages stemming from regional factor endowment and industrial conditions.
I believe China has significant comparative advantages in emerging industries such as artificial intelligence and big data. With its vast human capital, expansive market size, and complete industrial supporting facilities, China has a competitive edge in emerging industries with short R&D life cycles and relatively low capital requirements. This advantage has already been evidenced, for example, by the dominance of Chinese-developed applications among the top downloads in the United States, with four out of the top five most downloaded apps originating from China. This fully demonstrates China's competitiveness in the new economic field of software.
At the same time, China is also leading in hardware such as electric vehicles, lithium batteries, and solar panels. For example, Tesla has been developing electric vehicles in the United States for over a decade, but its production volume never exceeded 30,000 vehicles. However, it achieved an astonishing production milestone of 480,000 vehicles within just one year since it chose to invest in China. This not only averted the company's looming bankruptcy but also elevated it as the world's highest-valued automotive company, with Musk becoming the world's richest person. These achievements fully demonstrate China's comparative advantages in hardware-dependent new economic fields.
As for traditional industries, there is also great room for improvement. China can improve productivity levels and unleash new productive forces for national development by introducing, learning, and integrating advanced technologies and leveraging its advanced digital infrastructure for industrial digitization.
Q2:
Currently, what is the biggest challenge confronting the Chinese economy? What will be the biggest source of motivation for China in facing these challenges, either internal or external?
Justin Yifu Lin:
Currently, the biggest challenge confronting the Chinese economy is a lack of understanding of its current conditions. Correct identification of the issues at hand is a prerequisite to effective solutions. Misinterpreting the economic challenges could lead to policies that are not only ineffective but may also aggravate existing problems. For instance, the inefficiency issue of state-owned enterprises (SOEs) cannot be resolved simply through privatization, as evidenced by the history of the Soviet Union and Eastern Europe.
In the context of a global economic slowdown, China, as the world's No.1 exporter and trading nation, faces diminished external demand. This reduction, no doubt, dampens the investment willingness and employment generation capabilities of the export sector, predominantly comprised of private enterprises, thereby placing downward pressure on economic growth. Nevertheless, there is still considerable space for counter-cyclical adjustments within the country, particularly through investments in new infrastructure [first raised in the 2018 Central Economic Work Conference, referring to digital, 5G, and green infrastructure, etc.]. Effective government fiscal strategies and proactive measures can pave the way for stable economic growth.
Understanding the primary reason for the economic slowdown helps to shift away from the simplistic perspective of "advance of the state, retreat of the private sector (国进民退)." The focus instead will be on the emerging opportunities in the new economy and actively seek out these opportunities. In recent years, the new economy has shown strong momentum, especially in areas such as electric vehicles, lithium batteries, and solar panels, where the private sector plays a leading role, gaining robust momentum. This indicates substantial opportunities for the private economy in industrial innovation and upgrading.
Moreover, traditional industries present significant opportunities. Digital transformation can greatly enhance the efficiency of these industries. Additionally, among numerous products imported annually in the traditional economy, there are a large number of high-quality, technologically advanced products. Actively importing and assimilating these high technologies, followed by self-innovation, will greatly enhance productivity in China. This strategy not only satisfies domestic market needs but also facilitates entry into international markets. Therefore, opportunities are everywhere, awaiting discovery and exploitation.
Overall, the Chinese economy is faced with challenges from two aspects: firstly, challenges in the external environment, and secondly, the accuracy of its understanding of the current situation. Once it has a comprehensive and accurate grasp of the situation, the Chinese economy will be able to better utilize its favorable conditions to address the downward pressure brought about by the external environment.
I firmly believe that China has sufficient capability and space to navigate these challenges while also possessing tremendous growth potential. Furthermore, as a developing country in transition, China still has plenty of room for reforms. Through deepening reforms, China can further unleash the potentials previously constrained by insufficient reform efforts, thus maintaining a stable growth momentum and a reasonable growth rate.
Q3:
Many large real estate companies in China have recently encountered difficulties. Does this mean that government assistance to real estate companies is limited and that some companies' bankruptcy liquidation may even be tolerated? How do you view the issues and prospects of China's real estate sector?
Justin Yifu Lin:
This issue can be viewed from two perspectives.
Firstly, regarding the government's policy stance on the real estate industry, the policy of "houses are for living in, not for speculation" is based on the commitment to long-term stable development. It is informed by the lessons learned from many developed countries, where real estate bubbles have led to financial and economic crises. China is determined to avoid the same mistakes and has therefore prioritized the residential over the speculative function of real estate to safeguard economic stability and enhance the welfare of residents.
Secondly, despite the emphasis on "houses are for living in, not for speculation," the real estate sector remains a pillar industry for China. Ongoing urbanization will sustain the rising demand for real estate; increasing income levels will fuel the demand for high-quality housing. Therefore, the real estate industry still maintains a crucial role in the national economy, albeit with a shift toward eliminating speculative practices and focusing more on residential needs.
Of course, in this process, it's natural for some poorly managed real estate companies to face crises. This is similar to other industries, where those burdened by excessive leverage might encounter financial distress during economic downturns or periods of slower industry growth. However, these instances should be viewed as company-specific cases rather than having engrossed the entire industry.
Q4 (Wang Xianqing, host):
The 5% GDP growth target announced at the 2024 "two sessions" has attracted much attention. What are the favorable conditions for achieving this target? What are the unfavorable factors?
Xu Gao:
Achieving the 5% GDP growth target is indeed challenging, particularly against an elevated economic base. However, in an economy with excess supply like China, the potential to effectively stimulate demand through policy measures provides China with a considerable degree of flexibility, though further increase in supply is unlikely.
The economic downward pressure China has faced in recent years is partly the result of excessive suppression of domestic demand, especially in the real estate sector. Therefore, as long as policy misdirections are corrected, it won't be too hard to achieve the 5.0% goal. But the challenge lies in correcting entrenched misperceptions. Many believe that no further expansion should be allowed in the real estate sector. If these misperceptions should be corrected, it would be much easier to solve the current problems.
Luo Zhiheng:
The 5.0% GDP growth target for 2024 differs from last year's objectives, as the 2023 growth rate was built on a foundation of a modest 3%. This year's target, however, is set upon an average growth rate of 4.1% over the past two years and a 5.2% growth achieved in 2023. Consequently, achieving the 2024 growth target is more challenging.
The most favorable condition for the Chinese economy in 2024 could come from increased infrastructure investment and equipment upgrades. Fiscal resources have notably increased for 2024, with a deficit of 4.06 trillion yuan [561 billion U.S. dollars], up by 180 billion [25 billion U.S. dollars] from the 2023 budget; local-government special bonds amount to 3.9 trillion yuan [539 billion U.S. dollars], an increase of 100 billion [14 billion U.S. dollars] from 2023; an additional 1 trillion yuan [138 billion U.S. dollars] from ultra-long-term special treasury bonds has also been announced.
(With the inclusion of 1 trillion yuan in special treasury bonds issued in the fourth quarter of 2023 yet to be spent,) the total funds available nearly reach 10 trillion yuan, significantly outstripping the 7 trillion yuan [968 billion U.S. dollars] from 2023. This is only the financing scale for 2024's expenditure, with annual government revenues further bolstering the actual spending power.
More importantly, local governments that were anxious over the package of local government debt management measures last year, now see a clearer path forward featuring coordination of fiscal and financial policies to defuse debt risks. This approach is characterized by short-term interest rate reductions and loan extensions, which enhances local government expectations.
Despite certain provinces facing restrictions on infrastructure development—where government projects are tightly controlled and new hidden debts are strictly prohibited—the limitations primarily target potential hidden debts and inefficient projects. The state continues to support sectors it is committed to, focusing on areas that promise high-quality development.
Therefore, there is reason to believe infrastructure investment will serve as a crucial pillar for the Chinese economy in 2024. Similarly, the potential for equipment upgrading is also significant. Of course, the effectiveness of these measures depends on policy implementation, including coordination between fiscal and monetary support. Through these measures, the economy is hoped to maintain healthy growth.
In my view, the Chinese economy is currently facing two major challenges: real estate and exports, both of which have significantly impeded economic momentum in recent years.
Stabilizing the real estate market is crucial for this year's economic outlook, which involves ensuring supply, stimulating demand, and stabilizing housing prices. In the mid-to-long term, China's engines of prosperity must shift from real estate to technology and innovation. Nevertheless, in the short term, real estate remains necessary for stabilizing the economy. Economic transition takes time, and traditionally industries should not be abruptly discarded in favor of new productive forces.
Exports are influenced more by external factors over which China has limited control. Export performance can sometimes fall below expectations. Despite encouraging year-on-year and biennial average data that exceed expectations in the January-February period, the global economic slowdown, the uncertainty of the elections around the world, and escalating geopolitical risks could present formidable challenges to China's export markets.
In a word, I see infrastructure investment and equipment upgrading as key pillars of the economy in 2024, while real estate and exports are challenges that must not be neglected.
Lu Feng:
Given the average growth rate of 4.1% over the past two years, aiming for a 5% target this year indeed presents challenges. Nonetheless, judging from China's estimated potential growth, this target may yet fall below the economy's full potential, indicating more room for further expansion.
Internationally, the economic climate appears relatively stable; the IMF even adjusted its global growth forecast slightly upwards early in the year. However, the economic landscape faces hurdles such as overcapacity in certain industries and a complex economic and trade environment, particularly with the added uncertainty of the US presidential election, all of which could impede growth.
I previously proposed that China's economic growth strategy is characterized by "macroeconomic regulation for stability, reforms for growth acceleration." That assessment probably remains pertinent. In terms of favorable conditions for this year, I believe that effective policy modifications are crucial. Specifically, in the real estate sector, more resolute policy modifications could not only bolster investment but also significantly stimulate consumption along the value chains. However, the swift adjustment of policies is invariably limited by various factors.
Conditions that favor growth in 2024 include moderately relaxed regulatory policies, with policy modifications anticipated to escalate progressively. This underscores the interplay between economic performance and the impact of policy interventions observed in recent years. Moreover, reform continues to act as a pivotal growth catalyst. The recent intensification of reform discussions in media and academic circles, particularly if the upcoming Third Plenum can deliver substantive systemic policy breakthroughs, bodes well for significant economic advancement. Nonetheless, it's crucial to acknowledge the various limiting factors and maintain a balanced outlook, avoiding undue optimism.
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