Part II of Liu Shijin: charting a new wave of structural reform
Part II of Liu Shijin: charting a new wave of structural reform
Emphasizing rural land reforms and differentiating entrepreneurs from capitalists, former Vice President of the State Council Development Research Centre envisions new potential for China’s growth.
Liu Shijin is a Former Vice President (Vice Minister) of the Development Research Centre (DRC), a comprehensive policy research and consulting institution directly under the State Council, the central government of the People's Republic of China.
Liu delivered a speech at the Tsinghua University “预见中国 Vision China” High-Level Forum and the Tsinghua PBC School of Finance (PBCSF) China Economy Lecture Series on April 2. The transcript was released on June 13 via an official WeChat account of Tsinghua PBCSF.
The first half of the speech was published yesterday. Here is the second half.
Liu believes China has untapped potential by narrowing the consumption gap between different income groups and leveraging technological advancements to enhance industrial value chains. Combined with intensive competition and the vastness of the Chinese market, these factors could sustain medium-speed economic growth for the next 5-10 years.
Liu's policy recommendations focus on two main areas. Firstly, he emphasizes reinstating rural reforms, including hukou (household registration) reforms, equality in access to basic public services, and the marketization of rural land, as proposed by the Third Plenary Session of the 18th CPC Central Committee in 2013. This reform could be particularly relevant with the Third Plenary Session of the 20th CPC Central Committee approaching in July.
Secondly, Liu advocates for theoretical breakthroughs in recognizing entrepreneurship and reforming ownership classification. This involves differentiating between the roles of entrepreneurs and capitalists—entrepreneurs are not exploiters—and classifying enterprises based on their scale, technology, employment, and other relevant characteristics, rather than categorizing them as state-owned versus private. This proposal was also featured in a previous Pekingnology post, The East is Read's sister newsletter.
Notably, the Seventh meeting of the Standing Committee of the 14th National Committee of the Chinese People's Political Consultative Conference (CPPCC), held between June 4 and June 6, also saw similar proposals. The recommendation to "strengthen theoretical innovation based on practical experience, scientifically address major theoretical and practical issues of private economic development in the new era, and clarify the role of the private economy in the socialist market economy" could signal reform directions in the upcoming Third Plenum.
In summary, Liu encapsulates his recommendations with "two critical minorities"—entrepreneurs and key local leaders—and "one critical majority," rural migrant workers. These groups are pivotal to China's economic development and transformation. Structural reforms targeting these "2+1" areas will address economic challenges and unlock new growth opportunities.
—Yuxuan Jia
II. Leveraging Catch Up Effect and New Technological Revolution to Sustain China's Medium-Speed Economic Growth for 5-10 Years
Facing so many challenges and difficulties, can confidence still be maintained? Where does this confidence come from?
I believe China still possesses growth potential to sustain medium-speed economic growth for 5-10 years. This potential comes from two main areas: the catch up effect and the potential in digital and green technologies driven by the new technological revolution.
The term "catch up effect" is often discussed. Simply put, it refers to activities that developed economies have already undertaken, which China has yet to do but has the conditions and possibilities to accomplish. Currently, China's per capita GDP is $13,000. By 2035, this is expected to reach $35,000 to $40,000, indicating at least $20,000 of growth potential. This growth is primarily driven by the upgrading of the consumption structure leading to the development of the service sector, as well as the consolidation and upgrading of traditional industries like manufacturing and agriculture. Many people believe that the Chinese economy is uncertain, but the catch up effect is actually the most reliable aspect of its growth potential.
The other potential comes from the digital and green transformation driven by the new technological revolution. Unlike previous technological revolutions, this time the gap between China and the pioneers is not as large; in some areas, China is even on par or ahead. Despite the gap in per capita income compared to mature Western economies, there is a new momentum driven by digital and green technologies. Combined with a large and unmet market demand (a population of 1.4 billion), this momentum can still support 5-10 years of medium-speed economic growth. Therefore, the traditional catch-up effect, combined with green and digital potential, are essentially on the same integrated track.
For instance, China became the world's largest automobile exporter last year, with a significant portion being new energy vehicles (NEVs). China's NEV production and sales have ranked first in the world for nine consecutive years. Recently, several companies, including Mercedes-Benz, announced they would no longer pursue electric vehicles. As the Chief Chinese Advisor of the China Council for International Cooperation on Environment and Development, I have asked many foreign experts if their green policies had changed and why they were not pursuing electric vehicles anymore. They quickly clarified that their policies hadn't changed, but they simply couldn't compete with China in electric vehicles.
Some argue that with so many Chinese companies in the NEV sector, only three to five might survive in the end. In my opinion, China's greatest advantage is its competitive environment—a large market with a latecomer advantage and strong industrial support capabilities, leading to intense competition. The NEV industry will indeed see only three to five companies emerge as winners, but they will stand out through competition. Therefore, China's current landscape is unique and difficult for other countries to emulate.
Currently, NEVs, lithium-ion batteries, and photovoltaics are dubbed the "new trio" of China's foreign trade, with combined exports exceeding 1 trillion yuan. Progress in the new energy sector has led to a significant transformation: previously, environmental protection and carbon reduction were seen as growth inhibitors, but now the opposite is true. By focusing on innovation-driven green transformation and replacing traditional technologies and products with new technologies and products, the previously conflicting relationship between environmental protection, carbon reduction, and growth has become one of mutual promotion and win-win outcomes.
III. Two New Growth Potentials for China's Economy at the Current Stage
The first growth potential is what I call "horizontal demand space." This involves narrowing the gap in terminal demand structure (including consumption and non-productive investment) between the low-to-middle-income groups and the middle-to-high-income groups, gradually bringing the consumption level of the low-to-middle-income groups closer to that of the middle-to-high-income groups. While serving in the National Committee of the Chinese People's Political Consultative Conference (CPPCC), I proposed a motion to double the size of the middle-income group by 2035, expanding it from the current 400 million to 800-900 million people. Some say that 500 million Chinese people still don't have access to a flush toilet, and 1 billion have never flown on an airplane. By addressing these unmet needs, enormous growth potential can be unlocked within the existing consumption and production structures.
Recently, there has been much discussion about common prosperity, with various interpretations in society and some explanations from the central government. While this is a political, social, and moral issue, the more immediate concern is whether sustained and stable economic growth can be ensured. Countries and regions such as Japan, South Korea, and Taiwan have successfully crossed the middle-income trap and entered the high-income stage, with a significant commonality being a relatively small income disparity. These economies have a Gini coefficient below 0.4, whereas countries like Brazil have a coefficient above 0.5, and China's has been around 0.45 in recent years. From an economic perspective, narrowing the income gap is essential for sustained economic growth.
The second growth potential is "vertical upgrading momentum." This involves enhancing the value chain of existing industries and developing new or future industries driven by new technologies. The core goal is to increase the technological content and added value of industries, thereby expanding the upward economic space. For example, the concept of "new productive forces" broadly refers to this, with digital technology and green transformation providing comprehensive empowerment for vertical upgrading.
Why are these new growth potentials often visible but hard to tap into? Many non-governmental voices frequently suggest that macroeconomic policies should be more relaxed, questioning whether quantitative easing or more aggressive fiscal policies, such as the issuance of ultra-long-term special treasury bonds, could be implemented. In my previous role as a member of the Monetary Policy Committee of the People’s Bank of China, I continually pondered the impact of macroeconomic policies. It is crucial to distinguish between the macroeconomic policies of China at the current stage and those of developed economies.
Among mature developed economies like Japan, Europe, and the United States, the U.S. benefits from cutting-edge technological innovation and consumer demand driven by immigration, thus enjoying the best economic performance and sustaining a growth rate of 2%-3%. Other developed economies generally experience low growth or rely on consuming existing resources to sustain the status quo, with very little new potential. In these cases, macroeconomic policies can often play a decisive role, such as interest rate levels determining whether growth is 0.5% or 1%.
China still has about 5% growth potential. While macroeconomic policies are necessary, their primary role is to stabilize and balance the economy. If the potential growth rate is 5%, macroeconomic policy might contribute approximately 1 percentage point, while the remaining 4 percentage points depend on technological innovation and the institutional and policy environment. Macroeconomic policy is important, but it is essential to understand its capabilities and limitations. Achieving a 5% growth rate solely through macroeconomic policy is not feasible. Therefore, while maintaining relatively relaxed and proactive monetary and fiscal policies is necessary, it is more crucial to tap into growth potential through structural reforms.
Policy Recommendations for the New Round of Structural Reforms
I. Demand-Side Reforms: Promoting "Three Equalities" in Urban-Rural Integration
China's future growth drivers include the potential for a "second wave of urbanization." While urban development in China's core areas is impressive and often more advanced than in many developed countries, a significant gap persists between urban areas, suburbs, and rural regions. Typically, 30%-40% of residents live in core urban areas, while 50%-60% reside in suburbs or the outskirts of core cities, known as metropolitan circles. The next focus of China's urbanization should be these metropolitan circles.
Many small and medium-sized towns in China still require development. This includes relocating some population from urban core areas and accommodating a large influx of migrants, including rural migrant workers. A survey in Beijing found that 25% of the population over 60 years old desires to buy houses in suburban rural areas due to lower prices and better environments. However, current policies around rural land make this challenging. If these policies are relaxed, it could lead to the development of numerous small towns around Beijing, indicating potential for real estate and infrastructure growth.
Thus, I propose to promote "three equalities" in urban-rural integration:
Equality of Status: Intensify hukou (household registration) system reforms.
Equality in Access to Basic Public Services: Following the success of the three-year battle against poverty, a similar three-year effort should be dedicated to equalizing basic public services for 300 million farmer-turned-workers moving to cities. Zhejiang province serves as a good example, having recently announced policies to equalize basic public services for new and existing urban residents by 2027.
Equality in Property Rights for Land and Real Estate: In cities, housing construction, despite some restrictions, allows for free buying and selling. In contrast, building houses on rural land requires approval from the rural collective, and even approved homestead land can only circulate within the collective, which doesn't meet real demand. The disparity in market valuation and actual price between movable, tradable, mortgageable, and guaranteeable properties and those that are not is elementary financial knowledge. The low property income for farmers is primarily due to restricted land rights.
The direction for rural land reform, as proposed by the Third Plenary Session of the 18th CPC Central Committee in 2013, is to equalize the pricing, rights, and market entry of collective and state-owned land and to gradually allow the transfer of homestead land. By addressing issues such as farmers' social security and government-subsidized housing, land as a scarce resource can be liberated. The 14th Five-Year Plan (2021-2025) emphasizes the bidirectional flow of urban and rural production factors, which should include the flow of land rights and residential rights, allowing urban residents to buy houses in rural areas. Although controversial, it is time for a breakthrough on these issues.
II. Supply-Side Reforms: Recognizing, Protecting, and Promoting Entrepreneurship
Recently, there has been considerable discussion about the issues facing the private economy, with many advocating for policy changes. More importantly, there needs to be a breakthrough in major theories and policies.
As I have previously called for, it is crucial to distinguish between the functions of entrepreneurial talent and capital providers—in other words, to differentiate between entrepreneurs and capitalists. Historically, it was assumed that wealthy individuals, or capitalists, could start businesses and hire workers, which was true in the early stages of the Industrial Revolution. However, true entrepreneurial spirit encompasses qualities such as vision, curiosity, insight, risk-taking, exploration, perseverance, organizational coordination, and execution. These traits are distinct from the function of providing capital. While capital is important, it is only one of the factors of production, alongside labor, land, technology, and now data. But who combines these production factors? It is the entrepreneurs. Entrepreneurial talent is a resource that combines other resources and is more scarce and valuable than capital. Understanding this distinction is essential, especially since promoting Chinese modernization and overcoming the middle-income trap requires innovation driven by entrepreneurship more than ever.
The private entrepreneurs who have risen since China's reform and opening up are almost all self-made. They had no money but possessed entrepreneurial talent and seized the opportunities presented by China's economic development, establishing many dynamic and innovative enterprises. Additionally, as the market economy develops, the ownership and equity structures of enterprises are constantly evolving. Once enterprises reach a certain scale, it becomes increasingly difficult to distinguish between purely state-owned or private enterprises. [In 2022, the proportion of mixed-ownership enterprises among central state-owned enterprises and local state-owned enterprises has exceeded 70% and 54%, respectively, in China.] In the past, enterprises were categorized by ownership, with different policies for state-owned and private enterprises. As long as this differentiation exists, there will be unfairness. Now, when discussing fair competition among different types of enterprises, it is necessary to reconsider whether this classification makes sense and whether it should be diminished or even eliminated. This is also a matter of national governance. Recently, I have been proposing that except for a few areas where state-owned enterprise monopolies are necessary, enterprises should no longer be classified by ownership but by their scale, technology, employment, and other characteristics, with corresponding policies.
This does not mean that ownership classification is unimportant; it is still necessary from the perspective of investors, such as central state capital investors, local state capital investors, non-governmental institutional investors, individual investors, and foreign investors.
This shifts the differentiation based on ownership from the enterprise level to the investor level. Reforms have been made in the management methods, distribution methods, and ownership structures of the planned economy, and now it is necessary to adjust the classification method of enterprises. The conditions are ripe for such adjustments, which will strengthen the institutional foundation of the "two unwaverings" [meaning unwavering support for private companies, as well as state-owned ones] and promote the mutual reinforcement and integration of state-owned and non-state-owned economies. Internationally, some countries also have state-owned enterprises, but they are limited to a few specific areas, and ownership-based classification of enterprises is not common. This adjustment, therefore, aligns with international practices and facilitates alignment with a high-standard market economy system.
Entrepreneurship should not only be embodied by entrepreneurs but also by the leaders of local governments. It is often observed that if a local leader has a pioneering spirit, the locality's overall economic situation is markedly different. The term "entrepreneurship" essentially refers to a pioneering and enterprising spirit, which is essential for leaders in a socialist market economy. While the national top-level design sets the direction and boundaries, it is crucial to encourage local governments to be proactive and creative, allowing for trial and error and correction, and permitting more discretionary actions. Creating a relaxed environment for innovative leaders and talents at all levels will fully unleash China's growth potential, providing a solid foundation for achieving short-term growth targets of 5% and long-term phasal targets.
In summary, for the smooth operation of China's economy, it is essential to focus on and address "two critical minorities" and "one critical majority." The former refers to entrepreneurs and key local leaders, the two engines of China's economic development, while the latter refers to rural migrant workers, the main group driving economic transformation. Structural reforms focusing on these "2+1" key areas will address the challenges and bottlenecks in China's economy, opening up new avenues for growth and transformation.
