Top economist on China's economic recovery in post-COVID days
GDP growth in 2023, private sector, consumption, real estate, and birth rate
As COVID-19 measures relaxed, people are preparing, both mentally and materially, for a big wave of infections. Meanwhile, economic activities are thawing. Last Friday, the government of Suzhou, a city in east China's Jiangsu Province, organized a charter flight carrying a business delegation to Europe to get more foreign orders. According to Global Times, this was the first charter flight with a business delegation on board ever since the outbreak of COVID pandemic.
Other than Suzhou, governments in Zhejiang, Guangdong, Jiangsu, and Fujian all chartered flights abroad so that trade companies could join expos and business meetings.
As China sees some good signs in exports, many turn their eyes to the domestic economy. In December, China's top leaders usually hold the annual Central Economic Work Conference, setting the tone for next year's economic development. The 2023 meeting is expected to take place soon, and economists have already made some predictions.
Wang Tao, chief China economist with UBS Investment Bank anticipated in an article that the upcoming conference would put more stress on stabilizing growth while downplaying "zero-COVID." She also anticipated that China would adopt a positive financial policy, roll out more measures to buttress the real estate sector, employment, and boost consumption. [Notes: Wang published the article on Dec. 5, two days before China's COVID policy shift.]
On Dec. 3, several days before the State Council released the "Ten Measures" to optimize China’s COVID response. Yao Yang, dean of the School of National Development at Peking University, and five other renowned economists published a joint article, calling for opening up economic activities in public places and setting the GDP growth above five percent for 2023. [See the translation of the article by Pekingnology, which also published another article by Professor Yao in April this year: PKU National Development dean on Chinese economy]
In a recent interview with National Business Daily (NBD) that was posted on NBD’s WeChat account on Dec. 12, Professor Yao shared his views on China's economic recovery in post-COVID days, including the details of setting GDP targets for 2023, the top priority for China's economic recovery, the inflation rate China could bear next year, the development of the private sector, the government's role in the economy and the demographic challenge facing China.
As the Central Economic Work Conference approaches, Ginger River believes that Professor Yao's interview will help get you familiar with the focus of China's society and the key elements influencing China's future economy.
1.The priority is to get the whole society moving
NBD: Will the economy get better once we open up economic activities?
Yao: China's economy is now under enormous downward pressure, largely due to a lack of domestic demand. Why the domestic demand is sluggish? The major reason is the pandemic. When the Omicron strain became dominant in China, public consumer confidence fell by 30 percent.
Therefore, if we remove all the restrictions, there would be a surge in consumption when the Spring Festival arrives. By the May Day holiday next year, the virus may be less pathogenic, and the public may be accustomed to infections. If the government extend the three-day vacation [of the May Day holiday] into a five-day one, the economy will surely rebound. You see, in the past two years, whenever COVID was contained in a place, tourists were queuing up at tourist attractions. So people do have the willingness to spend.
The groups that took the hardest blow in COVID are the ones working in industries highly related to epidemic prevention and control, such as catering, tourism, accommodation, and entertainment. The top priority is to get people moving. The flow of people would create revenue for those working in industries mentioned above.
Many hold a gloomy view about the future, arguing that "there will be no rebound even if we open up." I think these are unthoughtful remarks. In general, China's saving rate rose during the epidemic, which means consumption is suppressed. Indeed, if we see a rebound as a 50 percent growth in consumption, that's another story. But for China, considering the size of the economy, even a 20 percent growth in consumption would be impressive. So, I'm still confident, because when the demand goes up, the supply will follow.
[Note: China's state council released a document on Wednesday, aiming at further boosting domestic demand to a new level by 2035.]
NBD: You had suggested setting the GDP growth target for 2023 at five percent or more. Is there any evidence that made you believe China would accomplish that?
Yao: The evidence lies in the potential growth rate of China. By my calculation, the potential growth rate stands at around 5.5 percent, or even higher.
China's saving rate is very high (45 percent). The saving rate can be transformed into investment. The increase in the capital would drive the GDP to grow by 3.75 percent. Besides, the rate of technical progress accounts for around 30 percent of economic growth. Thus, according to my estimation, China's GDP growth rate can reach 5.5 percent. Therefore, I think it's reasonable to set the target at five percent or more.
Moreover, setting the GDP growth target for 2023 at five percent would send a strong signal to the market —— China will double down on the economy next year.
We have to focus on the economy. Because in the short term, we must boost employment and people's income. In the middle to long term, to reach the goal of doubling China's per capita income from that of 2020 as planned, the average annual GDP growth rate must reach 4.7 percent. However, the average growth rate of GDP fell short of 4 percent for the last three years in the pandemic, and three years accounts for a big part in the span of 15 years. The window left for us to reach the goal is only about six or seven years. Therefore, I proposed setting next year's target at above five percent, and we should strive for a growth rate of six percent. When the economy is back on track, I think six percent is an achievable goal.
2.To boost confidence in the private sector, we should tolerate economic overheating to a certain extent
NBD: How can we boost confidence in the private sector?
Yao: Once the economy recovers, private enterprises will regain confidence naturally. We must beware of one thing, that the government should not roll out regulatory policies easily. When regulation is necessary, do it gently. We learned some lessons from the last two years, such as the regulation of the real estate sector.
To be honest, with such a sluggish economy, what's the matter if the economy is a bit overheated? I think we should set next year's inflation limit at five percent, which sends out a message —— China can bear a certain degree of economic overheating.
The target set for China's consumer price index (CPI) was to increase by three percent in 2022, which became a tall order. Were it not for pork prices that buttressed the CPI, we would have entered deflation this year. It's extremely difficult for an economy to recover from deflation. This is what Krugman called Depression Economics. When public expectations change if everyone envisages a worse future, why would they invest or produce?
Moderate inflation is merry for all. If a product produced is sold for 5 cents today and for 5.5 cents a few days later, companies will feel motivated, and the confidence will return accordingly. When companies are on the rise, employment and incomes will improve. Then, we can introduce some gentle measures to gradually bring inflation down.
NBD: What should be noted when supporting the private sector?
Yao: As we all know, private companies operate at a higher risk. In particular, the characteristics of small and medium-sized enterprises (SMEs) determine their high risks of failure. For large banks, lending to SMEs is not cost-effective. Because the cost of loans for large banks is exceedingly high, and it is relatively easier to make money from large customers. Therefore, it is common sense that large banks are unwilling to issue loans to SMEs.
However, every time when the economy is under great downward pressure, we encourage big banks to lend to SMEs. As a matter of fact, we have experienced such a torturous process before. After the financial crisis of 2008, the government asked big banks to lend to SMEs. But many enterprises still collapsed or "ran away" after getting the loans, which triggered a small financial crisis in Wenzhou.
Moreover, many SMEs are also reluctant to borrow from big banks. Why run up the debts? There's a misunderstanding in our policies right now, that is to put all the focus on the supply side regardless of the demand side. All bets are on how to stimulate the supply without considering promoting consumption. We had it completely backwards.
Why doesn't the government give money to the general public and encourage them to spend? Every year, the central government allocates to local governments three to four trillion yuan in special infrastructure bonds. But we know that many local governments are unwilling to build infrastructure because it's too much of a burden.
I suggest changing some local special infrastructure bonds into special consumption bonds. And we use the money to help people who were hit hard by the pandemic, to help those who lost their jobs and live on debts. The government may give an average of 1,000 yuan to each person in those groups per month. If "giving money" is not pleasant to the ears, we might as well call it "consumption coupon," but we shouldn't restrict the usage. Let people buy anything they want with consumption coupons and help them get through the hard times. People will use the consumption coupons quickly, which will greatly help us stabilize or even boost confidence.
3.Let the market play its role, the government should fine-tune its regulations.
NBD: It was about respecting the invisible hand and bringing the market into play. So, what should the government do?
Yao: Yes, let the market play its role. The government's job is to fine-tune things. It should regulate, but in an invisible way. The government cannot stand in the way of economic development, saying no to this, putting a brake on that.
If the regulation is done in a drastic manner, entrepreneurs would be spooked. In fact, many policies have little impact on private enterprises, but entrepreneurs are still nervous. Why is that? Because the change in policies was drastic in the past. When the market fluctuates, policies are in full swing, which is clearly unbearable for entrepreneurs.
NBD: As we see, the boom in certain industries, such as the new energy vehicles (NEVs), is closely connected to favorable industrial policies. How should we perceive industrial policies?
Yao: China's new energy industry is highly competitive worldwide. How can we make the industry bigger and stronger? I believe the government should roll out some new policies to encourage innovation.
When we encourage the photovoltaic industry, some local governments are directly involved in deciding which company should receive investment. This is "picking winners." However, the success of NEV industrial policy lies in not picking winners beforehand. Instead, it subsidizes the consumers who buy new energy vehicles.
This method would encourage many private enterprises, particularly new automakers, to compete in the game. Look at those rising stars in the NEV industry. Many of them come from the internet industry, and they brought in a new way of thinking. If we had been "picking winners," none of them would be chosen, because all experts would say that, since these people had no experience in car manufacturing, how could they make cars? No, no subsidies for them, right?
[Read GRR's previous posts on What's Huawei's master plan for electric vehicles? and Can Chinese batteries rise to power European EV?]
Therefore, I am not against industrial policies, but how to make policies work deserves serious consideration. For example, does the current policy for the chip industry pick winners or subsidize customers, and create a level playing field for all enterprises? We must think about it. [Check GRR's previous post on the future of China's chipmaking after the U.S. chips bill ]
NBD: The real estate sector is a typical "policy-dependent industry." The real estate industry is fraught with risks, and multiple real estate developers failed to deliver houses. How can we adjust the macro-regulation policy for the real estate sector and help the industry get a soft-landing?
Yao: The biggest problem in real estate is the lack of liquidity. Without liquidity, enterprises will have difficulties in operations, and some even don't have the money to pay back their debts since the capital chain is ruptured. This situation was caused by policies such as "Three red lines" and classification on home mortgage loans. We're over with these policies now, but people are still startled at the thought of them.
Real estate sector is a typical "policy-dependent industry." If the policy encourages the industry, it booms immediately, and if the policy suppresses it, the industry falls off the cliff. To boost confidence, the government must show everyone a shift in attitude. Therefore, Xu Gao, chief economist of Bank of China International Securities, once suggested that we build a "national team" in the stock market, and buy the shares of the "star performers" in the real estate sector. It's like endorsing these companies. I think this is a good idea. Because we cannot let the "star performers" get mired in trouble.
Besides, the recovery of the real estate sector is also related to COVID. After we optimized epidemic responses, the whole economy begins to recover, and the people will rebuild confidence, which will help the recovery of the real estate industry.
Real estate is an industry closely related to people's lives. So, the government should finetune regulations, and adopt moderate policies to prevent huge ups and downs in the industry.
4.Encouraging childbirth starts with involving men in childcare
& Exercising to get ready for an "aging population"
NBD: How to reduce the impact of the epidemic on fertility rate? How should we interpret China's current demographic situation and challenges ahead?
Yao: The decline in China's population is a sure thing. The population will shrink this year. There may be a rebound in fertility after the pandemic, but the population will go down thereafter, and the decline will be a long-term thing. For society, all we can do is to prepare for an ageing population.
Those born between 1962 and 1976 will retire in the decade to come. By 2040s, the population aged above 65 will account for one fourth of China's total population, which will be more than 300 million people. It will be a heavy burden on young people. The most immediate problems are elder care and medical care.
In Japan and the US, for example, aging is a big drain on government spending, not because of pension, but the medical expenses of the elderly. Because the pension is basically sustainable through insurance operations.
So from now on, I believe we must promote a healthy lifestyle, balanced diet, and proper physical exercise among the "the younger ones in the elderly", so that they "age in a healthy way." I do admire Zhong Nanshan [China's top respiratory disease expert]. He is energetic, and still working at the age of 85. I wish I could be like him 30 years later, but we must start exercising when we are young. Zhong was an athlete when he was young, and he still lifts dumbbells in his 80s.
Therefore, I recommend that the health commission should advocate for two things. One is encouraging childbirth, the other is promoting physical fitness among the middle-aged and the elderly.
NBD: How come many policies to encourage childbirth yield little results?
Yao: Some measures are effective but others are not. Effective measures include building more kindergartens and lifting the burdens on new parents. When we have kindergartens, the fees charged for each kid will go down. Now we don't have enough daycare centers. Who is going to take care of kids under three? Many people expect the elderly to help bring up children when they retire, but this solution is unfair to the elderly. Thus, in the long run, it is necessary to build more daycare centers.
One policy that may not work is to extend maternity leave. Because extended maternity leave will turn companies away from hiring women. Besides, overly extended maternity leave is also inappropriate. Because when the new mother comes back to the office six months later, her position might be gone. There is a big problem in China: men don't do enough housework. Society believes that it's the mother's job to take care of babies. In China, many men hold the idea that "my wife goes home, and we have two or three kids." This is a raw deal for women. Right now, it is a global trend that men should participate in more housework. Only in this way will women be willing to give birth to kids.
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Very interesting interview, thanks for sharing. Is there any reason to believe that the new leadership team - particularly the incoming Premier - listens to such views?