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Report

Right solutions can bring out China’s growth potential

December 24, 2018


Abstract : The Chinese market still has huge potential. If the right solutions are applied, this potential will be realized.

Note: 2019 could be a difficult year for the world economy. Many international institutes have predicted that the growth rate of the US economy will fall back to 2.5 percent, with Europe and Japan set to follow suit. China's growth is also expected to slow down to 6.2 percent.  What is crucial for getting through this predicament for China? Qin Xiao, a member of Hong Kong's Financial Service Development Council, shared his views with Global Times in his article Right solutions can bring out Chinas growth potential.

The excerpt of the article is as follows:

2019 could be a difficult year for the world economy, many international institutes have predicted. We have forecast that the growth rate of the US economy will fall back to 2.5 percent, with Europe and Japan set to follow suit. China's growth is also expected to slow down to 6.2 percent.

It seems that only the US has recovered from the economic cycle stretching from 2008 till now. Most other countries in the world are burdened with uncertainties. For China, it is the same, and there is no new economic driver kicking in yet. China's growth model is transferring from quantity to quality, but this has been going on for a while. Why did the Chinese economy cool down during 2017-18?

The China-US trade tension is surely a factor. But its impact is hard to gauge. Some economists estimate a decline in growth of 0.2 to 0.3 percentage points as a result of the tariffs. This might be an underestimation.

Another reason is weak demand. There has been some fluctuation of imports and exports, but in the long run, net exports can no longer play a major role in Chinese economic growth.

Even in 2017, when the economy was strong, government-driven infrastructure projects played a big role. It was expected that as the government pulled back from this spending, more investment by companies would take its place to a certain extent. But spending in the real estate sector cannot grow too fast, given the risk of a bubble and the rise of non-performing loans at banks.

What would be more welcomed in the market would be meaningful tax cuts and free movement of capital, vertically and horizontally. Much work has been done, including supply-side reform, moves to cut overcapacity, deleveraging and adding requirements for banks' financial disclosure. But the tax reductions so far haven't met the market's expectations. I believe the government is working on it. The Chinese economy will see positive growth if there is good anticipation, which is crucial for getting through this predicament.

Another area of hope is the development of the new economy, symbolized by artificial intelligence and bioscience. So far, the new economy is still not strong enough, in quality and structure, to replace the old economy in supporting China's growth.

But the uniqueness of the new economy is able to reach out to everybody. It has been changing our way of living. Compared with previous industrial revolutions, the new economy has not been attracting heavy investment due to its structure.

To address the pressure from the economic slowdown, fiscal, monetary and environmental protection policies will need to be adjusted, as will rules for real estate. It seems that going back to the Keynesian method of relying on economic stimulus is inevitable. But frequent use of such short-term emergency plans should always be the last option because this policy comes with a price. The result and influence down the road need to be closely monitored.

In a nutshell, the Chinese economy faces three problems. The first is that this economic cycle contains long-lasting effects from the financial crisis. The second is what to do about the growth model at a structural level. So far, production is still the main driver of China's growth, although this situation is changing. The third problem is institutional - the role of the government and the market, and the balance between State-owned enterprises and private enterprises.

The three problems are intertwined but different. Each problem needs to be targeted with specific policies. Use Keynesian theories when dealing with cyclical issues. Leave structural issues to the market and tear down barriers such as protection and monopoly. Improving market infrastructure and the rule of law will help address institutional problems. Using macroeconomic adjustment to manage structural and institutional issues does not go anywhere. Short-term stimulus cannot solve long-term problems.

Overall, the Chinese market still has huge potential. If the right solutions are applied, this potential will be realized.

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Keyword: China-economy

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