Scientific response to economic challenges is key

Since the start of this year, the Chinese economy has begun to recover, as reflected by a resurgence in some fields and the rise of some key economic indicators, thereby showing great resilience and potential.

However, the macroeconomy has not yet come out of the woods overall, with the output gap, inflation level, asset prices and employment pressures all weighing on its momentum, leading to weak market confidence and risk appetite.

Voices of pessimism are being heard, at home and abroad, over the medium- to long-term expectations of the nation's economy, triggering growing talk of whether China can overcome the "middle-income trap" and achieve its long-term development goals.

Regardless of those ill-intentioned comments, headlines regarding tensions between China and the United States, negative population growth and aging, and real estate adjustments have indeed reflected pressure that is weighing on China's economic development prospects.

It is natural to encounter difficulties amid economic and social development. China had been through even tougher times. What really matters currently is to face those economic challenges and respond to them realistically and scientifically.

Advantageous system

The economic challenges that China faces, currently or in the future, are related to its vitality. In the short term, its market vitality is insufficient, and the economy is facing downward pressure; in the medium and long terms, the weakening vitality impacted by demographic changes might restrict China's economic and social development potential.

Externally, the United States has been trying to suppress China in an attempt to curb the vitality of its market system.

In this case, boosting vitality comprehensively should be the key reform focus of economic policy. China, with its institutional advantages of promoting a market economy with Chinese characteristics, is able to do a better job in addressing such issues.

A well-functioning market should be one in which the market plays a fundamental role in the allocation of resources. Governments can only intervene in markets if there is a clear market failure or other reason, where the Chinese market economy system has greater institutional advantages than the traditional ones.

First, a combined policy pool filled with measures of a traditional market economy and a socialist system enables the Chinese government to have a wider policy space and more choices. This has been repeatedly proven in practice in dealing with negative externalities, such as environmental pollution, time lag in macroeconomic policy implementation, difficulty in coordinating different policies, and the elimination of market monopolies.

Second, in terms of institutional vitality, under the framework of the socialist system with Chinese characteristics, policy selection and implementation are more efficient, because as long as the policies are in line with the reform measures to maximize social welfare, they will be supported and embraced by the masses and can be implemented quickly, unlike some capitalist societies that face problems such as partisan disputes, interference by interest groups, and lack of policy tools.

Of course, in order to give full play to the advantages of the above-mentioned systems, policymakers must adhere to a realistic attitude and a rational and scientific spirit, so as to ensure that optimal solutions that are better than those of a traditional market economy system can be found at a higher strategic level.

Way out

Regarding the short-term issues, the trend of weakening market vitality, the downward pressure on the economy and the lack of market confidence have not been fundamentally reversed.

To this end, the macroeconomic regulation system must operate more effectively and scientifically. It is necessary to coordinate departments with various functions and issue a combination of macroeconomic policies smartly.

The nation should also make greater efforts to stimulate demand, internally and externally, while paying due attention to financial risks. Externally, China should continue efforts to promote peace, development and cooperation. Domestically, amid its push for a more relaxed, inclusive, free and innovative market environment, the government should keep a close eye on and guide market expectations with more credible policies so as to boost market confidence.

The nation should coordinate the demand- and supply-side policies to accelerate the return of its macroeconomy to a long-term growth trend as soon as possible, and simultaneously postpone the introduction of long-term and structural policies that may exacerbate short-term downward pressures on the economy, such as tighter market regulation and income redistribution policies, to reduce any possible negative impact of such policies in the short term.

In terms of the stock market, regulators should conduct more extensive research, and listen to stock market participants at the grassroots.

Reforms are needed to improve its system further and shift the focus to protecting the rights and interests of investors, not just financiers. Efforts should be made to crack down on fraud and insider trading, and create a fairer and more efficient and sustainable institutional environment.

In terms of the real estate market, first- and second-tier cities still have a lot of room for development.

China should now pay more attention to "houses are for living in" rather than just "not for speculation".

It is necessary to revise and improve the home purchase restriction policy more vigorously, and boost the circulation and transaction of various types of homes to improve livelihoods.

The government should formulate a systematic urban renewal plan and transform the old housing projects in urban areas to address the demand of residents.

Government units concerning the supply of land, urban area planning and housing supplies should work together to meet the increased housing needs.

In the medium to long term, reinvigorating China's demographic vitality is key to addressing future economic challenges.

Here are a few things to start with.

The availability of housing and per capita living space in large cities are important factors restricting the willingness of young urban couples to have children. It is thus necessary to redesign China's housing market, give full play to the advantages of China's socialist market system and maintain sufficient housing supply with reasonable prices.

Additionally, the government should conduct research at the grassroots level to identify other important reasons for the sharp decline in the marriage and birthrate of young people, and provide strong support and subsidies at various levels to help reduce the opportunity cost of childbirth and the cost of child care.

For example, the government can enhance land supply and financial subsidies for preschool care and preschool education, build more public childcare institutions and offer community support.

Last but not least, to maintain its institutional vitality, China, on the one hand, should not close itself off and impair the vitality of its own system, and on the other, continue to deepen reform and carry out institutional innovation to continue improving its socialist market economic system on the basis of pooling wisdom and scientific research.

To conclude, it should be kept in mind that an open, inclusive, and free institutional environment is the institutional basis for the sound operation of the socialist market economy.

Better integrating the advantages of the socialist system with the market economy, and demonstrating and giving full play to the results generated by such an integration — that should be the major focus for China amid building a high-standard socialist market economy.

The article is a translation of the writer's speech at a recent seminar of the China Macroeconomy Forum, a Beijing-based think tank.

The views do not necessarily reflect those of China Daily.

The writer is a professor at the School of Economics, the Renmin University of China.