By Li Wei

2017-02-20

Since the second half of 2016, global environment has remained volatile, the impact of Brexit is still evolving，French and German general election results are unpredictable, the intervention of government affairs by South Korean President Park Geun Hye’s best friend Cui Shunshi has led to government unrest and social turbulence and Donald Trump’s success in U.S. Presidential election also caused large swings to global politics and economy. In the meantime, after a continuous decline of China’s economic growth and relevant transformation and adjustment since 2011, the risks relating to China’s dropping economic growth have become significantly weakened, the slow economic performance has become stabilized, showing a sound and smooth growth in terms of quality. With global economic and political uncertainty on the rise and black swan events of de-globalization becoming frequent, it has become an issue that draws special attention from the whole society on how to view domestic and international economic environment and development trend.

I. Views on performance of Trump’s Administration

Since Donald Trump announced his candidacy for president to his final victory, from his commitments made before the election to his formally assuming office, all of these have ignited controversy and even caused shock in the U.S. and the international community. At present, all countries are watching how President Trump will lead the country and almost all the headlines are about President Trump. According to some media, President Trump is the one who is most certainly a master of making troubles and of taking advantage of chaos and he is a man different from other presidents in American history.

After Trump swore in, his administrative principles have gradually become clear. About twenty days after he assumed office as US President, he issued 12 presidential orders, 12 memoranda and 2 statements, and it can be seen that his political concepts have taken shape. The essence of Trump’s strategy is “America First” and his policy follows two simple principles, i.e. buy American commodities and hire American workers so as to realize the goal of revitalizing US industries, increasing employment opportunities, enriching wealth and creating a prosperous future for the country.

Trump’s policies highlight that all efforts should focus on America’s interest, and his policy measures include tax reduction, loosening financial regulation, strengthening infrastructure construction, providing trade and investment protection, and keeping energy independence. These policy measures are featured by the characteristics of revitalizing real economy, loosening regulation, boosting bilateral negotiations6 and advocating mercantilism. So far, there is a great consistency between what Trump had said and what he has done before and after the election. This is quite different from former US Presidents’ common practice that their deeds do not match their words before and after the general election. Trump’s policies have much to do with his personal character. Some media say that he has a firm determination, his executive capability is strong, he has a spirit of adventure, he attaches great importance to business negotiation while laying emphasis on real benefits. His lone ranger’s character will no doubt leave a deep imprint on America’s new policies. Trump’s policies are bound to trigger a series of reactions. In the wake of the world financial crisis, the world economy has remained sluggish, the growth rate of global trade has been lower than the economic growth rate over last five consecutive years. Anti-globalization, Populism and protectionism have made a great clamor, imposing a great negative impact on global economic recovery. Against such a landscape, as the biggest global economy, US policy adjustment will bring about different reactions in the world. First, if the U.S. implements a trade protection policy, relevant countries will follow suit and take countermeasures such as adjusting tariffs and restricting import and export volumes, which will further slow down global trade progress. Second, the impact of Brexit has not faded away while French and German general elections are around the corner. It is possible that “America First” vision will further stimulate Populism. If Marine Le Pen wins French general election, the stability or even survival of the EU will face a major challenge. Third, although Trump’s Muslim ban did not get implemented, it still makes the issues of refugees and religions become hot spots of the media, and it is hard to forecast what the revised Muslim ban to be issued next week will be like and what kind of social conflicts it will bring about. What’s more, America’s new international diplomatic policies will affect the world situation and their impacts on global politics and economy deserve close attention.

In terms of Sino-US relationship, because of Trump’s tough statements on China before the presidential election and there is no lack of trade protectionists in his administration, both China and the international community are keeping an eye on the trend of America’s policies toward China. Several days ago, on a call with General Secretary Xi Jinping, President Trump showed a relatively positive and constructive attitude and highlighted his acknowledgment of and respect for the One China principle, which should be regarded as a good sign. But the future performance of Trump’s administration, especially his attitude toward RMB exchange rate and Sino-US trade relations are all uncertain, which should not be taken lightly. According to the statistics released by US Department of Commerce, America’s commodity trade deficit with China is 347 billion US dollars, which accounts for nearly 46.3% of total commodity trade deficit. If the U.S. enforces tariff barrier device, not only Sino-US trade but also global labor division pattern will all get impacted. But if America’s policies relating to tax reduction, increased input in infrastructure construction and deregulation can be implemented, it will directly or indirectly propel US aggregate demand, and enable China’s growth. In short, China should pay high attention to US policy performance, size up the situation, grasp the correct direction, maintain an overall balance, go after advantages and avoid disadvantages, and strive to achieve win-win results for Sino-US relations in a smooth manner. As the second largest economy in the world, China’s contribution to world economic growth has always been kept at about one third of the total in recent years, its development initiative is quite strong, and China boasts the ability to stave off external risks than ever before. The best way to comply with the changes of America’s policies is to fulfill various reform tasks and mind its own business well.

II.Ways for deepening supply-side structural reform

The overall supply-side structural reform launched in 2016 has a positive impact on economic structural adjustment and market expectation improvement. As far as cutting overcapacity is concerned, steel production capacity was cut by more than 45 million metric tons and coal by over 250 million metric tons, going beyond the annual targets. With regard to de-stocking, the total areas of unsold houses had decreased by 23.14 million square meters, with a significant reduction of stock-to-sales ratio. As for de-leveraging, the asset-liability ratio of industrial enterprises above designated scale by December 2016 stood at 55.8%, a year-on-year decrease of 0.4 percentage points. In respect of cost reduction, electricity price and taxes and fees were cut and the share paid by enterprises for social security contributions was lowered (note: This includes old-age insurance, health insurance, unemployment insurance, workers' compensation, maternity insurance, and housing provident fund schemes.) and logistics cost was downward adjusted. The comprehensive cost of business operation had decreased, and the cost of industrial enterprises above designated scale per 100 yuan of principal business revenue was 85.52 yuan, a decrease of 0.16 yuan compared to that of 2015. In regard to improving the weak links, the growth rate of investment in agriculture, water conservation, ecological and environmental protection projects was tangibly higher than that of other programs, shanty towns transformation and poverty alleviation had witnessed a dramatic improvement in household living conditions.

In 2017, supply-side structural reform should be further deepened according to new changes in the internal and external environment of economic operation. In light of cutting overcapacity, the disposal of zombie enterprises should be highlighted, and special emphasis should be made on effectively eliminating low efficient production capacity by market and legal means. The problems to be addressed now are that since the second half of 2016, coal and steel and iron prices have gone up; due to improved performance, enterprises’ motivation to cut overcapacity has reduced, and some suspended enterprises have resumed operation. In 2017, according to the arrangements of the Central Government, more emphasis should be placed on cracking the hard nut of zombie enterprises, and more attention should be paid to the enforcement of standards relating to environmental protection, product quality, workplace safety and energy consumption. More efforts should be made on fleshing out market mechanism to eliminate low efficient production capacity and create conditions to encourage enterprises to conduct merger and acquisition, prudently deal with the debts of enterprises and provide assistance to laid-off workers. The supervision conducted on the reduction of overcapacity in Jiangsu and Hebei provinces also proves the Central Government’s firm resolution.

The key to addressing de-stocking is to adhere to the principle that houses are for living, and not for speculation and houses by nature are consumer goods for the people. To achieve this goal, work should be done to act according to the local conditions and comprehensive policies and measures should be taken to accelerate the pace of establishing a long-term mechanism. First, the Central Government needs to make a proper top-level design for real estate industry, including tax collection, land and finance, and improve the supervision and inspection as well as reward and punishment mechanism on local governments’ regulation responsibility. In the meantime, local governments should be given the rights for self-regulation, with different and targeted measures for carrying out regulation. Second, preventing and coping with real estate bubble risks should be placed top priority in our work. In 2017, comprehensive measures including financial, crediting, land, fiscal and taxation should be taken to appropriately control liquidity and keep a reasonable scale and intensity of regulatory policies in order to restrain bubble inflation and avoid bubble bursting which may trigger risks. Third, the housing demand of urban residents including migrant farmers who have settled down in cities should be met so as to push forward de-stocking in an orderly manner. As for the third- and fourth-tier cities and counties with a heavy task of de-stocking, diversified fiscal policy measures need to be implemented toward the migrant rural population who have purchased urban commercial houses in cities. Fourth, the institutional reform relating to housing property tax, the marketization of rural collectively-owned land designated for business-related construction and housing provident fund-based and policy-oriented financial institutions needs to be accelerated and a long-term mechanism to propel the sound and sustainable development of real estate needs to be established and fleshed out.

The crux of de-leveraging is to actively yet prudently reduce enterprises’ leverage ratio on the premise of controlling the aggregate ratio. In September 2016, the State Council issued guidelines on actively and prudently reducing enterprises’ leverage ratio and put forward 23 major measures. Among them, the most effective measures include optimizing enterprises’ debt structure, carrying out marketized debt-to-equity swap and actively developing equity financing. In light of debt stock, debt structure optimization and marketized debt-to-equity swap will help reduce the aggregate debt size. As for the increment, the fast development of equity financing will give enterprises the access to reducing their dependency on debt. What’s more, guiding enterprises to turn to innovation-driven development model and changing their former ways of development by mainly relying on scale expansion are also ways to effectively reduce leverage ratio.

With regard to cost reduction, special attention should be paid to alleviating enterprises’ business operation burden and strengthening their comprehensive industrial competitiveness. In 2017, further efforts need to be made to reduce taxes, fees and factor costs. Transaction costs of all kinds especially institutional transaction costs should be lowered, the procedures of administrative examination and approval should be reduced, intermediary evaluation fees as well as logistics costs should be lowered, and the flexibility of labor market should be enhanced. But it should also be pointed out that tax reduction is faced with the rigid constraint resulting from the scale of governmental expenditure and the major challenges of balance of fiscal revenue and expenditures, thus the room for tax reduction is limited.

In light of weak links improvement, both hard and soft weak links improvement should be highlighted, and work should be done to strengthen development and institutional weak links. To do so, work should be done to tackle issues in major fields and key links which seriously hamper social and economic development and resolve profound problems relating to people’s urgent demand. The so-called soft and institutional weak links improvement mainly refers to optimizing market environment, strengthening government’s services and solving the problems of the misplacement or failure of government administrative functions. China still has much to do in this aspect, and the effect of fostering the development of real economy is much bigger than directly expanding investment. For example, in Doing Business 2016 report issued by the World Bank, China ranked 78th among 190 economies and has risen by 6 places compared to that of 2015. Compared with advanced economies, China still has much to do in terms of enterprises’ property right protection, market supervision and services for enterprises. In the meantime, work should be done to vigorously and solidly push forward the work related to poverty alleviation, and joint efforts are called to help impoverished people to solve their practical difficulties.

Agricultural supply-side structural reform should be mentioned here. On February 5, the No. 1 Document was formally issued by the Central Government which put forward the reform tasks that “agricultural supply-side structural reform should be deepened and the cultivation of new drivers of the development of agriculture and rural areas should be accelerated.” To fulfill these tasks, we need to make clear the challenges facing China’s agricultural and rural areas development. 1. Price inversion relating to some agricultural products is quite serious. The price inversion of rice and wheat is becoming sharper between domestic and international markets, and the price gap of pork and sugar between domestic and international markets is widened. 2. Grain overstock is escalating. In recent years, China’s grain stock keeps reaching a new high, and it had exceeded 600 million tons last year, which ascended to a historical record with the stock of corn accounting for nearly half. Besides, due to high grain production output and a large amount of import volume, inventory pressure is continuously increasing. Grain overstock has caused great losses to the country. Calculated by the current corn stock volume, the long-term stocking fees might amount to 170 billion yuan and the potential loss is nearly 200 billion yuan. 3. Over-stocking has given rise to difficulties in grain selling, and it will lead to a slump in grain prices and a decline in farmers’ income. China’s corn production in 2016 was 219.554 million tons, and its price dropped by 600 yuan per ton over that of 2015, and if estimated according to this, China’s farmers’ income will decrease by 131.7 billion yuan. Even if the government subsidies for producers are added, their loss will still stand at 92.7 billion yuan, or an average loss of 157 yuan per farmer, which equals to bringing down per capita disposable income of rural residents by 1.4 percentage point. Thus, the key to deepening current agricultural supply-side structural reform lies in the reform of agricultural supporting policy system, straightening out the pricing mechanism of agricultural products, optimizing the resources allocation between domestic and international markets, among the thrice industries and within agricultural sector itself. We need to stimulate and cultivate the endogenous development momentum and new drivers for agriculture and rural areas.

III. An overview of economic performance in 2017

China’s economic operation in 2016 remained stable across the board, showing some positive changes that PPI (producer price index) and the growth rate of enterprises’ profits shifted from fall to rise and that of unemployment rate from rise to fall. Many facts prove that the risks for China’s economic growth rate to drop sharply has significantly weakened, factors for stable economic performance have increased, the process of improving quality and enhancing efficiency is actively moving forward, and the “L-shaped” growth trend is expected to transform from a vertical line to a relatively stable horizontal mode.

In light of the three major demands, China’s economy will witness a slight decline in investment growth rate, a stable increase in consumption and a negative to positive growth change for export. 1. It is predicted that there will be a modest slowdown in investment growth rate. China’s infrastructure construction demand is still on the rise, and with the support of active fiscal policies, infrastructure investment might maintain a double-digit high-speed growth rate in 2017. Affected by regulatory policies and market sales, the growth rate of real estate investment in 2017 will expect a significant slowdown compared to that of last year. In the second half of 2016, the performance of enterprises had improved to some extent, and investment of manufacturing industries will continue its trend toward stabilization and its growth rate may expect a slight rise. 2. Consumption is still the main driver of economic growth. Due to a decrease in residential income and the growth rate of consumption related to housing and transportation has slowed down, the growth rate of residential consumption will be affected. But with the upgrading of consumption structure and innovation of consumption models, consumption potential will be further released and consumption will hopefully maintain a double-digit growth on the whole. 3. With the impact of US dollar’s appreciation fading away, the fundamentals of emerging economies have taken a turn for the better and bulk commodity prices have become stabilized, the environment for foreign trade is getting better. If the world economic pattern remains unchanged, export situation in 2017 will get better and China’s export might expect a transformation from a negative growth to a positive one.

Viewing from the mid-to-long-term perspective, the downward pressure for China’s economic growth rate is clearly reduced. Since 2010, China’s economic growth rate has experienced a continuous downward adjustment. The economic growth rate in 2016 was 6.7%, a fall of 3.9 percentage points compared to that of 2010 and the decline of economic growth rate was close to 40%. In terms of the development experience of countries like Japan and South Korea, the decline in economic growth rate was usually 40% to 50% when the economic development transferred from a high-speed to a medium-speed growth. China’s economic is close to this level after this round of adjustment, and with the decline in recent years becoming gradually eased, the space for further decline is getting limited and China’s economy has the condition to rebound step by step. More importantly, initial progress had been made in China’s economic structural adjustment in 2016, some major indicators had shown tentative pick-up trend, and China’s economy will hopefully enter a relatively stable mid-to-high speed growth stage.

In light of risk prevention, more attention should be paid to financial risk prevention in 2017. At present, there are mainly three risks. 1. The government’s implicit guarantee. The fiscal or quasi-fiscal subsistence assistance for liability business will lead to the difficulty in risk clearance. In addition, it will increase risks such as void circulation of fund, speculations in the stock market and disguised leveraging, adding difficulties to regulation. 2. Some local governments pursue growth rate, which has exacerbated the risks of debts and overcapacity. Given the fact that China’s financial system is mainly based on indirect finance, financial institutions have a preference for major investors and too much capital flows to state-owned enterprises and financing platforms of local governments, it not only results in the increase of government’s hidden debts, but also causes difficulties in clearing those zombie enterprises out of the market, inducing new overcapacity risks. 3. In the course of opening up, financial industry has displayed a weak management ability. With China’s further integration into globalization, cross-border capital flows have increased and the resonance of domestic and foreign markets is getting stronger. But there remain some problems to be addressed such as the lack of experience in financial supervision, inadequate institutional mechanism and inappropriate ability to follow market performance. In 2017, we need to enhance bottom-line awareness, take prompt measures to resolve relevant risks, and guard against the occurrence of systemic or regional financial risks.

In 2017, the economic operation is experiencing a weak balance between upward and downward performance pressure. If we want to realize a sustainable mid-to-high growth, we need to strive to fulfill the following basic requirements in four aspects. 1. The investment in manufacturing industry should be stabilized. Investment in manufacturing industry, especially private investment is the basis of economic stability, whereas the investment inclination of enterprises is still uncertain. 2. Financial risks should be effectively solved. Although banks’ non-performing asset ratio has declined slightly (banks’ non-performing ratio fell to 1.74% in the fourth quarter of 2016), risks of non-bank financial institutions are looming up, and the environment of financial development should be further enhanced. 3. Enterprises’ eagerness to increase stock becomes stronger. Though destocking has received some results, industrial enterprises’ desire to increase stock is relatively susceptible to external impacts and it remains to be seen whether enterprises would increase stock or not. 4. Substantial progress has been made in reforms of key and critical sectors. The positive incentive mechanism of reform should be established and fleshed out, breakthrough should be made in reform of relevant fields such as state-owned enterprises, land system, finance and some institutional obstacles should be removed.

The year of 2017 is a critical year for China’s economic transformation and upgrading and the implementation of the 13th Five-Year Plan. With a comprehensively overview of internal and external situations, China’s economy will realize a stable growth rate within the predicted range, gather related momentum for a sustainable mid-to-high growth and enhance the process of realizing a steady, healthy and sustainable development at an early date.

Note: Li Wei, research fellow and President (Minister) of the Development Research Center of the State Council.