By Zhu Huichun & Yang Yangteng, Economic Daily

2017-02-27

The National Policy Consulting Conference 2017 held by DRC was convened in Shenzhen, Guangdong province from February 23 to 24. Journalists from Economic Daily had an interview with Li Wei, President (Minister) of DRC, and exchanged views with him on the following issues to be focused for policy consultation work in 2017.

I. Economic transition is featured by quality improvement

The economic growth of China in 2016 registered a slow but stable performance, with positive changes relating to the formation of new driving forces. PPI (producer price index) turned from negative to positive year on year, performance of enterprises took a turn for the better, and new job opportunities were increased in urban and rural areas beyond expected goals. These highlights shows that the imbalance between supply and demand of China’s economy is being alleviated, the quality and efficiency of economy are improving gradually, the L-shaped growth of the economy is transforming from a vertical line to a relatively stable horizontal mode, and economic transition has turned from speed reduction to quality improvement.

The economic growth still faces downturn pressure in 2017, featured by a slight correction in growth rate of domestic demand and the growth of overseas market demand turning from negative to positive. If the bottom line to guard against systemic risks can be kept, the stable growth of the economy will be guaranteed. In fact, the economic performance in 2017 still faces various uncertainties in light of external environment, liquidity, and economic transition in some regions, all of which need to be paid utmost attention and handled properly.

Viewing from the mid-to-long term perspective, whether the economic growth can keep a medium-to-high speed is largely determined by improvement in four aspects: first, the steady increase of manufacturing industry and private investment; second, the gradual improvement in asset quality of financial institutions, especially that of banks; third, enterprises’ willingness relating to stock replenishment and the continuing smooth rise of PPI; and fourth, the realization of reform results.

The world economic performance trend is moving forward and is conducive to developing countries. As the world’s largest developing country, China needs to maintain its economic momentum and promote the reform and development of domestic economy. In addition, China needs to accelerate the construction of an international collaboration system for mutual benefits, creating a good external environment with strategic opportunities for development.

II. Intensify efforts to shore up both hard and soft weak spots

The supply-side structural reform of the economy initiated across the board in 2016 has produced positive effects on adjusting economic structure as well as on improving market expectation. In 2017, in face of new changes in internal and external environment of the economy, the supply-side structural reform needs to be pushed on further.

In terms of addressing overcapacity, emphasis should be put on the disposition of “zombie enterprises” and we need to use market mechanism and take legal measures to effectively eliminate low efficiency capacity. Following the deployment of the Central Government, the disposition of “zombie enterprises” should be regarded as the key issue. We need to implement strict standards relating to environmental protection, product quality, workplace safety and energy consumption, use market mechanism to close down backward production facilities, create conditions for enterprises to carry out acquisitions and restructuring, properly handle with enterprise debts and the resettlement of laid-off workers.

In terms of reducing inventory, the key issue is to stick to the principle that “houses are built for living, and not for speculation” and houses are consumer goods by nature for the people. To achieve this goal, we need to take comprehensive measures in light of local conditions and construct a long-term mechanism.

In terms of deleveraging, the key issue is to reduce the leverage ratio of enterprises actively and steadily under the premise of monitoring the overall leverage ratio, and implementing significant measures including optimizing liability structure of enterprises, conducting debt-to-equity swap, and actively developing equity financing. Another significant way of reducing the leverage ratio of enterprises is to guide the innovation-driven development of enterprises and change the past development pattern focused on scale expansion.

In terms of lowering costs, efforts should be scaled up in tax reduction, expense reduction, and reducing costs of factors of production. Transaction costs, especially systematic transaction casts, procedures for administrative review and approval, intermediary assessment fees of all kinds, and logistic costs should all be reduced, while the flexibility of labor market should be improved. However, it also needs to be noticed that there is little room for tax reduction in the fact that tax reduction is faced with rigid restraint imposed by government expense scale and challenges from great pressure of fiscal balance between state revenue and expenditure.

In terms of bolstering weak spots, both hard and soft weak spots in development and system should be strengthened. Bolstering soft or system weak spots refers to optimizing market environment, and enforcing government service. If the government oversteps its bounds of duties or if the government fails to perform its functions, they must be pointed out and corrected. In the meantime, we need to take effective and practical measures to promote the work of poverty alleviation.

III. Encourage the consumption of domestic products and enhance enterprises’ innovation-driven development

In recent years, the development of China’s real economy has encountered many difficulties and problems, including structural imbalance between supply and demand as well as between real economy and finance. The first priority of vitalizing the real economy lies in rebuilding consumers’ confidence in using domestic products and removing barriers that block the intermediate links between market demand and enterprises. China’s enterprises are very competent in productivity, yet the key problem is that consumption demand cannot be transmitted to production of domestic enterprises, for the market in the middle is a weak spot and domestic consumers are lack of confidence for products made in China. Creating a systematic environment that facilitates consumers’ confidence in goods made in China is the key to vitalize the domestic real economy.

In addition, the implementation of Made in China 2025 strategy needs to be enforced and efforts need to be made to enhance enterprises’ innovation-driven development. The manufacturing industry of China urgently needs to be revitalized to a higher level, particularly when China is faced with the double pressure from low costs of rising countries and remanufacturing of advanced countries. In this sense, we need to make studies on the implementation of Made in China 2025 strategy, enhance enterprises’ innovation-driven development, and promote industrial transformation and upgrading towards “digitalization, networking, and smart technologies.” We need to build a group of strategic industrial clusters with core competence and forge a large number of famous brands that are accepted and liked by consumers both at home and abroad.

IV. More importance should be attached to preventing and controlling financial risks

In 2017, the pressure on preventing and controlling financial risks will increase for the following reasons. First, with the swift raising of interest rates by Federal Reserve at a higher speed, the international financial environment will become more complex. The impacts imposed by external risks cannot be underestimated. Second, maintaining stable growth still depends on credit expansion to some extent due to insufficient internal driving force for growth, adding to the risk of increased leverage ratio. Third, in the process of eliminating zombie enterprises and deleveraging, accumulated risks may continue to loom up. Fourth, in the work of deleveraging and addressing risk issues, financial risks, especially liquidity risks, can be triggered if financial regulatory ability and the effectiveness of regulation and coordination are not properly improved, or if the risk transmission links are not accurately grasped or are disposed with improper response measures, intensity and timing.

Therefore, more importance should be attached to preventing and controlling financial risks. More efforts need to be made to closely monitor the risk performance in relevant sectors and to improve local financial regulation and risk disposition mechanism.

V. Fundamental system and long-term mechanism need to be built in real estate sector

Prevention and elimination of real estate risks need to be given adequate concern so as to restrict expansion as well as bursting of real estate bubbles. Relevant regulatory policies on preventing real estate bubble risks need to be formulated, and more policy measures need to be taken on financial and land issues. At present, the differentiation in real estate market will become more obvious, while the living standard of urban and rural residents has been improved by a big margin, with a higher demand raised by them for comfortable living conditions. The periodic changes of real estate market need to be studied in line with the development pattern of real estate market in the new era and the study findings could serve as the basis for policy making relating to the regulation of real estate market.

We need to think highly of preventing and eliminating real estate risks, focus on the two key issues relating to national conditions and market performance, build a fundamental system and a long-term mechanism in real estate sector, and set a solid foundation for the healthy development of real estate market.

VI. Protect entrepreneurship and promote private investment

One of the issues relating to reform for us to take seriously at present is to protect entrepreneurship and support entrepreneurs to make innovations and business start-ups. Entrepreneurs are concerned about relevant objective economic factors including changes in market demand and reform of industrial development. Therefore, we need to set high store on the protection of intellectual property rights. According to results collected respectively from questionnaire surveys, and fact-finding meetings, one of the issues cared about most by owners of private companies is intellectual property rights protection. In 2016, the CPC Central Committee and the State Council jointly released the guidelines on the institutional and legal enforcement of intellectual property rights protection, showing kind concern of the government leaders on this issue. It proves that the government faces up to the problems and hits the nail on the head. It’s crucial for us to implement these guidelines with substantial efforts.

Both the SOEs and private enterprises need entrepreneurship. SOEs also have to participate in market completion and resolve various market risks through innovation-driven development. In the new round of SOE reform, we need to mobilize SOE managers’ motivation through systematic design, flesh out corporate governance, and entrust enterprises the power of independent management by optimizing accountability system, ensuring the exemption of responsibility mechanism, and tolerating unavoidable risks in the course of business operations, innovation-driven development and business start-ups.