Chinese Economy at a Medium-high Growth Rate

Sen WEI, professor of School of Economics and director of Institute of Economic Thoughts and History, Fudan University, joined the Public Lecture Series on October 18th, explaining the slowing growth rate of Chinese economy.

-rather high interest rate of corporate debt and financing costs

Although some economic indexes hint that China’s economy looks robust in the short run, Wei points out that in the long run, Chinese economy is entering into a phase of comparatively declining growth rate. Wei argues that as he already pointed out in his article as early as 2012, urbanization is the result of industrialization, which has boosted worldwide economic growth. However, Wei contends that China has almost completed this wave of industrialization based on technological revolution, which will see a decline in the rate of urbanization, or an economic growth solely driven by investments in infrastructure. We can also see the change of trend in numbers: the manufacturing industry in China has outpaced that in US, Japan and Italy as early as in 2012. Substantial shrink of China’s overcapacity industries in 2016 left China with an annual production of 2.6 billion automobiles, far more than 1.4 billion in US. Professor Yi-fu Lin maintains an opposite stance towards China’s economic growth, says Wei. Lin comes to his conclusion through a comparison between the percentage of China’s GDP per capita to US GDP per capita today, and the percentage of that of Japan to US when Japan’s economic boom took place. Lin observes that Japan, South Korea, Hong Kong, Taiwan and Singapore had witnessed rapid economic growth when their GDP per capita was between 17-20% of that of the US. Therefore, as China’s GDP per capita has not reached to 20% of that of the US, Chinese economy is expected to have another 20 years of growth. Nevertheless, Wei demonstrates that looking at the numbers and growth periods in other East Asian economies, China share with them a rapid economic growth with an annual growth rate at 10% for twenty or thirty years. And now, with decreases in export, consumption and rate of investment, China is entering, like all of them, a period of relatively low growth rate of 6%, or even 5%, as President Xi Jinping mentioned during the 19th CPC National Congress.

Moreover, Wei points out that it seems that Chinese people are getting ever richer; However, loan balance in China in the first quarter this year is 110 trillion while the bond balance at the end of last year was 60 trillion. The debt ratio of Chinese households and government are low while high in SOEs and local governments. Since 2012, according to Wei, the total service on credit in China has been far larger than the incremental nominal GDP. Therefore, “I have been warning against the Fisher Effect and the real balance effect.” However, Wei is not all pessimistic about Chinese economy. He illustrates three “bumpers” that ensure the well-being of Chinese economy:

Therefore, Wei implies that there will not be a financial crisis in China.

In response to China’s slowing down economic growth and a healthier economy, Wei suggests that cut on taxes is the optimal macroeconomic policy. From 1994 to 2014, the annual growth rate of taxation has been twice more than that of GDP, according to Wei. “That’s why we need to revise the current law on budget, says Wei. Taxation amounted to 25 trillion in 2015, same amount of 37% of total GDP that year. The VAT reform has rather than reduce the amount of tax, increased taxation of 5400 billion RMB. Therefore, Wei suggests that involved parties should strictly implement the policies released from the central government to reduce tax at the macro-level. Besides, Wei advocates for depreciation of RMB according to the supply and demand in the international market, in order to maintain and increase the growth of exports. Wei also warns that the core of economic policy now is not to retain the growth rate, but to resist risks. However, resisting risks does not necessarily result in austerity. On the contrary, austerity may undermine the stability of Chinese economy. A lax monetary policy can do the job of de-leveraging, adds Wei. Last but not least, Wei indicates that with the low securitization ratio, China should invest in developing the bond market.