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China's Economy Is Expected to Enter a New Stage with Mid-to-High Growth



On March 12, 2017, the Fifth Session of the Twelfth National People's Congress was held in the Great Hall of the People in Beijing. After conclusion of the meeting, the Ministers attending the meeting met the press and answered their questions in the lobby. Prof. Li Wei, President of DRC, gave a 16 minutes’ briefing first on China’s macroeconomic performance, the future supply-side structural reform and the progress and planning of the construction of high-end think tanks and then he took questions from the floor. His interview with journalists lasted for over one hour.

I. China’s Economic Growth Is Moving from a "Vertical" Growth toward a "Horizontal" Growth Following an L-shaped Growth Curve

Not long ago, Li Wei made a judgment on China's economic performance. According to him, the economy is expected to enter a new stage of moderately mid-to-high growth in a relatively stable manner and his remarks have attracted great concern. The first question put to him was what was the basis for him to make such a judgment.

Li Wei reiterated his previous judgment by saying that in 2017 China's economy will evolve from a “vertical” growth to a “horizontal” growth following an L-shaped growth curve. He stressed that this judgment was mainly based on the new changes emerged in domestic and international economic operation, but at the same time medium-to-long-term growth trend and short-term factors should be distinguished. The “horizontal” growth referred to the relatively stable mid-to-long-term growth trend, whereas the possibilities of short-term economic fluctuations were not ruled out.

From the international point of view, the global deflationary pressure has been relieved significantly, with long-term interest rates picking up, shock waves induced by dollar appreciation has weakened, commodity prices become stabilized, and PMI index of manufacturing industry continues to rise. In particular, emerging economies have turned around the slowdown of economic growth over the past five years, witnessing a slight rise from 4% in 2015 to 4.1% in 2016. In the World Economic Outlook released in January 2017 by the International Monetary Fund (IMF), the global economic growth expectations, including the expectations for major developed economies and emerging economies, have been lifted. It was estimated that in 2016 the global economic growth would be 3.1%, slightly higher than that in 2015, and that in 2017 and 2018 the figure would be 3.4% and 3.6% respectively. The reports published by the Organization for Economic Co-operation and Development (OECD) also raised this year’s economic growth expectations of China, the United States, Japan and some other countries at varying degrees. These are all because of the increase of positive and favorable factors.

From the domestic point of view, in recent years, many highlights have emerged in China's economic operation. The economy has maintained a stable growth, the structural adjustment is pressed forward, business efficiency has been improved profoundly, and employment fares well and has gone beyond our expectations. The producer price index (PPI) has been rising for 8 consecutive months. The first two months of this year witnessed a substantial increase in the total volume of imports and exports, raising the possibility of this year’s international trade volume turning round from negative to positive. All these facts have proved that the quality and efficiency of China's economic operation are taking shape for improvement, and a smooth economic performance is ensured. With reference to the experience of those countries with successful economic transformation, their economic growth, after a rapid growth in the transitional period, would drop by about 40% and then gradually became stabilized. Based on that fact, the risk of a sharp decline in China's economic growth has reduced significantly.

Li Wei noted that we need to distinguish the facts between the medium-to-long-term growth trend and the short-term factors. Despite the relative stable medium-to-long-term growth trend, short-term fluctuations are quite probable. In terms of a quantitative evaluation, a fluctuation in the growth rate within 1% should not be termed as unstable. According to the data published by the US government, the economic growth of the US in 2016 was about 1.6%, lower than 2.6% in 2015. However, the world opinion held that US economic performance was "slightly below the market expectations", instead of hyping the instability of the US economy.

Li Wei stressed that although China's economy is expected to transform from a slow growth to a growth focusing more on quality and efficiency, this does not mean that the economic restructuring has completed. At present, the upward momentum and downward pressure in the economy are still in a fragile balance, with many problems in want of solution and relevant preparations are required to face great potential risks.

II. Three Issues Need to Be Noted in Deepening Supply-Side Structural Reform

The Central Economic Work Conference pointed out that 2017 would witness a further supply-side structural reform, which has been further elucidated in the report on the work of the government. Li Wei believed that three issues need to be noted in deepening supply-side structural reform.

First, we need to enhance our awareness of the outstanding conflicts and problems in China's economic operation. Some are attributable to cyclical and overall factors, but the root cause lies in major structural imbalances, especially the imbalance between the supply and demand in the real economy, between the financial sector and the real economy, and between the real estate market and real economy. Only by deepening the structural reform, especially the present supply-side structural reform, can a fundamentally solution be found to address the structural conflicts and restrike new balances, and thus to achieve the transformation in the development pattern.

Second, we have got more to be done. Besides fulfilling the tasks of cutting overcapacity, destocking, deleveraging, reducing corporate costs and shoring up weak spots to gain substantial progress, we need to take into account the conflicts in the economic operation and accomplish relevant tasks including the supply-side structural reform of agriculture, the revitalization the real economy and the establishment of a long-term mechanism in real estate sector. We need to put the supply-side structural reform on top agenda during the 13th Five-Year Plan period.

Third, we need to make a breakthrough in institutional mechanism. To deepen the supply-side structural reform, the key is to achieve a breakthrough in the reform of the institutional mechanisms relevant to the supply-side structure. Those regulations that hinder the decisive role of the market in the allocation of resources need to be fleshed out, and market access threshold needs to be further lowered. We need to improve the factor market, allow the price mechanism to guide the allocation of resources and form a market-oriented mechanism for removing those inadequate enterprises and facilities from the market. We need to further stimulate innovation in the institutional reform, enhance the endogenous power of microeconomic entities, and improve labor productivity, total factor productivity and the potential growth rate.

III. The Building of High-End Think Tanks Should Be in Conformity with the Goal of Providing Appropriate Policy Options for Central Decision Making

2016 was the first year to launch the pilot practice for the building of think tanks with Chinese characteristics. In this regard, Li Wei illustrated his views.

He said that in April 2013, General Secretary Xi Jinping made important instructions on the building of think tanks with Chinese characteristics, which has added a new chapter to China's high-end think tanks’ construction, and his instructions have been incorporated into the reform tasks of the 3rd Plenary Session of the 18th CPC Central Committee. 2016 marked the first year for the pilot construction of national high-end think tanks. Under the guidance of the Central Government, DRC has followed closely the principle of rendering policy consultation service for central decision making and has gained some significant progress and positive results in the pilot work. Li Wei believed that the building of high-end think tanks is a major practice on the national level to promote the construction of think tanks. It’s also a major move in promoting scientific and democratic decision-making, advancing the modernization of state institutional governance, and shoring up the enhancement of national soft power.

In 2016, DRC firmly adhered to the fundamental direction of providing service for central decision making, actively explored new ways and new methods for national high-end think tank construction, fleshed out the approaches to making service for the central decision making, and actively enhanced DRC’s working functions including policy research, policy evaluation, policy interpretation and international cooperation.

According to Li Wei, in 2016 DRC undertook a total of 34 major research programs and 13 policy assessment projects entrusted by the Central Government, and came up with a number of highly valuable research results for policy making with considerable social effects. DRC successfully held the 17th China Development Forum, held the 3rd Silk Road International Forum in Poland during President Xi Jinping’s state visit, established and promoted national-level bilateral cooperation mechanism with Britain, France, India, Singapore, Vietnam, and the OECD and put out a series of cooperative research results with profound influence in the world. DRC has made a positive contribution to China's overall diplomatic strategy.

Li Wei stressed that the government will deepen supply-side structural reform in 2017. DRC will make endeavour to build itself into a high-end national think tank. The major work of DRC in 2017 will focus on further implementing President Xi Jinping’s instructions on the construction of the high-end think tanks, actively exploring the improvement for the organizational structure and management mode of DRC with Chinese characteristics, actively promoting the reform and innovation in the management mechanism and system including the quality of research outcomes, the cultivation of talents, the cooperation with foreign counterparts, the introduction of achievements, the supporting measures for Party’s leadership, and actively advancing the reform and innovation to better serve central decision making.

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