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Economic Restructuring Is Witnessing a New Round of Performance Improvement


By Li Wei, DRC


The Chinese economic growth is still facing certain downward pressure and in general, the growth of domestic demand will witness a minimum downturn and external demand will turn from negative to positive. If we can ensure that no systematic risks occur, we could keep a smooth economic growth this year. But it should be noted that the economy is still under the impact of multiple uncertain factors like volatile external environment, mobility and economic restructuring in some regions, which merit our attention and proper measures for response.

At present, the unbalanced supply-demand economic performance is relieving and the quality and effects of economy are improving gradually. The L-shaped growth is transforming from a vertical mode to a horizontal one. The economic restructuring has entered the phase from speed reduction to quality improvement.

In the mid-to-long term, whether economic growth can keep a mid-to-high-speed is highly determined by the improvement of four basic aspects, namely whether the manufacturing industry and private investment could gradually pick up, whether financial institutions and especially bank asset quality could gradually become fleshed out, whether enterprises’ restocking willingness and PPI (Producer Price Index) could become gradually rebounded and whether reform could gain further momentum.

The performance of world economic pattern and economic order is still favorable for the developing countries. As the largest developing country in the world, China needs to maintain a stable economic growth through reform, accelerate the establishment of an international economic and cooperative system with mutual benefit and win-win result, and create a sound external environment and strategic opportunity for self-development. I. We need to intensify efforts to shore up both hard and soft weak spots.

The supply-side structural reform needs to be practically and further promoted in light of the changing economic performance both at home and abroad.

In terms of cutting overcapacity, we need to focus on disposing of “zombie” enterprises and adopting market- and law-based means to remove low-efficient capacity. Based on the arrangement of the central government, we need to close down insolvent companies and pay more attention to strictly carrying out the standards relating to environmental protection, quality, safety and energy consumption. We need to stress the perfection of market mechanism to eliminate low-efficient capacity, create conditions to promote merger and reorganization of enterprises, appropriately handle enterprises’ debts and make proper arrangement for the reposition of redundant personnel.

With respect to de-stocking, we need to stick to the principle that housing is for people to live in and not for speculation. We need to let houses reinstate their residential property as consumer goods for the people and that requires us to accelerate the construction of a long-term mechanism in light of local conditions through comprehensive measures.

As for de-leverage, the key is to positively and steadily reduce the leverage ratio of enterprises based on the total leverage ratio. We need to adopt methods to effectively optimize enterprise debt structure, carry out market-based debt-to-equity swap and positively realize equity financing. Another major method to reduce leverage ratio is to guide enterprise to adopt an innovation-oriented mode and change the past expansionary development pattern.

In respect of reducing cost, we need to work harder on cutting taxes and fees and reducing factor costs. We need to reduce various kinds of transaction costs especially institutional transaction costs, simplify the review and approval procedures, lower various types of intermediary assessment fees, reduce logistics costs and enhance the flexibility of labor market. However, it should be noted that tax cut is facing the binding regulations imposed by the amount of government expenditures and the pressure resulting from the balance of state revenue and expenditures. As a result, there is limited space for tax cut.

In view of making up for weak points, we need to pay attention to both hard and soft weak spots relating to development and system. To make up for soft weak spots or systematic weak spots, we need to mainly optimize market environment and strengthen government service. If the government oversteps its bounds of duties or if the government fails to perform its functions, these must be pointed out and corrected. Meanwhile, we need to make more efforts in steadily pushing forward the work of poverty alleviation. II. We need to encourage people to buy domestic products and enhance the innovation ability of enterprises.

In recent years, the development of China’s real economy has encountered many difficulties and problems, mainly including the imbalance between supply and demand structure, and between the real economy and finance. To boost the development of real economy, we need to boost consumers’ confidence about domestic products and connect intermediate links between demand and enterprises. The Chinese enterprises have very strong production capacity, but the crucial question is that consumers’ demand cannot be delivered to the production of domestic enterprises and the major weak spots are the “market” in between and domestic consumers’ insufficient confidence on “Made in China” products. Creating an institutional environment that consumers can “rest assured to buy” is the key point to boost real economy.

Another important issue is to implement “Made in China 2025” strategy and to make efforts to improve enterprises’ innovative ability. At present, we are facing double pressure imposed by low cost of late movers and re-manufacturing of developed countries. Under such a landscape, the Chinese manufacturing industry urgently needs to enhance its development to a higher level. That requires us to study how to implement “Made in China 2025” strategy, so as to comprehensively promote enterprises’ innovative ability and realize enterprises’ transformation and upgrading through digitalization, networking and smart technologies. We need to build a number of strategic industrial clusters with core competitiveness as soon as possible, and forge a large number of well-known brands accepted and acknowledged by domestic and foreign markets.

III. We need to put financial risks prevention and control in a more important position.

This year the pressure of preventing and controlling financial risks is becoming severer. First, as the US Federal Reserve accelerates the raising of interest rates, the international financial environment will be more complex and changeable, and the shock resulting from external risks cannot be underestimated. Second, due to the lack of endogenous growth momentum, “steady growth” will still rely on credit expansion to a certain degree, and the leverage ratio is still facing rising risks. Third, in the course of removing zombie enterprises from the market and deleveraging, the accumulated risks may be exposed. Fourth, in the process of deleveraging and dealing with a number of risk issues, if financial regulatory capacity and regulatory coordination cannot be effectively improved timely, the risk of transmission chain is not grasped accurately, the disposal level, rhythm and timing are not grasped properly, it is possible to induce financial risks, especially liquidity risks.

Therefore, we need to put financial risks prevention and control in a more important position. We need to strengthen relevant investigation and study, closely monitor the risk operation trend in various fields, make risk prevention plan, and improve local financial supervision and risk disposal mechanism.

IV. We need to establish a basic system and a long-term mechanism relating to real estate market.

We need to pay high attention to the prevention and defusing of real estate risks. We need not only to curb the expansion of real estate bubbles, but also prevent the bubbles from bursting to induce risks. We need to seriously study relevant regulatory policies on the prevention of real estate bubbles, including financial policy and land policy. At present, the differentiation of real estate market will become more obvious. The housing conditions of urban and rural residents in China have been greatly improved. The former renters now have their own houses and they hope to have more spacious and comfortable homes. The phased changes in the real estate market require us to further study the development rule of real estate market in the new era, and formulate relevant policies for the regulation of real estate market according to our research findings.

We need to attach great importance to preventing and defusing risks in real estate sector, firmly grasp the two key points of “national conditions” and “market rules”, and establish a basic system and a long-term mechanism to lay a solid foundation for the steady and healthy development of the housing market. To make up for the soft weak spots and the weak spots of system, the main method is to optimize the market environment and improve government service. As I mentioned earlier, if the government oversteps its bounds of duties or if the government fails to perform its functions, these must be pointed out and corrected. At the same time, we need to push forward poverty alleviation work in a steady manner.

V. We need to protect entrepreneurship and promote private investment.

Presently, we need to effectively protect the entrepreneurial spirit and support entrepreneurs to concentrate on innovation and entrepreneurship, which are the major issues for current reform and development. Entrepreneurs’ expectations are affected by objective economic factors like market demand changes and industrial development reform, and we must attach great importance to the issue of property rights protection. According to the results of relevant questionnaires survey and seminars, in recent years, one of the most concerned issues of private entrepreneurs is about property rights protection. In 2016, the CPC Central Committee and the State Council jointly promulgated the guidelines on improving the system of property rights protection and the protection of property rights according to law, which proves the central government’s concern for this issue. This policy does not evade the problem, but hits the mark, and the key is that it needs to be implemented seriously and effectively.

Both state-owned enterprises (SOEs) and private enterprises need to display entrepreneurial spirit. SOEs should also participate in market competition, rely on innovation to realize development, and face all kinds of market risks. In the new round of state-owned enterprise reform, we need to mobilize the enthusiasm of SOEs’ managers through system design, perfect corporate governance, and truly put into effect the authority of enterprises to operate independently. We need to perfect the accountability mechanism and establish a liability exemption mechanism, and prevent risks that are difficult to avoid in commercial operation and during innovation and entrepreneurship drive.

Note: Li Wei, President, Deputy Secretary of the Leading Party Members’ Group and research fellow of DRC