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Seven Major Issues to Be Addressed During the New Round of Economic Restructuring



The annual mid-year meeting sponsored by DRC on economic performance of relevant provinces and cities was held on June 22, 2017 in Guiyang, provincial capital of Guizhou Province. Li Wei, President of DRC, made a report on the economic performance and Chen Yiqin, Deputy Secretary of Guizhou Provincial Party Committee and Secretary of Political and Legal Commission under the Guizhou Provincial Party Committee, made an opening speech. Zhang Junkuo, Vice President of DRC, chaired the meeting. Long Guoqiang, Vice President of DRC and Wang Fuyu, Chairman of the CPPCC of Guizhou Province, attended the meeting.

The meeting lasted for one and a half days, focusing on the analysis of the economic performance of China and relevant provinces and cities in the first half of the year and prospects for the economic development trend in the second half of the year. Some policy options were raised at the meeting.

In his report, Li Wei made a comprehensive and in-depth analysis of the current economic performance of China, illustrated the positive changes and uncertainties relating to economic recovery, and made predictions on economic performance in the whole year.

Li Wei says that in the first half of 2017, the global economy has continued to gain momentum for recovery and major economies’ demands are increased. The market expectations are improved and favorable conditions for China’s economy to witness a mid-to-high growth continued to increase. Progress have been made in industrial transformation and upgrading and enterprises’ profits have taken a turn for the better. Export has bottomed out and become obviously rebounded and some sectors with operation difficulties have realized steady growth. Meanwhile, de-globalization and trade protectionism are looming up, adding uncertainties to economic recovery. Global economic recovery might be hindered as major economies gradually exit from quantitative easing policies and this has led to the reallocation of assets and fluctuations in the capital market. Influenced by deleveraging, enforced regulation and the adjustment of the real estate market, the domestic economy is also facing pressure to pick up in the short term. In general, the economic growth in the first half of 2017 would be faster than in the second half, and the growth speed might slow down by a narrow margin in the second half of the year, but we are confident to realize the economic growth target set for the whole year.

Li Wei makes an in-depth elaboration on the following seven major issues which deserve close attention in the current economic operation.

I. New policy measures of the U.S. and development trend of the global economy

Li Wei noted that since 2016 the world has been obsessed by Brexit, Trump’s victory in US presidential election, anti-globalization and trade protectionism. The geopolitical turmoil such as the North Korean nuclear crisis, the Syrian stalemate, sanctions against Iran imposed by Western countries led by the U.S. and Iran’s anti-sanction measures has also overshadowed the economic recovery. However, people’s concerns have been reduced because in the first half of 2017, there have been some positive changes in the international environment, and major events which could influence global economic recovery have not reared their ugly heads.

1. The comprehensive trade war between China and the U.S. did not break out and uncertainties over the relationship between the two countries have been reduced. As US and China counterbalance each other in many interest-related aspects, Trump didn’t provoke a trade war with China as he mentioned during the presidential campaign. After a series of diplomatic efforts, especially after the “Xi-Trump meeting”, Sino-US tense relations have been mitigated and the new bilateral economic and trade dialogue mechanism is also taking shape, which have laid a sound foundation for the establishment of a rational and practical Sino-US relationship and a stable cooperation. 2. As political situations in France and Germany are stable, the European Union’s economy is picking up and the possibility of hard Brexit is reducing, people’s worries over the Euro disintegration and the break-up of the European Union are somewhat alleviated, all looking forward to restarting the reform. 3. Recent positive changes in the international environment have also improved the overall expectations of the global market. Recently, the IMF raised, in its forecast, the global growth in 2017 by 0.1 percentage point to 3.5%.The global trade growth is hopefully predicted to be enhanced to about 4%, and was expected to exceed the GDP growth rate for the first time since 2012.

Li Wei emphasizes that the uncertainties over trade protectionism, populism, terrorism and geopolitics turmoil have not been eliminated, and we need to make proper judgments, formulate related measure and address the relevant issues with good reasons and integrity.

II. China’s industrial reorganization and upgrading

Li Wei points out that in recent years, China’s real economy is facing a number of difficulties. In the recent two years, the profits of enterprises have been greatly improved through the deepening of supply-side structural reform, making genuine progress in cutting overcapacity and excess inventory, deleveraging, reducing costs and strengthening weak points, forming the mechanism of letting market competition determine which businesses could survive, and accelerating the transformation from old to new growth drivers.

1. Progress in cutting overcapacity of steel and coal industries has been made and provided conditions for structural adjustment of the heavy chemical industry. By May 10, 2017, 31.7 million metric tons of steel production capacity and 68.97 million metric tons of coal production capacity had been cut across the country, fulfilling 63.4% and 46% of the annual targets respectively. 2. The industrial structure continued to be optimized, and high technology and emerging industries grew fast. In the first quarter, the tertiary industry remained the most powerful driver for economic growth. The supporting role played by the secondary industry, especially industries has been enhanced, and the value added of advanced manufacturing industry as well as the new technology industries have maintained a fast growth. 3. An industrial system has been set up in which the good eliminates the bad, and the market share of advanced enterprises is gradually increased. The traditional industry is accelerating its transformation and upgrading, and through introducing new technologies, new modes and new mechanisms, the organizational structure of traditional industries has been fleshed out and optimized and the industrial concentration ratio has been obviously improved. 4. Innovation investment has been constantly increased and the innovation capability has been greatly enhanced. The innovation-driven strategy has stimulated the whole society to invest in independent innovation. Currently, the R&D investment of enterprises accounts for 78% of the aggregate R&D input across the country, and the R&D investment intensity is about 2.1%. 5. The profits of the real economy are constantly increased. The industrial growth is stable and rebounds slightly. The profit margin of enterprises is increasing and the number of loss-making enterprises is reducing. The leverage ratio of the real economy is brought down.

Li Wei asserts that it is a long-term task to improve the operational environment of the real economy and promote the transformation and upgrading of industries. We will accelerate the debt disposition of enterprises and provide assistance to laid-off employees, prevent the resurgence of enterprises which have been closed down due to their outdated facilities, constantly improve market and environment regulation, level the playing field for competition, accelerate the establishment of a market system in which the good eliminates the bad and promote the transformation and upgrading of industries. We will work harder to streamline administration and delegate more powers to lower levels, reduce taxes and fees, cut the costs of financing, energy and logistic sectors and stimulate the vitality of the real economy.

III. The relations between financial deleveraging, regulation intensification and strengthening service to the real economy

Li Wei highlights three points. 1. The aim of financial deleveraging and regulation intensification is to provide better service to the real economy. At present, due to the imbalance between the financial sector and the real economy, elements of innovation including entrepreneurs’ capability, capital and talents are flowing from the real economy to the virtual economy. Financial deleveraging means to manage the imbalance between the financial sector and the real economy at source and prevent and resolve financial risks, which can help prevent production factors flowing from the real economy to the virtual economy, maintain the financial security, and enable the financial sector to provide service to the real economy.

2. Financial deleveraging and regulation intensification require a better coordination between all relevant departments. Regulation departments need to enhance their coordination in the following three aspects: they need to unify the regulation standards of asset management products and strengthen information sharing; they need to improve the coordination between regulation policies and monetary policies and ensure a reasonable and adequate market liquidity; and they need to strengthen the coordination between central and local departments.

3. Financial deleveraging and regulation intensification require the coordination of local departments. We need to flesh out local financial management mechanism and the incentive and restraint mechanisms of local state-owned financial institutions, actively deal with a series of risk issues, and keep high alert on and prevent the growth of implicit debt or contingent liability of local governments.

IV. New modes and characteristics of regional economic development

Li Wei focuses on three issues. 1. The new strategy of spatial layout is helping the transformation of regional economy. In recent years, the number of state-level new areas has increased significantly and the layout has become more balanced and these areas are imbued with more functions. For example, the newly established Xiong’an New Area bears some of the functions for relieving Beijing’s non-essential role as China’s capital. The promotion of the experience of pilot Free Trade Zones is also picking up speed.

2. The Belt and Road Initiative has provided new opportunities for central and western regions to participate in the global division of labor. Central and western regions, which are lagging behind in the process of opening up, is rapidly improving the degree of participation in the global division of labor and might play a leading role in opening up. The growth of foreign direct investments in central and western regions since the global financial crisis has rapidly improved, and with the development of all-round opening up, the central and western regions in China will share more benefits through opening up.

3. China should actively respond to regional development challenges imposed by regional differentiation resulting from different layout of natural resources, industrial foundations and institutional arrangements. To further promote the coordinated development of regional economy, China needs to be prepared for a long-term challenge in the course of economic transformation.

V. The effect of real estate regulation and control and the establishment of a long-term mechanism

Li Wei believes that great achievements have been made in the new round of regulation and control of real estate sector. With the gradual implementation of the restriction policy on housing purchase and housing loans, the sale growth of housing has slowed down and the rapid growth of housing prices in large and medium-sized cities has been curbed. The investment growth in real estate sector has declined and number of unsold homes continues to get reduced.

Li Wei indicates that the development of China’s real estate sector has transformed into a new stage, where the aggregate amount is balanced but the structure is under adjustment. The problem of insufficient supply has been basically resolved, but other structural problems relating to regions, housing quality, housing types and the proportion of commercial housing and government-subsidized housing are becoming increasingly prominent. It is estimated that in the second half of this year, the sales growth of housing will drop further, which is a natural and an inevitable result of the transformation of the real estate sector. Instead of continuing to stabilize growth through maintaining relevant investment in real estate sector, the focus of work should be shifted to promoting the structural adjustment and optimization, and establishing the long-term mechanism for the healthy development of the real estate market. The key to establishing such a mechanism lies in adhering to the principle of “houses are for people to live in, and not for speculation” and we need to let houses reinstate their residential property. We need to increase housing supply in major cities, increase support for the marketization of rural collectively-owned land designated for business-related construction, and expand marketing channels for the purchasing and renting of government-subsidized housing and homes purchased as owners’ residences. We need to keep a prudent and neutral monetary policy, maintain a basically stable paying capability of residents for purchasing houses, impose strict restrictions on down payment loans and other leveraging-up approaches in disguise designed to avoid regulations, and improve the macro prudential policy framework relating to real estate loans. We need to strengthen housing security, increase the proportion of monetary compensation for people displaced by the rebuilding of shanty towns improve the supporting facilities of low-income housing and improve the quality of housing security. We need to flesh out housing tax system and increase housing supply and the liquidity of housing market, enhance the interconnection of cities, improve cities’ carrying capacity and aggregation degree, accelerate the city-industry integration and the construction of towns with distinctive features, connect big cities with surrounding cities and further equalize public services.

VI. Farmers’ income growth and poverty alleviation

Li Wei holds that at present, the income growth of farmers still has a large potential, and the reasons are as follows. 1. The high grain inventory has hindered the income growth of farmers. The inventory of corn and rice is maintained at a high level and wheat inventory is growing, which will exert a significant negative impact on farmers’ income. 2. The growth of farmers’ wages is slowing down, because in recent years, the economic growth is declining and the employment structure is experiencing adjustment, which have influenced the employment of migrant works. 3. The growth of farmers’ net property incomes is still slow.

Li Wei claims that, currently, based on the supply-side structural reform of agriculture, we need to adhere to green development, draw strength from reform and innovation, focus on structural adjustment, accelerate the cultivation of new growth drivers for agricultural and rural areas, promote supply upgrading, improve the quality and effectiveness, boost farmers’ income and enhance the momentum for the development of agriculture and rural areas.

1. We need to accelerate grain inventory reduction and protect farmers’ interest at the same time. While promoting the market-oriented reform, we need to reduce inventory but also protect farmers’ interest and avoid discouraging farmers’ enthusiasm for grain growing. 2. We need to increase farmers’ wages with supporting measures. We need to seriously size up the new situations, new changes and new challenges facing farmers in terms of employment, income, training, and skill improvement and take proper measures to address these issues. 3. We need to speed up rural reform and increase farmers’ net property income. We need to summarize and disseminate the experience gained from the three pilot regions relating to rural land reform, advance reform of rural collective property rights system, and promote the flow of rural assets to increase farmers’ income. 4. We need to make efforts in pushing forward poverty alleviation and giving prominence to guarantee and improve people’s livelihood. We need to take targeted measures for different households and people and ensure the effect of poverty alleviation.

VII. An overview of the economic performance in the first half of 2017 and the whole year

Li Wei asserts that, since the first quarter of 2010, China has witnessed for over seven years the change of economic growth pace. China’s economy has overcome challenges induced by overcapacity, rising leverage ratio, cross-border capital flow and the devaluation of exchange rate. In the second half of 2016, China’s economic performance turned to become stable, and the economic growth as well as the effectiveness have been improved. This momentum has been maintained in the first half of 2017.

In the second quarter of this year, as the real estate regulation and control and financial deleveraging began to take effect, the overlapping inventory replenishment was reduced and the domestic demand faced certain picking up pressure. There are some new changes in the economic development: the output growth was slightly slowing down; PPI and profit growth surged prior to declining; the rebound of private investment was weak; and driving forces for re-stocking grew weak.

Viewing from the mid-to-long-term perspective, the essence of this round of picking up of growth is a short-term adjustment in the mid-to-high growth speed period, so the scale of this round of picking up is limited. 1. China’s economy has entered a phase for a new round of restructuring, and it’s highly likely that China’s economic growth will get stabilized with a mid-to-high growth. The drop of domestic demand relating to real estate, infrastructure and automobile sectors is gradually eased. After the overcapacity reduction, the risks for economic deceleration have obviously declined and the imbalance between supply and demand has been alleviated. Besides, China’s economy is imbued with the feature of both quality and quantity pursuance, and there’s still potential for the improvement of the effectiveness and scale expansion. 2. With regard to facility investment cycle, the potential for capacity improvement of the manufacturing industry is about 5%. According to the international experience, as the economic growth slows down, investment growth of manufacture facilities will continue to decline and there may be a negative growth in the short term. After that, the growth rate will become stabilized at the range of about 5%, and the economic growth will also become stable. Currently, China’s investment in manufacture industry falls in this range. 3. The periodic upturn of the external economy can help stabilize China’s economy. In May 2017, the PMI of manufacture industry of G20 countries, which boast more than 80% of global economic aggregate, stood at a high level since 2011. The overseas demand continues to grow and China’s export is expected to increase with relevant fluctuations. The US dollar index lacks impetus for further appreciation, and can support the stabilization of bulk commodities. Pressures for outflow of capital in emerging markets and the depreciation of exchange rate have reduced and the growth rate of the global economy and international trade are expected to increase respectively.

Li Wei reveals that the stabilization of economic development doesn’t mean that the economic growth will maintain a fixed level, but will slightly fluctuate around a certain growth rate. Currently, the foundation for economic growth at a mid-to-high speed is still instable, so we need more favorable conditions and policy measures need to focus on maintaining the future momentum of economic growth with a mid-to-high speed. We need to take further steps to reduce cost, prevent excessive leveraging by local governments and enhance the policy coordination when disposing risks. We need to adhere to the principle of seeking progress while keeping performance stable, maintain the strategic focus, improve the macro control and prudential management, deepen the supply-side structural reform, control risks effectively, improve the level of opening up, foster and strengthen new drivers, promote the integration of new departments with traditional ones, continue to increase the productivity, and maintain a stable and healthy economic development.

Chen Yiqin expressed her welcome and greetings to all the participants attending the meeting and gave a briefing on the economic and social development of Guizhou Province. She said that since the beginning of this year, Guizhou Province is strengthening the stable economic development and promoting the transformation. The new drivers are growing and more achievements are being made. The economic development of the province maintains a good momentum of stable growth, fast transformation and quality improvement. In the next five years, Guizhou Province will deepen the supply-side structural reform, adhere to development and ecological protection, make effort to implement the three strategies of poverty alleviation, big data and ecological protection, build a well-off society in an all-round way in step with other parts of the country and strive for a prosperous future of Guizhou Province where people are wealthy and the ecological environment is beautiful.

In the afternoon of that day, delegates attending the meeting from various provinces and cities held group discussions on hot issues, and major and difficult problems in light of the development of respective regions and put forward relevant policy options. Li Wei, Zhang Junkuo and Long Guoqiang participated in different group discussions and exchanged views with the delegates.

The agenda of the meeting on June 23 also included summary of the group discussions, reports on special topics, discussions on local economic performance and summary of the meeting. Long Guoqiang made a conclusion speech.

Attending the meeting were responsible members of research and development centers of various provinces and cities and policy research centers across the country and leading members of relevant research departments and research institutes of DRC.