By Wang Yiming

Research Report Vol.20 No.2, 2018

I. The Focus of Economic Work Shifting from “Stabilizing Growth” to “High-quality Development” as Economic Growth Stays Strong in the Reasonable Range

In 2017, China’s economy stayed on a steadily upward trend. The economic development remained in a reasonable range with the first rebound of annual economic growth rate slightly up to 6.9% since 2011. The structural adjustment has been continuously deepened, and the contribution of final consumption and the service sector to economic growth has increased. With accelerated shift in driving forces for development, the increased capacity utilization rate, higher enterprise revenues, and improved quality and efficiency, the economic development will see increased vitality and resilience. The economic outlook of China for 2018 is the further accumulation of favorable conditions for high-quality development as well as new challenges and risks. We must adhere to the overall principle of making progress while maintaining stability and the supply-side structural reform; in accordance with the requirements for high-quality development, we should coordinate the efforts to promote steady growth, reform, and structural adjustment and to improve people’s lives and prevent risks. We need to prevent and resolve major risks, eliminate poverty with targeted measures, and prevent and control pollution, so as to foster sustained and healthy economic development.

II. 2017: Accelerated Transition Towards High-quality Development

In 2017, under the combined effects of further structural reforms on the supply side, the gradual upshot of demand management policies, and the notably improved market expectations, coupled with the steady recovery of the global economy, China’s economy saw steady upward trend. The structure, quality and efficiency of economic growth displayed positive changes and veered toward high-quality development.

First, economic development showed stronger stability. The economic growth rate remained within a reasonable range at an annual growth of 6.9%, 0.2 percentage points higher than the previous year and the first rebound since 2011. With a GDP of RMB 82.7 trillion and calculated at constant prices, it will complete 83.2% of the target of 2020 by doubling the GDP of 2010, and lay a good foundation for building a moderately prosperous society. Employment remained stable with more than 13 million new urban jobs created. In December, the urban unemployment rate was less than 5%. The overall prices remained stable, with the CPI rising by 1.6% and the increase rate down 0.4 percentage point from the previous year. PPI rose by 6.3%, ending the continuous decline for five consecutive years since 2012. The balance of payments (BoP) continued to improve, as the contribution of net exports of goods and services to economic growth turned positive from negative. Overall, the major indicators of the macro economy were better than expected, and indexes such as economic growth, employment, consumer price, and BoP were nearly matched and have been gradually adjusted to the level that is compatible with the potential for high-speed growth.

Second, structural adjustment continued to deepen. The consumption in economic growth has become more dominant. In 2017, the final consumption accounts for 58.8% of the economic growth, which is 26.7 percentage points higher than the capital formation and 2.6 percentage points higher than the average contribution rate of final consumption in 2013-2017. The proportion of the service sector has increased. The added value of the service sector accounts for 51.6% of the GDP, and its contribution to economic growth reaches 58.8%. The contribution of net exports of goods and services to economic growth rises from negative to 9.1%, an increase of 18.7 percentage points from the previous year. The increased contribution rate of consumption, the increased proportion of the service sector, and the improvement in the structure of external demand have played a fundamental role in the shift of China’s economy towards high-quality development.

Third, the transformation of driving force accelerated. The development of new technologies, new industries,new types of business, and new models was robust. New technologies such as the C919 large aircraft, “Fuxing”, “Hualong I”, and quantum communications have risen rapidly. Production of industrial robots, new energy vehicles, and integrated circuits has increased by 68.1%, 51.1%, and 18.2%, respectively. The added value of high-tech industries and equipment manufacturing industry increased by 13.4% and 11.3%, respectively with growth rate 6.8 percentage points and 4.7 percentage points higher than that of industries above designated size respectively. Online retail sales, online retail sales of physical goods and online retail sales of non-physical goods increased by 32.2% and 28%, and 48.1%, respectively. The scale of mobile payment transactions exceeds RMB 81 trillion, ranking first in the world. The development of sharing economy, shared economy, digital economy, and platform economy spurred. The accelerated technological innovation and technology diffusion have driven the growth rate of total factor productivity to maintain its upward trend since 2015 and reversed the downturn after the financial crisis.

Fourth, quality and efficiency showed significant improvement. Driven by structural reforms on the supply side, companies have increased their adaptability to the rapidly growing markets, which has improved their profitability and profit significantly. In 2017, profits of enterprises above designated industrial size increased by 21% year-on-year, an increase of 12.5 percentage points from 2016. The per capita disposable income of residents maintained a relatively rapid growth, with an actual increase of 7.3%, which was 0.4% higher than the economic growth rate. The growth rate of fiscal revenue went up, reversing from a downward trend. The revenue of the general public budget increased by 7.4%, and tax revenue increased by 10.7%, which was an increase of 2.9 and 6.3 percentage points over the previous year, respectively, and a reverse of year-on-year slowdown trend in recent years. The effort in making ecological progress was unprecedented, and the environment was conspicuously improved. The energy consumption per GDP decreased by 3.7%, which was better than the annual target. The concentration of PM2.5 decreased in 338 prefecture-level cities nationwide.

Fifth, financial risks prevention showed initial results. With strengthened supervision, rectified financial chaos, mended system’s shortcomings, and progress in de-leveraging, the “retreat from real economy” was basically impeded. In the third quarter of 2017, the leverage ratio of non-financial corporate and non-financial sectors began to decline. In the fourth quarter, the growth of macro leverage rate went down. At the end of November, the asset-liability ratio of industrial enterprises above designated size was 55.8%, a decrease of 0.5 percentage point over the same period of previous year. Such cases as local governments exempt from the regulation of borrowing, the “name-shared stocks”, non-compliance guarantee, and off-balance-sheet financing have been reined. The coordination and penetration of financial supervision was enhanced; the chaos of regulatory arbitrage decreased; and the rapid expansion of inter-bank business, shadow banking, and asset management was curbed. All aspects of risk awareness have been strengthened, and the market expectations for “rigid cashing” and “implicit guarantees” are changing, creating favorable conditions for deepening supply-side structural reforms.

While the upward trend is more stabilized and quality and efficiency have been improved, we must also see that due to deep institutional factors, economic development still faces new conflicts and risks.

First, there are still challenges for the real economy. Although the profitability of real economy businesses has been greatly improved, the problem of low investment efficiency, high business cost, and lack of business vitality is still prominent. For example, the non-financial listed companies still have the lower return on net assets in 2017 than the average since 2010; the task to improve production efficiency and reinvigorate the real economy still remains arduous.

Second, the growth of private investment remains weak. Due to such factors as overcapacity in traditional industries, hidden obstacles in access to certain sectors, incomplete implementation of private investment policies, and unsound protection means for property rights, the private investment went up by 6.0% in 2017, which was a 2.8 percentage point increase over the previous year but still lower than the growth rate of fixed-asset investment by 1.2 percentage points.

Third, the pressure of potential financial risks remains high. The cause of accumulative financial risk is that the macro leverage rate rises too quickly. The decreased growth rate of macro leverage since the fourth quarter of 2017 is largely benefited from the rising nominal GDP. The basis for deleveraging is still not solid, and the model of debt-driven investment expansion is not yet fundamentally changed. Since the conspicuous imbalance between financial and real economy, financing and real estate, and the internal structure of financial system, coupled with the slightly relaxed regulations, the leverage rate may rebound again.

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