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Out of the “Haze”


  On the afternoon of February 27, 2016, the 27th CCWE Macroeconomic Forum was held by the Center for China in the World Economy (CCWE) in the International Lecture Hall of Weilun Building at Tsinghua University. Like the city of Beijing, the Chinese economy was now shrouded in heavy “haze”. How do we react to those difficulties that will face the economy in the future? How should our macroeconomic policy respond to the situation? How does the Chinese economy get out of the “haze” and embrace “sunshine”? To find answers to these questions, the Center invited the following guests to the forum: Yao Jingyuan, Special Researcher from Counselors Office of the State Council, He Fan, Researcher from Institute of World Economics and Politics, Chinese Academy of Social Sciences, Jin Chanrong, Associate Dean of School of International Relations, Remin University of China, Wang Yi, Director of Science and Technology Policy Institute, Chinese Academy of Social Sciences, Xu Hongcai, Head of the Research Department, China Center for International Economic Exchanges, and Christopher Wiegand, former Chief Economist and Strategist of Soros Fund Management. Professor David Daokui Li, CCWE Director, chaired the forum.


  Professor Li first talked about the fluctuations in domestic financial market this January. He noted the surging amount of China doomsayers in the international market. For example, George Soros expressed the concern that Chinese economy would head for a “hard landing”. Next, Professor Li shared the basic views of CCEW research team on the situation of China’s economic development: Generally speaking, we still have the confidence, the methods and the incentives to overcome the “haze”.


  Firstly, we have the confidence because China’s economy still boasts three basic factors of economic growth: a stable and pro-market government, ever-increasing human capital (including the improvement of education and laborer health) and continued opening up policy.


  Secondly, we have our methods because the Chinese government proposed “de-capacity, de-stocking, de-leveraging, cost reduction, and gap filling” to further optimize the economic structure and ensure sustained and rapid growth.


  Finally, we have the incentives because of some delightful changes to China’s economy in recent time. For example, the real economy begins to show signs of going upward; the investment in real estate starts to bottom out and a number of “new generation” consumers may emerge thanks to the “two-child” policy.


  Professor Li believes that economic growth in China is expected to “bottom out” in 2016 if a variety of major reform measures are implemented. In 2017 and 2018, China’s economy will not only get stabilized, but also pick up again. 2016 is a year to look forward to. Once realized, China’s economy will lay a solid foundation for implementing the “13th Five Year Plan” and achieving the first centennial goal by 2020.


  In the roundtable dialogue session, the guests had in-depth discussions over the current hot issues.


  Mr. Yao Jingyuan shared his judgment of the situation of China’s economy. He holds that the current economic “haze” mainly features “four reductions and one rise”, respectively the reduction in growth rate, PPI, corporate profits and fiscal revenue, and the rise of potential risk. Talking about the decline in China’s economic growth rate, Mr. Yao pointed out in particular that one should differentiate statistics from accounting before analyzing the growth rate of China’s economy. Statistics is a dynamic measurement. Trend weighs heavier than static data. For instance, in 2015, China’s economy grows at 6.9%. Compared with the growth rates in previous three years, we can see that China’s economy is slowing down. Mr. Yao also drew an analogy of the four seasons when analyzing cyclical changes to world economy. He vividly explained that the current economic difficulties are partially attributable to the impact from the cyclical fluctuation of global economy. However, it is more important for us to recognize the structural problems of our own. Instead of putting all the blame to “cyclical changes”, we need to be on the move to reform rather than just “sitting there”. Of course, current challenges facing the Chinese economy also provide us with an opportunity to restructure and upgrade our economy by allowing it to enter a higher level of development.


  Mr. Xu Hongcai summarized major political adjustments for some time to come, such as the reform on the supply side (including state-owned enterprise reform) and reform of finance and tax system. Concerning the supply side, there are five main tasks to perform: de-capacity, de-stocking, de-leveraging, cost reducing, and gap filling; concerning the state-owned enterprise reform, we need to maintain public ownership as basic form of economy and carry out the reform in the context of market economy. Currently, the government focuses on two points in the top-level design: one is to strengthen Party's leadership and the other is to encourage corporate innovation. Since the two points contradict each other in some respects, it is necessary to have them integrated in a certain way. We need to improve the efficiency of state-owned enterprises, and boost economic vitality from the view of microeconomic entity. Some monopolized sectors should be opened up to the market, giving social capital the opportunity to join the competition. Moreover, the government should put forward supporting reform measures for the exit, merger and acquisition of zombie companies. Mr. Xu also stressed that China's fiscal and taxation reform must involve the establishment of a modern governance mechanism, which in turn require the government to transform its functions and improve efficiency. Moreover, Mr. Xu pointed out sharply that the complicated and overloaded documents on top-level design won’t work without concrete implementation.


  Professor Wang Yi, member of NPC Standing Committee and expert on environmental governance, introduced his judgment of China’s law-making process in 2016, consisting of the legislative process related to the development of market economy (including real estate tax, environmental protection tax and other taxes), and improvement of existing laws (including the modification of the Securities Law). Apart from these, Professor Wang encouraged national legislative departments to focus on people’s livelihood. Two of the most important subjects on the two sessions this year are the “13th Five Year Plan” and the discussion over the Charity Law. As China becomes a middle-income country, we need to mobilize more social forces to do charity, and make the society more and more involved in improving people's livelihood. As an environmental expert, Professor Wang made a special mention of the importance of environmental protection in the “13th Five Year Plan”. In his opinion, first, we should not just pay lip service but seek real harmony between development and the environment; second, we should walk out of the institutional “haze” by breaking the boundaries between different sectors and departments and have them all shoulder responsibility of environmental protection; third, we should attach great importance to technological development and update the industrial structure and optimize the industrial layout with the integration of a variety of green, intelligent technologies emerged in the new industrial revolution. Furthermore, Professor Wang noted that the above process, accompanied with a lot of uncertainties, should be advanced through integrated and solid efforts, and its results should be viewed rationally.


  Former chief advisor of George Soros, Mr. Wiegand talked about his view of the financial giant. He praised Soros as a great investor with outstanding predictive ability and is excellence in risk management. However, Soros is too pessimistic about China’s economy. In spite of the downside risk, China’s economy has a strong ability to withstand risks. Mr. Wiegand believes China would not become the source of a financial crisis thanks to a strong Chinese government and the limited financial influence of bad debts in Chinese banks - all entirely different from what was in the US in 2008.


  Mr. Wiegand pointed out that China's economic slowdown posed a severe challenge to a large number of countries, especially emerging markets. Some Wall Street investors not optimistic about China's economic prospects began shorting the RMB and other currencies in every emergency market. But he also holds that now is a good time for Chinese investors to go overseas, especially the corporate bond market in the US, because the market has a low probability of default and a fairly good rate of return.


  Mr. He Fan started with his column “The World Is in a Rage” and Fault Lines by Raghuram G. Rajan, an American economist. He said the widening gap in income and escalating conflicts between the civilizations could be seen as the aftermath of global financial crisis. In his opinion, when the economy is booming, the income gap will motivate people to work hard and ignore the gap between the rich and the poor; when the economy is down with income gap widening, more and more people will feel that a “good family background” is more important than hardworking. The twist in people’s values will cause widespread social problems. As China’s economy growth is slowing down, social harmony will be damaged. Mr. He Fan does not think property tax is the fundamental solution to this problem. He believes in “equal opportunities” and giving hope to the unprivileged young people. He also mentioned the grim employment situation for college graduates. Mr. He stressed that the problem could not be solved by encouraging young graduates to start their own business. Instead, we should adjust the economic structure, and develop more high-end services, aiming at absorbing high level talents and meeting the growing demand in the market.


  Mr. Jin Canrong shared his views on the US presidential election. He said the Trump “frenzy” reflects great changes in the US, signifying a kind of radicalization of American society while demonstrating people’s dissatisfaction with the governance as well as their distrust of existing politicians and governance system. Professor Li added the Trump phenomenon shows that US loses faith for the first time in hundreds of years. Mr. Jin emphasized that China does not need to be “panic” about the uncertainties in the US presidential election; China should also keep an eye on diplomacy while focusing on economic revival.


  After that, the guests had relaxed and pleasant interactions with the audience on the issues of internationalization of the RMB, exchange rate fluctuations, two-child policy, de-capacity, etc. The forum achieved complete success and concluded in warm applause.