Keywords: economic situation, digital economy, economic restructuring, opening up
Author: Zeng Peiyan, Chairman of China Center for International Economic Exchanges
Source: Globalization, 1st Issue, 2018
Abstract: At present, some new features have emerged in the Chinese and international economy. The global economic recovery is becoming increasingly evident, a new economy represented by the digital economy is on the rise, and the international community is highly concerned with the spillover effect of the US economic policies. As for the Chinese economy, we can see that it is experiencing a smooth transformation, progress has been made in transforming the old economic momentum, the opening up is moving in a two-way direction, the environmental protection and ecology have become more important than ever, the regional development has become more balanced, and the environment for business has been improved. In 2018, we should continue to seek economic growth while maintaining stability, adhere to the new development concept, closely follow the changes in China’s major social contradictions, and earnestly implement all tasks in accordance with the requirements of high-quality development.
An accurate understanding of the trend is a prerequisite for doing a good job and thus, we have to analyze the new situations and features of the current domestic and international economy. Generally speaking, the international political situation is likely to remain complex and changeable. The Trump administration has become stabilized after one year’s running-in period, regardless of its internal affairs or foreign diplomacy. However, it is difficult to predict the future development properly. There were no “black swan” incidents in the elections of major EU countries such as France and Germany. China’s relations with its neighboring countries, including Japan, South Korea, Vietnam, and the Philippines, is expected to be stabilized but the geopolitical situations such as the North Korea nuclear crisis and the Palestine-Israel conflict in the Middle East are worrisome. We need to stay calm and observe the development closely. The economy faces new uncertainties despite its recent progress.
This article is the speech delivered by CCIEE Chairman Zeng Peiyan at the General Assembly of the China Center for International Economic Exchanges.
Characteristics of the International Economy
The features of the current international economy can be summarized as the following three aspects.
First of all, the global economy has shown a clear sign of recovery. In 2017, the global economy made a great recovery and it will be out of the crisis soon. According to the forecast of the International Monetary Fund (IMF), the global economic growth rate in 2017 is expected to reach 3.6%. For the first time in the past 10 years since the international financial crisis, the major economies are making positive growth at the same time. The unemployment rate in the US continues to maintain at a low level, the economy rebounded and achieved a year-on-year increase of 3.2% in the third quarter of 2017. From the second half of 2016, the economic recovery started to speed up and the actual growth rate is expected to reach 2.2% in 2017. As for Japan, its economy grew at an annual rate of 2.5% in the third quarter, and has been growing for seven consecutive quarters. The growth rate of the emerging markets and developing economies has also accelerated. For example, Brazil and Russia, which were still in negative growth in 2016, achieved positive growth in the first three quarters of 2017. China continued to maintain its medium-high growth and its contribution to world economic growth remained at more than 30%. The global trade has started to recover after striking the bottom since the second quarter of 2016, and the growth rate has gradually accelerated. Hopefully, the global trade will be able to catch up with the economic growth.
Secondly, the new economy represented by the digital economy is on the rise. Since the international financial crisis, the mainstream view has always believed that a new round of science and technology and industrial revolution is on the way and will become an important driving force for pulling the global economy out of the crisis. Now, this expectation is becoming a reality and the highlight is the development of the digital economy. There are cyclical factors in the global economic recovery but the role of the digital economy cannot be ignored. If the development of the Internet in the 1990s led to global growth, then the new engines of the future growth will be the digital economy. According to relevant calculations, the US digital economy accounts for 33% of its gross domestic product (GDP), and China’s digital economy accounts for 30%. Some scholars predict that the digital economy will account for 22.5% of the global economy in the next few years, and will probably reach more than 50% by 2025.
What is the digital economy exactly? There are different opinions. A prominent feature of the digital economy is the deep integration of digital technologies such as artificial intelligence, the Internet, big data, cloud computing, and blockchain with the development of industries including manufacturing and service industries. The re-industrialization of the United States, Germany’s Industry 4.0, and Japan’s Society 5.0 are all essentially moving in the direction of the digital economy. Taking smart manufacturing as an example, some advanced factories have all achieved unmanned production, they even use robots to produce robots. It is reasonable to believe that the impact of the digital economy on human production and our life will exceed the imagination of most people and become the main battlefield for international technology and industrial competition. In this new round of competition, there is a gap between China and the developed countries in terms of applying the digital economy to the real economy, but we must not miss this historic opportunity.
Thirdly, we should keep an eye on the spillover effect of the US economic policies.
The first policy is the interest rates rise and balance sheet reduction. In mid-December 2017, the Fed raised the interest rate for the third time since the beginning of 2017. The market expects that the US will raise interest rates for another three times in 2018, and the balance sheet will be reduced by $500 billion within two years and $1.3 trillion within five years. Although the international market has fully expected the normalization of the US monetary policy, such kind of policy change can also trigger a new regional crisis or even affect the world if the appropriate response cannot be provided on time. After all, the current global financial market is featured with weak balance which has a high leverage, big bubble and small fluctuations.
The second economic policy is the US tax reform. According to some budget experts, the US government tax revenue will be reduced by more than $5 trillion in 10 years if the US tax reform plan is implemented. The tax reform will somehow stimulate economic growth, increase employment, encourage the back-flow of capital and bring the US real economy to a new level. However, it may also cause rising deficits, lead to a polarization between the rich and poor, create high inflation and other issues. It is possible that other countries will follow the US tax cuts, which is likely to intensify international trade disputes, and change the flow of international capital. The US tax reform will also bring challenges to China, such as the outflow of domestic capital, the withdrawal of foreign capital, and the depreciation of the RMB. In addition, it will also have an impact on the development of Chinese real economy, import and export as well as employment, therefore, we should take all these possible outcomes into full consideration.
The third US economy policy we should keep an eye on is the trade and investment protectionism. In 2017, the United States accused China of ineffective protection of intellectual property and began the section 301 investigation against China. Apart from that, the US Department of Commerce submitted a report to the World Trade Organization (WTO), which did not recognize China’s market economy status based on the six elements of the US law. By doing so, Europe, the United States, and Japan all rejected China’s request for the market economy status in different ways. At the ministerial meeting of the WTO, it seems that they are ready to jointly deal with China. The US “National Security Strategy Report” refers to China as a competitor and has repeatedly mentioned China’s “unfair trade and economic behavior,” indicating that the global economic and trade environment will become more complex and severe in the future, and China will face more and more anti-dumping and anti-subsidy investigations. The US and EU will impose more restrictions on China’s investment and some European countries have also proposed to establish a security review of China’s investment as they believe that this is their national sovereignty. Of course, all countries will have similar scrutiny but they must be non-discriminatory and transparent. China should be well-prepared in this regard.
The Characteristics of the Domestic Economy
Under the strong leadership of the CPC Central Committee, the new development concept has been clarified and the supply-side structural reform has made steady progress in the past five years. Since 2017, China’s economic growth has stopped falling and started to become stabilized, and the economic restructuring has taken substantive steps. More details can be described as the following six aspects.
First of all, the economic growth has achieved steady shifting. Since 2017, the Chinese economy has started to stabilize and put an end to the five-year-long decreasing growth. The growth rate in the first three quarters was 6.9%, and it is expected to remain around 6.5% in the future. China’s economic growth has achieved a smooth shifting from high growth to medium-high growth and this is mainly due to the constant optimization of the economic structure, changing from an industry-led economy to a service-oriented one, from investment and export-driven to domestic demand-driven. In 2016, the proportion of the service industry increased to 51.6%, contributing 64.6% of the economic growth. Furthermore, the middle-income group has exceeded 300 million people and the concept of consumption has been brought to a new level. The holiday economy, online shopping and other factors have pushed consumer spending. In 2016, the number of tourists nationwide reached 4.44 billion, the number of outbound tourists reached 122 million, and the number of express parcels exceeded 31.3 billion.
Secondly, progress has been made in transforming the old economic momentum to a new one. In 2016, China’s invested more than 1.5 trillion Yuan in R&D, accounting for 2.11% of its GDP and the contribution made by scientific and technological progress to economic growth reached 56%. In recent years, China has implemented the innovation-driven development strategies to promote the development of the high-end industry. Technology, branding and management have become the core elements of competitiveness enhancement, and the past development model that relied mainly on land, resources, and cheap labor has been changed completely. On the one hand, the outdated production capacity with low technological level, high energy consumption, and high pollution in the heavy chemical industries such as coal, steel and building materials have been eliminated. On the other hand, quantum computing, aerospace science and technology, large aircraft, and 5G communications have realized remarkable innovations. The value-added of strategic emerging industries made double-digit growth, and new business models such as the shared economy and mobile payment have flourished.
Thirdly, China’s opening up has demonstrated a trend of two-way development. In the past, China’s opening up was mainly relied on bringing foreign funds, technology, and management, and the economic growth was driven by large exports and labor services, leading to a large surplus in the balance of international payments. Now, goods, funds, talent and technology have all achieved the two-way flow and gradually become more balanced. The import and export have become more quality-oriented. In 2015, China became the net exporter of capital for the first time, and its foreign direct investment ranked the second in the world. What is more, highly-skilled foreign personnel have come to China for employment or start-up, which has become a new trend. Advanced technological products such as the high-speed railway, nuclear power, and communications equipment have been exported to other countries and the international competitiveness of Chinese enterprises has been increasingly strengthened.
Fourthly, the Chinese government has attached unprecedented importance to environmental and ecological protection. Nowadays, more and more people begin to realize that a good living environment is crucial, the one-vote veto system for environmental protection has been widely adopted across China, and green consumption and green travel have gradually become a social consciousness. The intensity of energy consumption has dropped significantly, and the environmental conditions have been improved to a great deal. In the past three years, the energy consumption per unit GDP has fallen by 15%, and the PM2.5 that has plagued people has fallen by 30% in 74 major cities. China has actively responded to global climate change, and its scale of clean energy such as hydropower, wind power, and photovoltaics ranks first in the world.
Fifthly, the regional development in China has become more balanced and optimized. The implementation of the three major strategies, the Belt and Road, Beijing-Tianjin-Hebei coordinated development, and Yangtze River Economic Belts, the launching of the Xiong’an New Area, the synergy-adding effect, the new growth points and the emergence of economic belts have made China’s regional development more balanced and better. The growth rate of the central and western regions is now even faster than that of the eastern region. The income growth rate of rural residents has been higher than that of urban areas for seven consecutive years, and the income gap has been gradually narrowed. The new-type of urbanization and precise poverty alleviation has progressed steadily and more than 60 million people were lifted out of poverty during the past five years. The Engel coefficient fell to 30%, close to the standard of abundance.
Last but not least, the environmental standards for business and investment have been improved. The market now plays a decisive role in resource allocation, market access has been relaxed, and administrative approval has also been reduced. The government has comprehensively promoted the reform of the commercial system, with an average of 15,000 newly registered companies each day. It also promotes public-private partnership (PPP) and mixed ownership reforms to stimulate the vitality of social capital. As for foreign investment, the government will implement the management model of pre-admission national treatment and the negative list, and more than 96% of projects will be subject to local record registration. Property rights protection is institutionalized and ruled by law.
The report of the 19th Party Congress stated that China’s economy has shifted from high-speed growth to a period of high-quality development. The 2017 Central Economic Work Conference also clarified that economic ideology with Chinese characteristics in the new era of Xi Jinping, which is not only the theoretical summary of the economic development in the past five years, but also the latest achievement in the political economics with Chinese characteristics and the guidance for future economic development. In order to ensure great economic development, we must study and implement the spirit of the 19th National Congress of the Communist Party and the Central Economic Work Conference, seek both economic stability and progress, adhere to the new development concept, closely follow the changes in the major social contradictions, and meet the requirements of high-quality development. We will do whatever we can to meet the three major challenges and implement well the eight key tasks.