China Center for International Economic Exchanges

Xu Hongcai: Deepening Reform to Expand New Dividends
Date:Feb 17,2019    Source:CCIEE

At the Economic Conference held by CCIEE recently, Xu Hongcai, deputy chief economist of CCIEE emphasized that despite the complex and severe external environment in 2019, the Chinese economy has enough resilience and appropriate strategies to cope with it. At the same time, we need to implement policies according to the changing environment.

Generally speaking, China’s economy is stable and is making progress.

Xu Hongcai pointed out that China’s economy remains stable due to great stability in economic growth, commodity price and employment, apart from the sound balance of international payment, optimized economic structure, and improved development quality.

The GDP growth rate is maintained within a reasonable range. Xu Hongcai pointed out that the GDP in 2018 was 900.30 billion yuan and the actual growth was 6.6%, which is in line with the expected target. If calculated quarterly, the year-on-year GDP increase is 6.8%, 6.7%, 6.5% and 6.4% respectively. In terms of industries, the added value of the primary industry was 647.34 billion yuan, an increase of 3.5%; the added value of the secondary industry was 366.001 billion yuan, an increase of 5.8%; and the third industry was 469.575 billion yuan, an increase of 7.6%.

“From a micro perspective, the growth of the added value of industries above a designated scale has remained relatively stable,” said Xu Hongcai. In December, the added value of industries above a designated scale increased by 5.7%, 0.3 percentage points higher than that in November. From January to November, the total profits of industrial enterprises above a designated scale reached 617.88 billion yuan, an increase of 11.8% but the growth rate slowed by 1.8 percentage points when compared with the first ten months. From January to November, the income of industrial enterprises above a designated scale was 94.4 trillion yuan, a year-on-year increase of 9.1%; the main business costs were 79.5 trillion yuan, an increase of 8.8%; the main business income profit rate was 6.48%, a year-on-year increase of 0.16 percentage points.

The Keqiang Index is doing well too. In November 2018, the Keqiang Index was 10.85%, the cumulative value from January to November was 9.99% and in December 2017, the value was 7.99%. From January to December, the value was 11.46%; in December 2015, the value was 1.0%, and the cumulative value for 2015 is 1.48%.

Progress has been made in the supply-side structural reform and the tertiary industry has made more contribution to economic growth. In 2018, final consumption, capital formation, and net exports boosted GDP growth by 5.03%, 2.14%, and -0.57%, and their contribution to GDP were 76.2%, 32.4%, and -8.6% respectively. The investment growth rate bottomed out and the investment structure has been optimized. In 2018, the national fixed asset investment (excluding farmers) was 63.56 trillion yuan, an increase of 5.9% over the previous year, and the growth rate was 0.5 percentage points higher than the previous three quarters. Investment in the tertiary industry increased by 5.5%, of which infrastructure investment increased by 3.8%. Investment in high-tech and equipment manufacturing increased by 16.1% and 11.1% respectively over the previous year, which was 6.6 and 1.6 percentage points higher than manufacturing-related investment respectively.

The real estate market has stabilized and the overheating in first-tier cities has been suppressed. From January to December, the national investment in real estate development was 1,226.4 billion yuan, an increase of 9.5% over the previous year. The growth rate dropped by 0.2 percentage points from the previous 11 months, an increase of 2.5 percentage points over the same period of the previous year. In 2018, the sales area of ??commercial housing was 171.654 million square meters, an increase of 1.3% over the previous year. The growth rate dropped by 0.1 percentage points from the previous 11 months, down 6.4 percentage points from the previous year.

Xu Hongcai pointed out that slow investment growth has become the new normal, the growth of household consumption is insufficient, the trade surplus has been decreasing year by year, the recent foreign trade has experienced negative growth, and the financial system has structural problems.

In 2018, the national fixed asset investment (excluding farmers) was 63.56 trillion yuan, an increase of 5.9% over the previous year. The growth rate was the same as the previous 11 months, down 1.3 percentage points year-on-year. From January to December, the total retail sales of consumer goods reached 38.1 trillion yuan, an increase of 9.0% over the previous year, the actual growth rate was 6.9%, 0.1 percentage points lower than the previous 11 months. The year-on-year growth of exports in 2018, 2017, 2016 and 2015 was 9.9%, 7.9%, -7.73% and -2.94 respectively; the import growth was 15.8%, 16.11%, -5.46% and -14.27 respectively. Recently, foreign trade has experienced negative growth. In October, exports increased by 14.3% and imports increased by 20.3%. In November, exports increased by 3.9% and imports increased by 2.9%. In December, exports increased by -4.4% while imports increased by -7.6%.

Xu Hongcai pointed out that the structural problems in the financial system can be summarized as follows: the pace of the de-leverage is inappropriate and there is a lack of macro liquidity. In December 2018, the balance of M2 was 182.67 trillion yuan, an increase of 8.1% year-on-year; the balance of M1 was 55.17 trillion yuan, increased by 1.5%, and the balance of various loans of financial institutions was 136.30 trillion yuan, a year-on-year increase of 13.5%. In 2018, total social financing was 19.26 trillion yuan, decreased by 3.14 trillion yuan year on year.

The problem in the transmission mechanism of monetary policy has made financing more difficult and expensive. On January 2, 2019, the Shanghai interbank overnight interest rate (shibor) was 2.3000%, it was 2.840% at the end of 2017; the seven-day pledged repo rate was 2.5935%, this was 5.4198% at the end of 2017; the 10-year bond yield was 3.1734%, it was 3.8807% at the end of 2017; and the base interest rate for one-year loans was 4.31%. In December 2018, the comprehensive interest rate of Wenzhou private lending was 16.41%, compared with 15.32% at the end of 2017.

The capital market has fluctuated violently and social wealth has shrunk dramatically. In 2018, the Shanghai Composite Index, the Growth Enterprise Index and the Small and Medium-sized Board Index fell 24.6%, 28.6% and 37.7% respectively; the market value of listed companies shrank by 14 trillion yuan. The GDP growth of 8 trillion yuan was insufficient to make up for the loss of investors.

Deepening reform and expanding the dividend.

Xu Hongcai pointed out that there are four challenges facing China’s economy: the global economic recovery is weakening; the US economic growth is slowing down, the Fed’s interest rate reduction policy is changing, the China-US trade friction will last for quite a while and the European economy is full of uncertainties. The good thing is that the Belt and Road Initiative has received a positive response from the international community and the economic cooperation in Northeast Asia is making progress.

Xu Hongcai believes that the resilience of China’s economic development is mainly reflected in the following areas: great political and policy stability, stable domestic demand, and huge market potential. Furthermore, the growing new kinetic energy and consumption growth has become the main driving force of economic growth and the new round of reform will bring more dividends.

Xu Hongcai stressed that policy should be adjusted according to the changing environment and macroeconomic policies should strengthen counter-cyclical adjustment. Moreover, we should continue to implement a proactive fiscal policy and a prudent monetary policy, and pre-adjust and stabilize aggregate demand.

Active fiscal policies include a further reduction in tax and fees and increase the scale of local government special bonds. Steady monetary policies mean that we must maintain ample liquidity, improve the transmission mechanism of monetary policy, increase the proportion of direct financing, solve the problem in financing for private small and micro-enterprises. In terms of structural policies, we should strengthen institutional development, continue to reform, deepen reform in state-owned enterprises, fiscal finance and taxation, land and market access. Furthermore, we should strengthen the importance of competition policy, create an environment for fair competition, and encourage small and medium-sized enterprises to accelerate their growth. In terms of social policies, we must strengthen the social security net and give priority to employment policies.

Xu Hongcai said that deepening supply-side structural reform requires us to consolidate the achievements of the “three-cut, one reduction and one improvement” (capacity reduction, de-stocking, de-leveraging, cost reduction, improving underdeveloped areas), get rid of industrial overcapacity, reduce the cost of doing business and further improve infrastructure. Apart from that, we should bring into full play the enterprises, establish fair and open market rules, develop high-quality enterprises, improve industrial chain, use technological innovation to form new competitive advantages, develop new industrial clusters, smoothen national economic cycle, accelerate the construction of a unified, open, competitive modern market system. Finally, we should improve the financial system to serve the real economy, form a virtuous circle among the domestic market, production entities, economic growth, finance, and the real economy.

Coping with three major challenges and ensuring high-quality development.

Xu Hongcai pointed out that we have three important battles in 2019, we should focus on stimulating the vitality of micro-entities, and improve macro-control.

The first battle is that we must minimize risks in major areas, adhere to the basic idea of structural de-leverage, prevent abnormal fluctuations in the financial market and reduce local government debt-related risks.

The second battle is poverty alleviation. we must make more efforts in certain poverty-stricken areas and prevent people from returning to poverty, and come up with policy support for those whose income level is slightly higher than that of poor households.

The third battle is pollution prevention and control. We must consolidate our achievements and put more efforts into getting back the blue sky. We should make overall plans, enhance our service awareness and help companies to develop environmental solutions.

There are seven key tasks in 2019: promoting high-quality development in manufacturing industry; promoting the formation of a strong domestic market; advancing the rural revitalization strategy and regional coordinated development; accelerating economic system reform; promoting all-round opening up; strengthening and improving people’s livelihood. Xu Hongcai stressed that China’s economic downward pressure will increase in 2019, the first quarter will be difficult but the situation will be stabilized in the second half of the year. It is estimated that the annual economic growth rate will be between 6.0% and 6.5%, and the annual CPI will increase by 2.2%; the newly added urban employment will be 13 million; the fixed asset investment and consumption will gradually stabilize, and fixed asset investment is expected to grow by about 6.5%. The total retail sales of consumer goods will increase by about 8.5%, the growth of import and export will slow down, and the trade surplus will reduce by 300 billion US dollars. The M2 is likely to increase by about 9.0%, the RMB loan will increase by about 10%, and the nominal interest rate will remain unchanged. By the end of 2019, the exchange rate of the US dollar against the RMB will remain below 7.0.


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