China Center for International Economic Exchanges

The Importance of Steady Growth Should Be Highly Emphasized
Date:Aug 28,2012    Author:Zheng Xinli, Permanent Vice-Chairman of CCIEE    Source:CCIEE

The Importance of Steady Growth Should Be Highly Emphasized

People’s Daily, Aug. 7th, 2012

The Political Bureau of the CPC (Communist Party of China) Central Committee pointed out in a conference held recently, that the economic work of the second half year should pay more attention to steady growth, and make a series of strategic deployment. In the first half year, despite the world economic slowdown, China's economy took great efforts to maintain stable growth, adjust its structure and constrain inflation. Summer crops had a good harvest, the growth rate of consumer prices decreased, and economic growth rate maintained at 7.8%. In other words, China has achieved stable economic growth while maintained its stability. At the same time, China’s economy also faces many difficulties and challenges. The most prominent one is that, because of hampered export growth and the lagged effect of the previous two years’ tightening monetary policy to curb inflation, China’s economic growth rate has declined for six consecutive quarters and enterprises’ profits have also decreased. If the economy could not rebound in the third quarter, China’s annual growth rate target of 7.5% will be affected, further, the problems of unemployment and corporate debt will also be more apparent. Therefore, we must attach great importance to the steady economic growth.

Facing the complicated economic situation, a consensus needs to be reached in the following two major issues in order to achieve the expected results of macroeconomic control as soon as possible. First, in order to accelerate the transformation of economic development mode and to promote economic structural optimization, we need to upgrade incremental adjustment. Only if the investment intensity of those industries in shortage or those which can lead structural optimization is satisfied, can incremental adjustment be a driving force of stock adjustment, can advanced productive forces replace outdated productive forces, and thus can we accomplish the goal of optimizing industrial structure and regional structure. Encouraging the application of advanced technology, and abandoning backward technology, are the objective requirements of accelerating the transformation of economic development mode. Upon the fact that consumption and export cannot be increased significantly in the short term, in order to reverse the downturn of economic growth, increasing effective investment is a realistic option. As long as the investment structure meets the requirements of economic development transformation, and total investment is controlled within a reasonable amount, it will not bring a new round of inflation, but can stimulate the short-term and long-term economic development effectively. Second, to stimulate the economic growth rate, we must overcome the inertia of declining, which requires greater pulling power than under normal circumstances. Economic growth rate declined quarter by quarter since last year and a half, from 9.7 percent in the first quarter of last year, to 7.6 percent in the second quarter of this year, and aroused social expectation of further declining, changed normal consumption and investment behaviors of residents and businesses, forming a huge inertia. Given this backdrop, the driving force of economic growth should include not only normal pulling power, but also the power to overcome the declining inertia; otherwise the stimulation method could hardly be effective. In order to make the national economic growth get to the turning point and switch back to its normal track of stable and rapid growth, the current macro-control should focus on the following points.

Coordinate the three leverages of planning, taxation and finance to yield twice the result with half the effort

Coordinating the three leverages of planning, taxation and finance in macro-control system is an important component of China's socialist market economic system. When facing major control tasks, the three levers of regulation must cooperate closely and coordinate their actions. If they can form a joint force, there will be greater effects with less effort. Currently, the three levers of regulation should focus on accelerating the transformation of economic development mode, promoting economic growth to rebound, and achieving stable and rapid development during structural optimization, and facilitate each other.

Based on fully discussion and unified understanding, we should introduce a directed demand-expansion plan satisfying the requirement of “Economic Mode Transformation and Restructuring”, including expanding residents’ consumption, accelerating service industry development, encouraging independent innovation, promoting coordinated urban and rural development, increasing export and etc., in order to expand domestic demand, especially residents’ consumption, and enhance its effect on boosting economic growth. We should guide social capital focus on investing in strategic emerging industries, infrastructure, and livelihood projects, so as to boost current economic growth, as well as to enhance the economic development potential. We should study and formulate special programs on making good use of foreign reserves, to attract overseas investment to create export demand, to reduce the pressure from increasing prices of importing energy and raw materials, and to enhance the enterprises’ capability of independent innovation and international business.

The fiscal reform has become critical for the current goal of “economic mode transformation and restructuring”. We should focus on expanding residents’ consumption, and adjusting fiscal system of income distribution, in order to increase workers’ income. We should lower import tariff of middle to high-end consumer goods, in order to expand domestic consumption. We should further increase the tax exemption threshold for small and micro-businesses, in order to cultivate future financial resources. We should speed ??up piloting and promoting the transfer of business tax to VAT in service industry. We should give subsidy to those local governments whose fiscal income reduced by the reform, in order to mobilize the motivation of local reform. We should increase support for independent innovation and strategic emerging industries development. We should introduce bank loans and social capital flow to policy-encouraged industries and key construction projects, by interest subsidies, tax relief, and capital subsidies.

Financial policy should not only have properly loose policy on total amount, such as lowering the deposit reserve ratio, appropriately relaxing deposit interest rate ceilings and minimum lending rates, and etc., but also provide structured credit and loan policy, and adjust credit structure in accordance with general requirements of economic structure adjustment. We should avoid "one size fits all" regulatory policy, because experience has shown that without differentiation, there will be no regulatory policy at all. We should reform the financial system, steadily promote interest rate marketization, satisfy loan demands from small and micro-enterprises and farmers, establish foreign reserve regulatory system based on foreign exchange usage, perfect a multi-layer capital market, and improve cash flow rate and its effectiveness. Under the premise to precaution and defuse financial crisis, we should give full play to the role of financial support for the stable and rapid economic development.

The joint force of consumption, investment and export forms a pulling power to rebound economy

To enhance the impact of consumption on economic growth in the short run, we should focus on housing and transportation consumption, which is irreplaceable by other kinds of consumption. We should activate housing consumption, and maintain a reasonable scale of real estate investment under the premise of stabilizing urban housing price. Facts have proved that the overly high price of land is the major promoter of high housing price, and the high price of land mainly due to the “bidding, auctioning and licensing” system. Compared with the past transfer based on agreement, the open and transparent new system is surely advantageous, which can prevent corruption during land transaction. However, certain land for affordable housing and subsidized housing with the nature of public good is also included in the “bidding, auctioning and licensing” system, which will further improve housing price inevitably. Meanwhile, due to the dependence of the local government on land finance, the higher land prices are, the more revenue land transaction will generate, forming the mechanism of land-housing price spiral. Therefore, reforming the land transaction system and differentiating transaction method by different usage, is the key issue to stabilize urban housing prices. We can continue using “bidding, auctioning, and licensing” system for business property and give favorable policy to land for affordable housing and subsidized housing so as to reduce land prices. Auto mobile consumption is the second largest consumption hotspot, and also the second largest economic growth engine. Changing automobile consumption tax from central to local government is good for local government to encourage automobile consumption and improve urban transportation. Only if the production, circulation and consumption processes of housing and automobile are all on the right track, can the market be activated, thus construction and automobile industries can be the two major consistent driving forces for economic growth. In addition, education, culture, leisure, tourism consumption also has great potential to expand. The policies implemented in the past two years that encouraged home appliances sold to rural areas, replaced old appliances with new ones, and encouraged fuel-efficient cars consumption should continue.

In terms of investment, we should maintain the scale of high-speed railway construction. A few years ago, investment in high-speed railway construction exceeded 700 billion per year, but the number decreased to 400 billion Yuan last year, with many projects under construction terminated, this gap of investment demand could hardly be made up by other industries. High-speed railway is a green mode of transportation, with only about one tenth unit transport volume energy consumption and land usage comparing with road transportation. Accelerating high-speed railway network is the fundamental strategy to solve the problem of China's high population density and our heavy traffic issue. During the construction phase, some debt is inevitable. With the passage of time, solvency and profitability of railway will be increasingly strong, and then railways will become a number of good assets. Therefore, we should speed up the construction of high-speed railway under the establishment of strict quality and safety standards. In the1990s, in response to the Asian financial crisis, we successfully built a highway network and turned challenges into opportunities; now facing current international financial crisis, could we turn challenges into opportunities, to some extent it depends on high-speed railway network construction. In addition, China's urbanization is rapidly proceeding, driving large investment demand which is sufficient to support rapid growth of investment in the next 20 years. The new rural construction will also devote to boosting investment. Strong investment growth will be a strong pulling power for economic growth.

The international financial crisis, especially the European debt crisis, causing weak markets of developed countries, led to difficulties in China's exports. But as long as we actively forge ahead, it is possible to maintain a rapid growth rate of exports. At present, we should take advantage of China's sufficient foreign exchange reserves and expand oversea investment to create export demand, and develop a way of capital export driving commodities and service export, which is a mature way developed by advanced countries in the past century. We should expand general trade and promote processing trade upgrade and localization. We should speed up the transformation from resource-intensive and labor-intensive export to technology-intensive, knowledge-intensive export. We should develop service trade, undertaking more service outsourcing.

Emphasize on encouraging private investment, and enhance endogenous driving force of economic stable growth

In 2008, in response to the international financial crisis, our country started a 4 trillion Yuan investment plan in a timely manner, and maintained steady and rapid economic growth despite the exports volume dropped significantly. At present, in order to turn the situation of economic downturn, we should emphasize on encouraging private investment. This can help to avoid the negative impact of heavily increased government investment, which is also entirely feasible. In the first five months of this year, the proportion of private investment has reached 62 percent of fixed assets investments; the growth rate of private investment is 6.6 percentage higher that total investment growth rate; and the increment of private investment accounts for 80% of the incremental investment, which reveals that private investment has become the main body of the entire investment. Therefore, the focus of increasing investment should be put on increasing private investment, which is significantly different from that of year 2008. At present, we should take the chance of the implementation of “State Council: Several Opinions on Encouraging and Guiding Healthy Development of Private Investment”, and create a favorable policy environment for private investment growth.

We should encourage and guide private capital flow into basic and infrastructural industries, municipal public utilities and policy-oriented housing construction, social work, financial services, commerce and trade, national defense technology and etc., in which we need to clean up barriers that block the inflow of private capital, give them equal status in aspects of market entry, project approval, tax policy, loan support, construction and etc., and encourage equal competition.

We should encourage and guide private capital flow into infrastructural and monopolistic industries, including railway, aviation, water transportation, electricity, and telecommunications, reform their management systems, separate government and corporate operation, and form a diversified investment pattern. We should subtract supporting transportation facilities, supplemental, service, value-added, and operational business (from the public sector), and form a for-profit mechanism, in order to create conditions for private capital’s entry.

We should change the situation of short supply in urban public service and social work, through franchising permission and governmental favorable policies to ensure reasonable return, thus to attract private capital to enter. Currently, cities are generally facing the problems such as difficulties in getting into nursing homes and nursery schools, difficulty in parking, if we can issue certain favorable policies and invite the entry of private capital, these problems could be solved quickly. We should continue encouraging the development of private hospitals and schools, to satisfy various demands.    

We should encourage private capital to initiate or participate in the establishment of financial institutions such as village banks, credit companies, and rural fund cooperatives, and deepen the reform of financial system. Only by establishing sound local financial regulatory agencies, deposit insurance and loan guarantee system, shall we provide a freer financial market access. In the progress of reform, we should pilot first, and then spread the success experiences.

(This article is translated by XU Qingyuan)

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