07
DecRetrospect and Prospect
In the future, China’s economic growth should not focus merely on maintaining a growth rate of a few percents, but on preventing accumulation and increase of various risks.
Obvious sign of stable real economy in the short run
In order to have a judgment of the operating logic of China’s economic growth in the future, an important task is to have a clear understanding of the growth momentum at present. The published statistical data shows that all parameters indicate a clear sign of short term stabilization of China’s real economy in 2016.
Firstly, in respect of GDP growth and price index, though the actual GDP growth rate in the third quarter was stabilized at 6.7, the nominal GDP growth rate showed a strong rebound and tended to rise in an accelerated manner. An important reason is that the industry has gotten out of downturn lasting for more than 50 months and has fundamental change. In October, industrial added value above designated size nationwide increased by 6.1% on a year-on-year basis calculated at comparable prices. Besides, GDPdeflator became positive, CPI was stable and PPI was not deflated any longer. A great reversal of the nominal GDP indicates that short-term supply and demand have been comprehensively improved while price reversals forebode new balance between supply and demand and short-term cyclical grounding has come.
Secondly, in respect of employment situation, it is stable and shows positive development. In addition to price level and GDP growth, what the government is most concerned about is employment. Newly increased jobs in cities and downs are estimated to reach about 14 million this year, and in the process of continuous drop of GDP, our employment situation is not worsened but somewhat improved, of which the core reason is that economic restructuring is proceeding, leading to great change in demands for population and labor. Employment and adjustment of imbalance show that structural adjustment might have made phased achievements.
Thirdly, in respect of performance of micro subjects, various indexes are greatly improved. In September 2016, total profits and aggregate main business income of industrial enterprises above designated size increased by 8.4% and 3.7% on a year-on-year basis respectively, aggregate total loss of industrial enterprises above designated size decreased by 7% on a year-on-year basis, finished goods inventory decreased by 0.8% over a year earlier and asset-liability ratio decreased by 0.6% over last year. All data shows that micro economic subjects have substantially improved in terms of operation performance, and economic recovery has a gradually solid micro-foundation.
Finally, rebound of a series of indexes above also results in significant change in such indexes as entrepreneur expectation index, future income confidence indexand bankers’ macro-economy confidence index, indicating people from all walks of life, both in real economy and in finance, begin to place great expectations on the rebound of China’s economy.
High dependence of “stabilizing growth” on “credit-investment”
The above-mentioned data suggests that economic growth performs well in several material respects. Then, will we have to maintain growth at the rate of about 6.7% in 2017? In this case, we have to ask what such change is derived from. If stable growth comes more from administrative power, original objectives should be adjusted, or we will be caught in excessive salvation and stimulation.
Firstly, “credit-investment” driving mode has replaced the “export-investment” mode, accompanied by a decrease in macroscopic investment efficiency. Data shows that the current growth has been transformed from being driven by export and investment to being driven by credit and investment, and economic structure has been greatly adjusted, with the orientation changing from overseas market demand to domestic demand.
However, in the process, being too swift and violent will cause bluff-type change while being too slow will incur other dilemmas. In practice, the gap is often filled in via large-scale investment which in turn comes from large-scale debts. Data shows that the ratio of fixed investment to GDP has reached 81.9% at present, and the ratio of M2 to GDP rate has reached 2.1, indicating that “stable growth” depends on the path of “debts-credit-investment” to a large extent.
Accompanying with it are a decrease in macroscopic investment efficiency, i.e., sharp fall of capital output ratio and wider gap between investment completed and capital formed. Total investment completed in fixed assets this year is estimated to be about 60 trillion, but the capital formation rate is only about 50%. This means a large amount of the investment is spinning and the real economy is also spinning, of which a possible consequence is decline of rate of return on investment.
Secondly, structural distribution of investment ownership conflicts with the overall industrial development trend. Large-scale investment has mostly been led by state-owned enterprises and local governments in recent years. The first effect of such an investment structure is continuous fall of private investment growth rate. From January to October 2016, investment by state-owned enterprises increased by 20.5% on a year-on-year basis, but private investment increased by only 2.9% in thesameperiod, presenting a huge contrast. Deleveraging process varies continuously from state holding enterprises to private enterprises above designated size.
The second effect is the reverse development of private investment structure as we see, which is maintained with a stable ratio in secondary industry, but is subject to a sharp decline in tertiary industry, that is, private investment might be squeezed out from the service industry. This involves what should play a leading role in the transformation from industry to the service industry in China. What will it be better to play a leading role? If a large number of state-owned enterprises comprehensively march toward the service industry, i.e., tertiary industry, we have to take into account relevant consequences.
Thirdly, policy focus does not match the impetus and the logic of the policy of stabilizinggrowth conflicts with the logic of strategic transformation in the medium and long term. From the perspective of medium- and long-term objectives, we have to transform the mode of economic growth simply driven by investment and allow growth to be driven by the service industry and consumption.
Nevertheless, in the process of “stabilizing growth” at present, our policies depend too much on investment, but less on the service industry and consumption, so thatthe logic of the policy of stabilizing growth at present conflicts with the logic of strategic transformation in the medium and long term; while such conflict will also lead to a series of mismatches in future economic growth.
“Stabilizing growth” in the short run also resulting in higher risks
Large-scale inefficient investment has caused lower investmentefficiency at the same time of a sharp increase in investment size and a substantial rise in accumulated debts. Total debt ratio of China and debt ratio of enterprises, especially state-owned enterprises, have reached a very high level. According to current data estimation, national total debt ratio will reach about 261% and enterprise debt ratio will reach about 184%, which are quite frustrating.
Meanwhile, credit gap and other indexes deviate greatly from trend values, far exceeding those in other countries. Step effects of risk diffusion are apparent and as a series of loan crisis incidents take place frequently, relevant risks and hazards are posing increasingly serious threats to economy. Bond issue continues high growth while default issues and amount of publicly and privately offered funds are increasing year after year. Banks, especially small and medium-sized banks and shadow banking system, are faced with great credit and loan pressures and the ratio of risk assets to capital buffer in different kinds of banks continues to rise. Housing price and exchange rate are subject to greater change, pressures of some market segments rise quickly and capital flight pressure is still large; while the pressure from capital “changing from being real to virtual” has not been effectively released. Diversified risks in economy are accumulating and comprehensively prominent.
In general, the current “stable growth” mode has achieved short-term stable economy, but also resulted in higher risks. Thus, a lot of organizations, including IMF, begin to warn China of hazards of risk accumulation. Though China has its distinctive characteristics of economic operation and does not have to completely comply with these international indexes, we still need to pay attention to significant change in these parameters. With accumulation of risks in different fields and frequent occurrence of risk events in recent years, harms caused thereby are increasingly serious, which requires reflection. The foundation of economic stability might have quietly changed, so healthy development of China’s economy in the future will be harmed if timely prevention could not be carried out. In this sense, the focus of China’s economic growth in the future is not simply maintaining economic growth rate at several percents, but preventing accumulation and increase of various risks.
Therefore, the core mission of China’s economy in the future should be “stabilizing growth” and, more importantly, “controlling risks”.
Source: http://epaper.bjnews.com.cn/html/2016-12/07/content_663116.htm?div=-1
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