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MarOn March 28, Premier Li Keqiang of the State Council attended the Boao Forum for Asia (BFA) and delivered a keynote speech, further demonstrating China’s attitude to support multilateralism and common development, and its stance for further opening up.
The Paper had an instant exclusive interview with Liu Yuanchun, Vice President of Renmin University of China (RUC) & Economist, to interpret the key information in the keynote speech.
【Dialogue】
“Uniting multilateralism-oriented cooperative forces”
The Paper: Recently, the overall growth rate of the world economy has slowed down, especially in developed economies. Do you think this is more due to cyclical factors or human factors?
Liu Yuanchun: Cyclical factors have dominated. In the post-crisis era, the world economy experiences the “three lows” of low growth, low inflation and low interest rate for several reasons.
First, the growth rate of innovation is actually slowing down; second, with the aging of population, the global demographic dividend is declining; third, the spread of protectionism, populism and isolationism leads to the exhaustion of globalization dividend; fourth, the whole world is facing the challenge of income distribution polarization and structural problems arise within economies.
These negative factors directly lead to the low-growth period of the global economy. Since 2008, global trade growth, investment growth, consumption growth, and GDP growth have been at a low speed, and dominant factors are still trend related.
There are of course human factors to this, especially due to the lack of a global governance system, which leads to a sharp increase in frictions and conflicts, as well as some mistakes in macro-policies and the lack of collaboration. On March 26 (local time), General Secretary Xi Jinping said in Paris that development deficit was formed due to governance deficit, trust deficit and peace deficit. The artificial short-term factors have aggravated the trend related factors in the medium and long term.
The Paper: The inequality between the rich and the poor and the rise of populism, among others, pose challenges to economic globalization. What role can China play in the reform of the WTO and the reform of the global governance system?
Liu Yuanchun: China is the world’s second largest economy, a big trading country and a big patent country. Its role in the world economy is indisputable. Therefore, China will play a very important role in a new round of global governance system reform and WTO reform.
The General Secretary also made it very clear during this visit to Europe that efforts shall be made to continue to hold high the banner of multilateralism of the United Nations, give full play to the constructive role of global and regional multilateral mechanisms such as the World Trade Organization, and jointly build a community of shared destiny for mankind. The direction is very clear.
The first thing China can do is to provide a China solution. Second, it can unite multilateralism-oriented cooperative forces to fight and offset protectionism and unilateralism. Third, we must also make positive adjustments to respond to the reform of the WTO and the reshaping of the governance system.
“The key to foreign investment law is implementation”
The Paper: The introduction of the Foreign Investment Law is considered to mark China’s move towards institutional openness and is an important measure of China to create a law-based, international and convenient business environment. Similar to the landmark opening up such as the accession to the WTO, there are always concerns in China about the impacts on domestic businesses and industry competition. What is your perspective on this?
Liu Yuanchun: This kind of worry is unnecessary. China’s economy at this stage must be further integrated with the world economy to reach a higher level.
At present, the introduction of foreign investment for China is not simply due to the lack of money. China needs management experience, marketing channels, restructuring of value chains, and technical cooperation, all of which require the introduction of foreign investment. Foreign investment is an important bridge.
As an advocate of the community of shared destiny for mankind, and an advocate of the new global governance system, China must allocate resources globally based on internationally accepted rules so that we can go one step further in the value chain of the world. Only by increasing competition can China achieve economic transformation and upgrading and high-quality development on a global platform.
The concerns of some people are unnecessary from a medium-term perspective and a macroscopic perspective. Of course, we can make transitional considerations as proper for some special sectors.
The Paper: At present, the Chinese government has initiated the formulation of supporting laws and regulations of the Foreign Investment Law to form specific workable rules that will be implemented alongside the Foreign Investment Law on January 1 next year. Do you have any observations or suggestions as to this?
Liu Yuanchun: The Chinese government is already on the way to formulating supporting rules. For example, the negative list has been greatly compressed, and adjustments have been made to many domestic provisions. The Foreign Investment Law has been adopted, and the key lies in implementation. More efforts should be made on implementation.
At the same time, we should pay attention to “improving internal conditions with external resources” and structure the overall investment environment and order with the Foreign Investment Law as an opportunity. We have noticed that in the past, some preferential policies for foreign investment were not fully enjoyed by private businesses. Therefore, it is recommended to use the implementation of the Foreign Investment Law to drive the improvement of some domestic investment laws and regulations so that the business environment truly achieves marketization, rule of law, internationalization and facilitation.
“This year may see the start of the reform of income division”
The Paper: China’s economic instability and uncertainty have increased significantly this year. In the speech at the Boao Forum for Asia and the previous government work report, the Premier repeatedly emphasized the need to streamline administration and cut taxes and fees in order to stimulate the vitality of market players and maintain a steady economic growth. How to streamline administration and reduce taxes without hurting the enthusiasm of local governments at work?
Liu Yuanchun: The enthusiasm of local governments is not simply maintained by fiscal revenue. Of course, fiscal revenue is very important to their enthusiasm.
To improve the enthusiasm of local governments, first, government officials and Party cadres must understand the country’s current steady growth policy from a strategic height and a political height; second, we need to grasp the root causes of government officials’ inaction.
Last year, the government’s fiscal revenue showed an upward trend while government investment went downward, and the growth rate of some investment projects of local governments also declined; the profit of state-owned enterprises rose sharply with a total profit of more than 3 trillion, but the investment of state-owned enterprises was basically in a negative growth. Therefore, the enthusiasm of governments and state-owned enterprises is not a money issue.
To improve the enthusiasm of state-owned enterprises and governments, it is highly important to match up incentives and constraints. Constraints cannot be the only way, and incentives also need to be in place to motivate them to act without burdens.
Third, it is very important that while intensifying taxes and fees reduction efforts, the government has made appropriate adjustments to the central government’s and local governments’ financial arrangements to mitigate the financial pressure of local governments. The first one is the central government deficit. We have arranged a deficit rate of 2.8% this year, and a considerable part will be arranged in localities; the second is the special bond, which has increased from more than 800 billion last year to 1.3 trillion. At the same time, we require the equalization transfer payment from the central government to local governments to increase 10.9%; the fourth is the moderate relaxation on government financing conditions. Therefore, I believe that in this round of taxes and fees reduction, it is unnecessary to worry too much about the enthusiasm of local governments.
However, it should be noted that the promotion of enthusiasm is about motivating the enthusiasm for scientific action. The enthusiasm of local governments and state-owned enterprises must be consistent with the goal of high-quality development in the new period. Simply returning to the previous distorted enthusiasm for extensive vanity projects may hurt the economy even more.
For example, if the limit on local governments to borrow money is truly relaxed, their impulse to borrow may come fiercer than we think. However, this could be more harmful to the sustainable development of our national economy than inaction. Such steady growth is definitely like quenching thirst with poison.
The Paper: After a large-scale taxes and fees cut, the government’s fiscal revenue and expenditure will inevitably face pressure. This year’s government work report proposed in the part on “deepening reforms of the fiscal, taxation, and financial systems” to deepen the reform to define the respective fiscal powers and expenditure responsibilities of central and local governments and move forward with reforming the way revenue is divided between them. What do you think about the key and difficult points of this task?
Liu Yuanchun: As one of the three major tasks of the reform of fiscal and taxation systems, this task has been mentioned for many years.
One of the key reasons for the rapid and invisible growth of local government debt is that its fiscal resources and powers do not match. In the past few years, especially since the 19th CPC National Congress, some powers have been transferred upwards, but institutionalized and systematic adjustments have not been made to establish a long-term mechanism.
Two aspects are involved here. The first is the income division between the central government and local governments. How to improve the tax-sharing system dominated system in the past? The second is the definition of powers of the central government and local governments, which involves many deep-level adjustments.
In the past, local government revenue was mainly from land transfer fees in addition to local taxes. More than 90% of government-managed fund revenue came from the transfer of state-owned land use rights, and other central-to-local transfer payments and local government financing. There are many institutional loopholes in these sources. Take a widely discussed issue for example, if the real estate tax is levied, should we continue to collect land transfer fee? For example, after the pilot of the reform that rural collective construction land, if in line with the planning, can directly enter urban construction is promoted, can the local government collect this part of the land transfer fee? This involves land system reform and real estate system reform. These are clearly some large-scale reforms.
In addition to income allocation, there is also the division of powers. The central and local powers are not only an economic issue, but also a political one. One of the ten relationships that Mao Zedong talked about is the relationship between the central government and local governments.
This reform actually involves very basic and deep-level contents, and the relative interest groups are also fixed, which is a real “hard nut to crack”. Of course, this year will definitely see some substantial progress, perhaps starting with the division of revenue, since last year and the year before it, some adjustments were made to powers.
“It is perfectly normal for new type enterprises to experience short-term fluctuations”
The Paper: Regarding “promoting the formation of a strong domestic market”, people generally talk about further developing the pension industry, medical industry, and public service industry. Compared with real estate, do you think these industries have enough capacity to drive the Chinese economy?
Liu Yuanchun: Judged from consumption alone, old-age care, child-rearing, medical care, and education have a much larger scale than real estate, and have much room for growth. The pension industry is especially so. The pressure of population aging in the Chinese society is getting bigger and bigger, and the quality of life of the elderly must be guaranteed and improved, so the space is very large.
But the function of real estate is not just for consumption. It provides housing services on the one hand and leverage on the other hand. It provides the government with the original development fund, and also provides the basis for capital pledge for many enterprises. Therefore, real estate is actually an important cornerstone for capital expansion.
This is why we will feel that when the real estate industry has a series of problems, it will have a great impact on the current government operation, investment and various financial markets. In comparison, problems in the pension industry and education industry are a slow variable.
We cannot simply make a strategic comparison between real estate with these industries. But in terms of consumption, it is safe to say that the consumption potential generated by these fields is much larger compared to the real estate industry.
The Paper: Every round of technological and industrial revolution will bring about rapid economic growth in some countries. China also needs to seize the opportunity to cultivate and expand new growth drivers, and be inclusive and prudent in regulating emerging industries. Recently, some new type enterprises have experienced large-scale layoffs. Do you think this is worth concern, or is it a benign market self-regulation?
Liu Yuanchun: Short-term fluctuations in innovation and entrepreneurship-themed new business forms are very normal.
The proportion of start-ups that can grow from a small size to a medium size may not exceed 10%. Innovation projects and risk projects have a survival rate of less than 10%. This means that a large number of startups and innovation projects will be eliminated during the growth process.
Since the 18th CPC National Congress, the government has proposed an innovation-driven development strategy with the theme of “innovation and entrepreneurship”. After several years, it has achieved many results, but at the same time some costs will also show, that is, some failed investment projects and startup projects will be eliminated. This is what we are talking about. It is not only about enjoying the benefits of innovation; we also need to bear the cost of it. At present, the downsizing and bankruptcies of some new type enterprises are actually a normal phenomenon.
But why is the impact magnified? The reason is that the current trade war and technological war have a relatively large impact on our confidence. At the same time, as the economy is in a downward cycle and the global economic outlook is not so good, it will have a magnifying effect.
Opinions