Research Update
24
NovOn Nov. 24th, 2018, the report meeting of “China Macro Economy Forum (2018-2019)”, jointly hosted by the National Academy of Development and Strategy (NADS) of Renmin University of China (RUC), the School of Economics of RUC, and China Chengxin Credit Management Co., Ltd. (CCX), was held in RUC. The theme of the Forum was “China Macro Economy in the New Phase of Reform and Opening-up”
Participants of the Forum included Hu Naiwu, First-grade Professor of RUC; Liu Wei, President of RUC and Dean of NADS; Gao Peiyong, Deputy Dean of Chinese Academy of Social Sciences (CASS); Cao Yuanzheng, Chairman of BOCI Research Limited; Dong Zhiyong, Dean of the School of Economics of Peking University; Liu Yuanchun, Vice President of RUC and Dean of the School of Economics of RUC; Mao Zhenhua, Co-director of the Institute of Economic Research of RUC; Yang Ruilong, Co-director of the Institute of Economic Research of RUC; Liu Fengliang, Executive Vice President of the Graduate School of RUC; Yan Yan, Chairman of CCXI and other experts and scholars.
Session I of the Forum was moderated by Mao Zhenhua, Co-director of the Institute of Economic Research of RUC.
Liu Yuanchun, Vice President of RUC and Dean of the School of Economics of RUC, on behalf of the research group, released the keynote report of the Forum entitled “China Macro Economy in the New Phase of Reform and Opening-up”.
The report points out that the year 2018 is doomed to be noteworthy for China’s macro economy. The turmoil of world economic structures, the radical change of market sentiments, the mutation of micro-foundations, the overlap and mismatch of economic policies, as well as the outburst of structural and systematic problems, have halted the stable and upward momentum of China’s economy since 2016. Fundamental economic factors stay stable with the prospects of recovery. Downward pressure continuously piles up. It turns out that China’s macro economy has neither bottomed out, nor entered into the “new cycle” of stable recovery. In contrast, caught in the crossfire of inside challenges and outside trade wars, it has entered into a new stage under “New Normal”. The constant downward economic pressure in 2018 cannot be effectively mitigated by short-term robust growth policy. A new round of overall reform and opening up and a new round of supply-side structure reform are required to solve the current problems and cushion the downward pressure. The exposure of underlying problems and the exposure of the pressure from inside and outside determine that China has entered the window of great change in 2018. China is bound to step in a new phase of reform and opening up in 2019.
Year 2019 is also bound to be a critical year for China to recover from dismal period under the “New Normal”, and transfer into a high-quality development pattern. The historic position and international standing of China’s macro economy have been deeply influenced by the turmoil of world economic order and structure, China’s changing economic structure, the outburst of the accumulated underlying problems and the implementation of China’s new round of great reform. The economic development pattern may also be changed in 2019. 1) Year 2019 is critical in the realization of Chinese economy’s “New Normal”. First of all, the gear shift of the economy hasn’t ended yet. We haven’t arrived at the periodic trough. Secondly, the upgrade and optimization of the economic structure is far from completion and we are just touching on the crucial problems. Thirdly, we are still in the shift from old economic growth driver to the new one, and have just begun the shift from government-supported new driver to the market-oriented new driver. Last, with the pressure from inside and outside, we have met all the requirements for the critical and fundamental reform. The window is open for a new round of reform and opening up and a second round of supply-side structure reform. 2) The continuous turmoil of world economic structure determines that even though the China-US trade negotiations are reporting progress, China’s external environment may continuously deteriorate in 2019. Influence factors include the widespread periodic recession of world economy, the constant misalignments of global financial cycles, as well as the increasing China-US frictions in other fields. There is a large probability that in 2019, China’s exports growth rate will start to ebb and the trade surplus will drop dramatically. RMB may face difficulties in depreciation. Certain export-oriented industries and areas may enter into a recession period. 3) In 2019, we will face the overlap of economic recession cycle and financial recession cycle, the overlap of downward momentum in foreign and domestic demands, the overlap of great adjustment and great change, together with the overlap of decreasing profitability and risk resistance capacity. All of them will build up the economic downward pressure in 2019. 4) Current problems force another round of economic reform. Taking the opportunities of the reconciliation of China-US trade frictions and the 40th anniversary commemoration congress of China’s reform and opening-up, in 2019, China will initiate a new round of overall reform and opening up, and a second round of supply-side structure reform, which will rebuild the confidence among China’s major economic agents and reverse the gloomy economic prospects. 5) The radical volatility of different market sentiments in 2018 has released the market pessimism beforehand. The initiation and implementation of “the six policy statements for economic stability” in Q3 will effectively offset the 2019 economic downward pressure in the near future. A new stage of supply-side structure reform and a new round of reform and opening up indicate the revival of market confidence in 2019. China’s macro economy’s downturn may not go as deeper as several market agents expected.
We use the China Macroeconomic Analysis and Forecasting Model – CMAFM model, developed by RUC, to make the following predictions. The model is parameterized under the qualitative conditions as above:
1. In 2018, China’s macroeconomic growth rate is predicted to stay stable with the prospects of recovery. According to model-based forecasts, in 2018, real GDP annual growth rate will be 6.6%, lower than that in 2017 by 0.3%, basically fulfilling the government’s target. Meanwhile, since the GDP deflator will drop to 3.1%, nominal GDP annual growth rate will be 9.8%, 1.4% lower than that in 2017. The short-term downward pressure will be significant.
2. In 2019, economic downward pressure will continuously pile up. However, the initiation and implementation of “the six policy statements for economic stability”, as well as the undertaking of a new stage of supply-side structure reform and a new round of overall reform and opening up, determine that the market confidence in 2019 will be effectively revived. According to model-based forecasts, in 2019, real GDP annual growth rate will be 6.3%, lower than that in 2018 by 0.3%. Since the GDP deflator will drop to 2.8%, nominal GDP annual growth rate will be 9.2%, 0.6% lower than that in 2018. Investments growth will be out of the downward spiral but still in weakness. Investments annual growth rate will be 5.9%.The slump of consumption may be slowed down, but the underlying problems cannot be solved in the short time. Consumption growth rate is predicted to be 9.0%. External environment may continuously deteriorate, with the predicted export growth rate of 6.1%, import growth rate of 16.1%. Trade surplus is expected to be US$ 99.4 trillion, close to balance. The further adjustments of supply and demand equilibrium in both domestic and foreign markets will keep the 2019 price level in a moderate situation. Predicted annual growth rate of CPI is 2.4%, PPI is 3.4%, and GDP deflator 2.8%.
We make following proposals based upon the qualitative and quantitative analysis as above:
1. Clearly understand the historic position and international standing of Chinese economy. Avoid the misjudgment of the growth strategy and the consequent misuse of the instruments.
2. Reflect on China’s strategy choice in the world structure’s turmoil. Firstly, we should further intensify the reform and implement a high-level opening up to meet the short-term challenge brought by world structure’s turmoil, especially in China-US trade frictions. We should use the liberalism to fight against the neo-protectionism, the bilateralism and multilateralism to fight against the unilateralism, and the new cooperation to fight against new cold war in China-US trade wars. Secondly, while insisting on opening up to meet the new challenges, we should realize that in the turmoil period, basic parameters of world economy have changed fundamentally, and thus we can never return to the previous strategic path. We must reconstruct the implementation road map for the forthcoming new round of reform and opening up, and prepare the tactical arrangements for short-and-mid-term problems.
3. Realize that many current macroeconomic problems are not only difficult to solve by macro-control policies, but also are the results of constant macro-control policies and administrative regulations. We cannot use macro-control policies and administrative regulations to tackle the problems originated from fundamental conflict of interest and distortion of the system. Fundamental and overall reform is still the key to solve the underlying problems in current period of structure transformation. Consistent with the mid-term road map and the design for a new round of fundamental and pioneering reform, we should comprehensively summarize the achievements and experience of the supply-side structure reform in the past 3 years, and take a resolute action to start the second round of supply-side structure reform.
4. Comprehensively summarize and orient China’s macroeconomics policies 2019 in the spirit of reform. First, the short-term macro-control policies, the mid-term economic growth policies, the transition period’ structure reform policies, and the fundamental reform policies should be categorized clearly, in avoidance of the problem including the misalignment in targets and tools for different kinds of policies, the administration of market-based tools, the structuring of aggregation policy, the protraction of administrative regulations, and the abuse of macro-control policies. Secondly, the macroeconomic policies should serve the subject of “great reform and new round of opening-up”, prepare the macroeconomic environment for a new round of reform and opening up, strengthen the bottom-line management, and cushion the various short-term turbulence from all aspects. Thirdly, we should realize that the reform and reconstruction of the delivery mechanism of macroeconomics policies, the reform and optimization of the system of macroeconomics policies, need to be processed in a certain period and based on the completion of fundamental reform. Therefore, when adjusting the short-term policies, we must take a prospective consideration of the problems brought by the current great reform and great adjustment, which may include inefficiency of macroeconomic policies, the externality and the fallacy of composition. The macro-control policies should not swing between the extremes of excess and deficiency, or become one of the main factors that exacerbate the macroeconomic volatility.
1) The key to “the six policy statements for economic stability” is “the stability of expectation”, while the key to “the stability of expectation” is “the stability of confidence”. We should realize that to stabilize the confidence is not about stabilizing certain macroeconomic factors in the short-term, or varying the macroeconomic policies with market sentiments to provide simple loosening or targeting supports. To stabilize the confidence, the market agents should have a clear, definitive and scientific solution for long-term strategic problems. In the meantime, we should undertake reforms of the fundamental problems, and provide a reliable and level-playing field for future development.
2) “The stability of growth” should keep rooted in bottom-line management. We must clearly differentiate the cyclical fluctuation from the change of the tendency, and scientifically set the border between short-term growth target and bottom-line management. It is appropriate to adjust the lower band of 2019 GDP growth rate to around 6.3%.
3) In the new declining period of household savings rate, “the stability of consumption” is of far more importance to the stability and healthy growth of macro economy, compared to “the stability of investment”. The infrastructure investments growth rate in 2019 should not surpass 6%.
4) The baseline of “the stability of finance” should be “avoiding the systematic financial risks”, and should not be over-interpreted.
5) We should fully recognize the different functions of different macroeconomic policies in different macro-control targets, fully consider the mutation of delivery mechanisms of different policies under the great reform and great adjustment period, so as to avoid the widespread misalignment of macroeconomic policies or the fallacy of composition.
6) The fiscal policy should be more proactive. We should adopt more targeted loosening of the proactive fiscal policy while further raising the fiscal deficits. Considering about the internal and external problems in 2019 and the uniqueness of the great reform, fiscal deficit rate can be raised to around 3.0%.
7) The monetary policy should be adjusted with the evolving external and interior environments. The content of prudent monetary policy should be changed. We suggest that M2 growth rate in 2019 should be recovered to the nominal GDP growth rate in 2019, up to 9%-9.5%.
8) The corrections of real estate markets and relevant risks should be in constant and strict supervision, especially the house pricing fluctuations in third-and-fourth-tier cities.
9) Further encourage the innovation and entrepreneurship in terms of institutional mechanisms. However, we should draw lessons from the past practice in emerging industries and innovation activities, and realize the short-term costs brought by large-scale implementation of innovation and entrepreneurship.
Session II of the Forum was moderated by Yang Ruilong, Co-director of the Institute of Economic Research of RUC. The panelists carried out an in-depth discussion and communication about the China’s macro economy.