Difficulties and prospects facing the Chinese economy

Ning Jizhe, deputy director, National Development and Reform Commission, examines what lies in store for the China economy during the coming year
Xinjiang desert, western China. Image: Shutterstock

In 2015, the Chinese economy experienced stable yet difficult growth due to the challenge of sustaining investment, boosting external demand, bolstering business development, increasing fiscal revenues, implementing economic reforms and addressing risks in the financial sector.

Growth of investment in fixed assets has been slowing down. As investment in traditional manufacturing becomes saturated, the inventory of commodities held in storage has grown and infrastructure investment faces numerous constraints as lacklustre market confidence hits investment. Meanwhile, the shrinking profitability of enterprises and the mismatch of demand and supply of capital are also leading to a drop in investment capacity. Furthermore, it will take time for countering policies to have a substantive impact on investment activities. Therefore, the sustainability of investment remains a serious issue.

Since 2015, the performance of export-related indicators has been particularly poor. Due to weak demand in external markets and increasingly fierce competition, early indicators such as the Exporting Leading Index and the PMI New Export Orders Index continue to slip back, making it very difficult to reverse the trend of declining exports in a short period of time. Weak demand in both domestic and foreign markets has directly affected the production and operation of enterprises. The price slump of industrial products exacerbates the plight of existing business operators and the ex-factory price of goods has been declining for 40 consecutive months. It is quite common that the capacity utilisation rate is falling and workers are being put on short time.

There is also a difficulty in increasing fiscal revenues. Due to economic slowdown, shrinking corporate profitability and structural tax reductions, the growth of Chinese fiscal revenues decelerated in 2015 and the revenues from usufruct transfers of state land also declined, which resulted in negative growth of fiscal revenues in some provinces. China also faces a challenge implementing reform policies and measures. Due to factors such as deficient supporting policies, unsynchronised reform attempts and the inaction and abuse of authorities, some policies and reform measures are belated and hard to be implemented in practice, which makes it hard for them to produce immediate and timely results. The risks in the financial sector have also manifested in 2015 and featured excessive production capacity, local government debt and housing bubbles. As the risks in some sectors are interrelated, the spillover effect is more likely to happen than before.

New five-year plan

At the end of October 2015, China revealed the initial draft of the Thirteenth Five-Year Plan, which includes a number of important points. First, China shall maintain a medium and high growth rate in the next five years, meaning that China's GDP and per capita income of Chinese residents in 2020 will double from 2010 levels. To fulfil this 10-year target of doubling the economic aggregates and income of residents, the annual GDP growth rate should reach at least 6.5%, which is impressive in absolute terms. Meanwhile, China should move forward in economic and industrial upgrading, aiming at a medium-high level.

Second, China's target urbanisation rate should be more than 55%, calculated with permanent population, and should reach 45% calculated with household registration population. In China, there is a gap between the permanent population and the household registration population - there are more than 200 million migrant workers living and working in cities that have not gained residency. They move back and forth between urban and rural areas and serve as an important source of labour that makes an important contribution to Chinese society.

Third, China needs to strongly enhance entrepreneurship and innovation. China should formulate plans to promote the strategy of 'Made in China 2025', so that achievements made in new economies, new industries, new technologies, new development models and new types of business can be built upon. More importantly, China should advance reforms in administration, management and business registration systems, as well as adopt other structural reform measures.

Additional reforms

China should also invest more in public goods and services, which are not sufficient, especially in areas such as social security, education, sanitation, basic healthcare and infrastructure (particularly in mid- and west China and other remote areas). The government and market entities should make a joint effort to propel infrastructure modernisation and invest more in projects such as water power, railways, roads, waterways, airways, communication, power, municipal administration and environment. Though China ranks first in terms of high-speed rail, it still ranks second in terms of expressway and railway operating mileage. Therefore, infrastructure development in China, especially in central and western areas, is not adequate and needs additional investment.

ning-jizhe-15Ning Jizhe

There is a need for a co-ordinated strategy to develop the west of the country, revitalise the northeast, boost the rise of the central region and ensure that coastal areas take the lead in developing the Silk Road Economic Belt, the 21st Century Maritime Silk Road, the Beijing-Tianjin-Hebei region and the Yangtze Economic Belt. Those strategies will narrow the gap among different regions in China and provide more opportunities for future economic growth. Since nearly 50% of the population lives in mid- and west China, those areas have great potential for economic development. Furthermore, coastal regions should continue to take the lead in reform and opening up. For example, pilot free-trade zones have been established in Shanghai, Tianjin, Fujian Province and Guangdong Province. Their successful experiences will be replicated and scaled up in other regions in the future.

At the same time, China must promote green, low-carbon and clean economic growth. The environmental protection industry in China has great potential and we should draw on the successful experience and advanced technology from developed countries. There is also a need to pursue shared economic growth and reform the current system of income distribution. The goal is to take targeted measures to help the 70 million rural residents who live on less than $1 dollar a day, to lift them out of poverty by 2020. And those who are not able to do so will be covered by the social security system.

China has already become the world's second-largest consumer market, worth $13 trillion to $14 trillion, which is expected to become even bigger as the Chinese middle-class keeps expanding.

China must also adhere to foreign policies promoting peaceful development. Chinese outbound tourists amounted to more than 130 million in 2015 and the number is expected to keep growing in the future.

While China continues to attract foreign investment, it should also promote its overseas investment. In 2014, China's direct overseas investment reached $120 billion. Furthermore, China has reached consensus with many countries in promoting international production capacity and equipment manufacturing co-operation. In addition, the Belt and Road initiative has resonated well in the world and can be integrated with the development strategies of many countries.

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