The signal of short-term steady economic development has shown up, and the various indexes of Chinese macroeconomy are changing for the better.
Article by Liu Yuanchun (National Academy of Development and Strategy, Renmin University of China)
According to the recently released data, various indexes of Chinese macro-economy are changing for the better. Antecedent and consistent parameters showed signs of stability. In the first half of 2016, Chinese economy increased by 6.7%. In the second quarter, the nominal GDP growth rate reached 7.3%, still higher than the actual growth rate, and 0.2 percentage higher than that in the previous quarter. The previously negative deflator index is getting better as well.
China’s industrial production is also improving. In August 2016, industrial added value on a national scale increased by 6.3% in comparison with that a year ago. High-tech industry and equipment manufacturing performed well, with the growth rate amounting to 10%. Producer Price Index (PPl) saw a shrinking drop, which looked positive if compared with that of the previous month. Purchase Management Index (PMI), previously on the decline for months, amounted to 50.4, an increase of 0.4 percentage, which turned the situation around for the better. Manufacturing industry was recovering, too.
In August 2016, industrial added value on a national scale increased by 6.3% in comparison with that a year ago. High-tech industry and equipment manufacturing performed well, with the growth rate amounting to 10%.
The decrease in import and export has dropped. The index of leading export indicators has recovered 3 percentage. RMB-denominated export has been on a continuous increase. Investment remained steady in August, 8.1% over that a year ago and equal to that of the previous months. CPI in August was 1.3% over that a year ago, stable if not powerful.
Government expenditure increased remarkably, which showed that financial policies were effective. The current financial and monetary transmission mechanism has begun to work.
In the meanwhile, Keqiang lndex (1) has witnessed significant recovery. Power generation in August went up 7.8 percentage compared with the amount in the previous year. Some international parameters, such as OECD, also began to recover.
Three challenges to the steady development of Chinese economy in the mid- and long run
The recovery of the world’s economy remains uncertain.
The downturn of Chinese economy may have come as a result of internal structure, externa l impact and periodical factors hidden in global and domestic economic cycle and structure. So far, the world’s economy has begun to show signs of recovery, but the impact of the economic imbalance caused by the worldwide financial crisis on the overall Chinese economy is still severe. The decrease of global trade and investment has not been completely reversed. Meanwhile, rally of consumer prices, Britain’s exit from the EU (Brexit), and Fed rate hike expectations may give rise to uncertainty of the world’s economy.
Domestic demand is still weak, and some risks still exist.
The mid- and long-term economy and demand arc to be stimulated. The impact of internal structural adjustments is continuously becoming obvious. The market-driven force is not as powerful. Although recovered significantly, investments in fixed assets are largely dependent on credits and governmental interference. Government expenditure, including public financia l expenditure and fund expenditure, shows remarkable increase. From January to August of 20 I 6, it amounted to RMB 14 trillion, new social finance added up to RMB 11 trillion, and new loans totaled RMB 7.5 trillion. In addition. RMB 4.8 trillion government debts were replaced in the same period. During the eight months, the government and state-owned enterprises played a leading role in investment while the market did not work much. Consumer demand is insufficient, negative growth in price index still exists, and export is ri s ing up rather slowly. Therefore, the stable development of Chinese macro-economy at present is largely attributed to governmental policies, and it takes time for the economy to develop steadily independent of those policies.
One of the key challenges to China’s economic development is to find new ways of economic growth since the traditional spurring forces, such as globalization, reform, population, and industrialization, are playing a less significant role.
New elements conducive to economic growth are to be sought after.
One of the key challenges to China’s economic development is to find new ways of economic growth since the traditional spurring forces, such as globalization, reform, population, and industrialization, are playing a less significant role. Although various technical indexes arc rising rapidly and new ways of economic growth are showing up, technical imitation and repetition cannot meet the needs of the sustainable development of China’s economy, which must rely on technical innovation.
Despite the challenges, Chinese economy can still grow at a mediumor high speed.
First, the conduction mechanism of fiscal and monetary policies is being resumed.
Since the beginning of2016, the fiscal and monetary policies in China have been playing a better role. In the future, more positive fiscal policies will be formulated by the Chinese government. Supported with stabilized monetary policies, they are to hedge against the pressure from the economic downturn.
Fiscal policies. There is a rapid growth of the budgetary funds in fixed asset investment, which indicates the positive fiscal policies of China have begun to have their direction and conduction mechanism. Although still faced with such problems as the declining growth rate in revenue, the restriction on fiscal policies caused by short-term high costs resulting from the structure reform, and the conflict between the fiscal and monetary policies, the Chinese fiscal policies in the future will be more positively oriented and the Chinese government’s advantages in system and fiscal space will be made full use of. To deal with the increase of fiscal deficit, more emphasis will be put on directional accommodative policies. Some of the specific policies are as follows: the fiscal deficit ratio will be further raised; more efforts will be made to tackle locally collapsed fiscal revenue; structural tax reductions will be replaced by gross tax reductions; new measures of fiscal expenditure in the interim will be adopted as soon as possible; the investment-oriented fiscal expenditure will be shifted to the people’s livelihood-oriented one. The future Chinese fiscal policies will be more positive and fruitful so as to be in full support of the active overall supply-side structural reform.
Monetary policies. The Chinese monetary policies this year have been adjusted. The past simple delivery is being replaced by specific projects supported with fiscal investments.
Secondly, the supply-side structural reform has been carried out and the new driving force for the economy is taking shape.
From the year 2016, with the structural adjustment and reform in China fully prepared and carried out, the underlying problems in the economy will be solved. For instance, the critical reforms, such as the state-owned enterprise reform, fiscal and tax reform, financial reform, and social reform, are being carried out. Those reforms will definitely boost the Chinese economy. Although problems such as excess manufacturing capacity and high inventory in the real estate industry remain unsettled for some time and the number of realistic challenges is increasing, there has been much improvement in these respects with the implementation of those reforms. As far as mid- and long-term economic growth is concerned, the new mechanism which is compatible with the new momentum will be gradually established with the step-by-step implementation of the supply side structural reform policies.
In 2015, 1.102 million patents of invention were received in the country, ranking first in the world for five consecutive years. Research and development expenses accounted for 2.1% of the national GDP in the same year. Therefore, in the fields of industry and technology, there is potential for China to catch up with and even surpass developed countries.
Thirdly, there is still large space for China in the field of new technology.
The new technological revolution has been the foremost motive force for the rapid growth of global economy in the past two decades while globalization is the second. After the economic crisis, the global technology witnessed a shift from the high-speed development to the moderate development. It is not so promising as expected. From the perspective of global patent development, it can be noticed there was an accelerated growth from 1990 to 2006 and then there has been an observable fall ever since. However, it has been different in China. In 2015, 1.102 million patents of invention were received in the country, ranking first in the world for five consecutive years. Research and development expenses accounted for 2.1% of the national GDP in the same year. Therefore, in the fields of industry and technology, there is potential for China to catch up with and even surpass developed countries. More importantly, the innovation driven technological advancement will bring a new round of economic growth in the country.
Fourthly, as far as the political economy cycle is concerned, the Chinese economy is rebounding.
So far, changes have taken place in the behavior pattern of the local governments in China, who are more active in participating in the in-depth economic reform and transformation. This will accelerate the transformation of dynamic structure of Chinese economy. Moreover, in response to the call of the central government, the local governments have begun large-scale project investments. The cumulative investment growth rate of local projects from January to April this year was I 0%, 3.6% higher than that of the last year, having promoted the regional economic development.
(1) Keqiang Index or Li Keqiang Index. created in 2010 by The Economist to measure China’s economic growth based on electricity consumption. railway cargo volume. and loans disbursed by banks. The term was first used in 2007, when Li Keqiang, then the Party Committee Secretary of Liaoning, used the following three indicators for economic analysis: the growth of electricity consumption, railway cargo vollume, and loans disbursed by banks. According to the journal, Keqiang Index is a better economic indicator than official numbers of GDP.