Source: Xinzhuang Classroom
Xu Lin is the former Director General of the Department of Finance and the Department of Development Planning of the National Development and Reform Commission
I think the Chinese economy is currently in a state of structural deceleration, and this slowdown is not cyclical. Our economic growth will always face cyclical fluctuations, there will be economic highs and inflation when it is high, there will be troughs and even deflation in economic growth deceleration, but that may be cyclical fluctuations. The causes of cyclical changes and structural deceleration are different, cyclical fluctuations are easy to achieve results with short-term macroeconomic control measures, but structural deceleration has a certain trend, and it is much more difficult to change the trend, and the solutions to problems are mostly structural. As a result, the economy is facing structural deceleration pressure, and I think there are mainly the following factors.
01
Factor conditions deteriorate
The most obvious is that China is getting older and older, and the proportion of people over 65 years old in the total population is close to 15%, and the proportion of people over 60 years old in the total population has reached 19%, and soon it will reach 20%. Due to the impact of the one-child policy that has lasted for many years, the mainland's aging degree has increased faster than many other countries, and it belongs to countries that are not rich and are aging rapidly.
The rapid aging will bring about a problem, that is, the change in labor supply and demand, in academic terms, is to cross the inflection point of the Lewis curve, or the demographic dividend disappears. China's working-age population is decreasing every year, and the working-age population refers to the population aged 15-60, and in some countries the population is 15-65 years old. Over the past decade or so, the mainland's working-age population has declined by an average of about 3 million a year. Since last year, China's total population has also begun to decrease netually, and the population dependency ratio of the entire country has also increased rapidly, and the burden of young people's pension will continue to increase.
This change in labor supply and demand first makes labor costs continue to rise. I remember reading a statistic that over the past decade or so, labor costs in China have risen by about 12% per year on average. This has caused some of our traditional labor-intensive industries to gradually lose their competitive advantage, so in the past, many industries in the mainland began to transfer to neighboring countries and regions with lower labor costs, and this process has actually happened for at least 10 years.
Second, as the age increases, the country's overall savings rate will show a downward trend. China's savings rate peaked at about 50 percent. Now it's down to about 43%, and I'm sure it's going to fall further. Nevertheless, if we compare China's savings rate with countries like the United States and Japan, our savings rate is still high, but it is continuing to decline compared to our own, that is, the wealth of domestic capital is declining.
Therefore, labor and capital are the two major factors of production in the growth function, and our supply conditions are actually weakening or even deteriorating.
02
Labor productivity growth continued to decline
When the factor conditions become unfavorable, if the factor allocation efficiency can be continuously improved, the negative impact of the unfavorable factor conditions on economic growth can be offset. Unfortunately, according to research on relevant literature and our own calculations, the growth rate of factor allocation efficiency in our country has also continued to decline in the past decade, and the growth rate of labor productivity has also declined in the past decade. When we studied the "13th Five-Year Plan", we calculated this figure, and the growth rate of total factor production and labor productivity were declining. When a country's factor supply conditions are deteriorating, the growth rate of factor allocation efficiency is also declining, if you directly use a simple neoclassical growth model to estimate, there is no doubt that the economic growth rate will also decline, which does not require advanced economic knowledge to understand.
03
The external environment has deteriorated due to tensions between China and the United States
Under the conditions of open market, the quality of the external environment determines the degree and convenience of obtaining external factors and resources, and the difficulty of factor resources to obtain higher benefits by expanding the allocation boundary. Since the Trump administration and the Biden administration in the United States, Sino-US relations have continued to be in a state of tension, which has led to great changes in the entire external international environment, and the trend of decoupling and breaking the chain with the economies of Western countries has begun to appear. Since the United States and other Western countries are not only the main source of trade surplus for us, but also the main source of advanced technology, equipment and capital, the negative impact of irreversible development is worrying. Because even under the current circumstances, the surplus we get from the United States in goods trade in a year is still about $300 billion.
The business community has long reflected the concern that Sino-US relations will deteriorate. I remember that in the process of compiling the "13th Five-Year Plan", when soliciting opinions from all walks of life on the "13th Five-Year Plan", Zhejiang entrepreneur Lu Guanqiu added a special suggestion after putting forward all the opinions, saying that we must not spoil relations with the United States, because the core technology of many of our Chinese industries is in the hands of the Americans, and if the relationship is broken, the impact on our country's industrial upgrading will be very great. When he said this in 2015, most people did not have too deep understanding and feelings, because at that time, Sino-US relations were not bad to the extent they are today, and the technology of many Chinese industries came from the United States, and even they would be stuck in the neck. It now seems that Mr. Lu Guanqiu's words are quite far-sighted, and this insight should be based on his extensive and deep understanding of China's industrial technology as an entrepreneur.
Lu Guanqiu
The current changes in Sino-US relations, especially the anxiety and containment of China's rise in the United States, are constantly weakening the already little mutual trust between China and the United States, and then leading to extreme political bias involving China issues in the United States, as well as the resulting de-Sinicization of the US-led industrial chain and technology chain, using various pretexts to promote the so-called de-risking through sanctions on Chinese entities and export controls and import restrictions, and the impact caused by the difference in the three-year new crown epidemic prevention and control system. It seems to have strengthened their supply chain de-risking rationale and efforts. Dealing with such adverse changes, while incentivizing the Chinese government and companies to strengthen their efforts to become self-reliant and circulating, will at least have a short-term adverse impact on the Chinese economy. In this process, we have seen that since the Trump administration, the United States has adopted different degrees of trade protection measures not only against China but also against its allies, and the international trade order based on WTO rules has continued to deteriorate. The free trade system on which economic globalization depends may also be further undermined or even marginalized in the future, and new regional or group high-standard free trade systems may be established one after another and play a greater role. The new geopolitical complexities caused by the Russian-Ukrainian war since last year have added new turbulent variables.
If you pay attention to the recent speech of US National Security Adviser Sullivan at a US think tank, you will find that he is actually rethinking and criticizing the Washington Consensus of the past based on neoliberal ideas in the United States, and proposing new ideas. According to his thinking, the United States should build a more resilient and safer industrial chain, promote the return of key manufacturing industries, and also help raise the wages of American workers, get rid of the growth model of overly dependent on the financial industry, maintain the industrial competitive advantage of the United States, especially the scientific and technological advantage, and implement the trade policy with the working class as the core. If the Americans can really come this far, the United States will most likely not be able to implement the free trade system it advocated in the past in the future, because the general manufacturing industry in the United States is not competitive due to the high cost of trade protection. This is probably the main reason why the United States has actively advocated so-called fair trade rather than simple free trade since the G20 German summit.
At present, the decoupling and breaking of the chain with de-China as the main content implemented by the United States to attract some countries has just begun, how the relevant countries respond, what is the impact on the international trading system, what kind of international pattern will eventually evolve, and how we can better deal with it, it will take time to observe, think and respond. But once this change takes shape, it can be very detrimental to our economic growth, especially for the external demand that has underpinned our strong growth in the past.
04
The "dual carbon goals" have both opportunities and challenges
Our country has clearly put forward a timetable for achieving the "dual carbon" goal, and has implemented stricter environmental protection constraints and governance in the past few years. This new constraint has actually put many traditional industries in China with relatively large emissions or energy consumption under great pressure to transform, and some polluting small and medium-sized enterprises have even been directly asked by the government to shut down. In fact, this transformation pressure for steel, cement, building materials, nonferrous smelting, and chemical enterprises means that it is necessary to increase the cost of new technological transformation to meet the requirements of pollutant and greenhouse gas emission reduction. I participated in a discussion on global industrial carbon reduction and carbon neutrality led by the United Nations Office for UNIDO in Japan. I remember a representative of the German Industry Association speaking at the time and saying directly: "The problem is actually very simple, for all our industries it is possible to not wait to accept the increase in costs." "Whether or not they can withstand the increased costs caused by the low-carbon transition is the same for many industrial enterprises in China."
For some industries and enterprises, once this transition cost increases, it may lose market competitiveness in the international market, and now the EU has clearly proposed to implement a carbon border tax, the specific legislative process has been completed and will soon be implemented, and finally it will actually increase the export price of our company's products, because if our company's products have a relatively high carbon footprint, they will face a higher carbon border tax when exporting to the EU.
Of course, the dual carbon goals bring us not all challenges, but also many new opportunities. For example, if China's energy industry wants to implement a green and low-carbon transformation, we must replace the original fossil energy with green and low-carbon energy, which itself is an innovation pressure and requirement, which will bring many innovation opportunities and investment opportunities, which is a very sustainable, broad and deep investment track. Because the Sino-US Green Fund is mainly to invest in this field, we pay great attention to various innovative products and technologies in this field, including innovation, production and services of material technology and electronic power technology, as well as investment and development of green and low-carbon energy infrastructure. Some experts in this field have calculated that if net zero emissions are truly achieved by 2060, an investment scale of close to 500 trillion yuan may be required, which will undoubtedly become a continuous driving force and support for economic growth.
If we have to deal with the weakening of external demand in the future, this can become an important area for expanding domestic demand. In fact, China is already at the forefront of the world in this field, both in terms of technology and scale.
05
Outlook for potential economic growth over the next decade
After considering all of the above, I analyze China's potential economic growth rate in the next decade to be between 4% and 5%. This potential growth rate is almost two percentage points lower than when we formulated the 13th Five-Year Plan. The potential economic growth rate we estimated when we prepared the 13th Five-Year Plan was about 6%, but the economic growth target set by the 13th Five-Year Plan is 6.5% per year, which is higher than our estimate of potential growth. This is mainly because the report of the 18th National Congress of our Communist Party of China put forward the growth target of doubling the growth rate in 2020 compared with 2010, and if the average annual growth rate of the "13th Five-Year Plan" does not reach more than 6.5%, the doubling target proposed by the 18th National Congress will not be achieved. At that time, when we set the target, there was such a pressure from the target reported by the 18th Party Congress, but in fact, we thought that we were under great pressure to achieve an average annual growth of 6.5% during the 13th Five-Year Plan period. Throughout the "Thirteenth Five-Year Plan" period, in fact, the government has maintained a certain stimulus by expanding government investment. At the end of the "Thirteenth Five-Year Plan", our actual five-year average annual economic growth was still a little worse than 6.5%, that is because the new crown epidemic occurred in 2020, and economic activities caused by epidemic prevention and control were blocked, so that the economic growth rate of that year declined, which was affected by exogenous unforeseen factors.
In fact, such a structural deceleration pressure has brought great challenges and pressures to national planning and policy formulation. If you pay attention, you will find that China's economic and social development "14th Five-Year Plan" does not put forward the average annual economic growth target. For the first time, I have experienced and participated in a number of five-year plans and plans, from the Eighth Five-Year Plan to the 13th Five-Year Plan, which does not put forward specific five-year economic growth targets, but proposes that five-year economic growth targets be determined by annual plans.
My personal guess is that the problem reflected in this change is that planners, faced with many uncertainties, feel that it is very difficult to clearly propose a five-year average annual growth target, and may also worry that once a specific target is proposed, there will be a big gap in the final achievement, which is also very face-shattering, so such an adjustment was made. Of course, I personally believe that the proposed planning goals cannot be achieved in the end, but it is actually acceptable, because China's five-year plan is not a directive plan, but a strategic and guiding plan. We are not practicing a central planning system, but a market economy system. In a market economy, deviations from actual results should be the norm. If the planning objectives cannot be achieved, the evaluation and adjustment mechanism implemented according to the existing plan may be proposed according to the actual situation during the mid-term evaluation of the five-year plan and submitted to the people's congress for approval. Even if the goal is not fully achieved in the entire five years, it can be explained to the National People's Congress to explain the main reasons why the implementation results of the plan deviate from the plan target, and there is no problem of not being able to live with the plan or being held accountable.
When I say this, I actually want to express that under the pressure of structural deceleration and the increasing uncertainty of the external environment, it is indeed more difficult for the government to put forward a clear growth target. In 2022, the second year of the 14th Five-Year Plan, the 2022 annual economic development plan adopted by the National People's Congress set an expected growth target of 5.5%, and only achieved 3% growth. It can be seen that even the expected target of short-term growth will be greatly affected by uncertainties during the implementation process, resulting in deviation from the expected target. This year's economic growth rate is likely to be around 6%, because after recovering from last year's low base, next year's economic growth rate is likely to return to the potential growth range of about 4%.