He Haifeng: There are four major challenges to China's economy and three responses

Inscription: On January 18, 2024, the 67th China Economic Observation Report of the Peking University Development Institute was held, with the theme of "China's Economy 2024: Establishment and Breakthrough, Challenges and Opportunities". This article is based on the keynote speech of He Haifeng, chief economist of Guotai Junan Securities.

The press conference of the National Bureau of Statistics on January 17, 2024 provided a wealth of data and information, including some statements that deserve our attention. For example, "withstanding external pressure and overcoming internal difficulties" reflects the complexity and severity of the current economic situation; "the complexity, severity and uncertainty of the external environment are rising", which undoubtedly poses a huge challenge to our internal stability and development.

Against this backdrop, I try to look at China's economy from a long-term perspective. Since the reform and opening up in 1978, China's economy has been operating in a high degree of similarity with the world economy, including the U.S. economy, but at the same time, the average growth rate of China's economy is significantly higher than that of other major economies. This is one of the "two miracles" we have created in the past few decades: sustained and rapid economic growth. Another miracle is long-term social stability, which provides a solid support for economic growth.

However, when you look at it in the five-year planning cycle, you can see that China's economic growth is gradually slowing. From more than 11% during the 11th Five-Year Plan period, to about 8% during the 12th Five-Year Plan period, to 5.7% during the 13th Five-Year Plan period, and 4.5% during the three years of the epidemic, this trend is very obvious. If the growth rate is projected at 4.5%, there may be some pressure to achieve the goal of doubling the total volume by 2035.

Therefore, 2024 is a very critical year, because the 14th Five-Year Plan will come to an end next year, and the growth rate of the first three years is already lower than our expected target.

In the face of such challenges, we need to take proactive measures. Next, I will sort out the current challenges facing China's economy from four aspects and propose three countermeasures. I hope to provide you with some new thoughts and inspiration.

One of the challenges: Economic globalization is facing headwinds

In recent years, there have been endless arguments about the headwinds of economic globalization. Some call it de-globalization, others call it anti-globalization or fragmentation, and so on. Trade is the most important thread in national economic ties, and from the beginning of trade, we have realized the flow of goods, the growth of investment, the exchange of finance, the interaction of technology and people, etc.

The export of goods is the core link of trade. When it comes to the export of goods, China's position is very important. Since the 80s of the last century, China's share of exports has gradually increased, and today it accounts for one-seventh of global exports. At one point, China accounted for one-fifth of global exports during the pandemic. For example, during the pandemic, the world needed a lot of supplies, including masks, 20% of which came from China, and if there was a supply problem in China, the world could face a shortage of masks.

China's major trading partners are also undergoing some turning points. In the past, the United States was China's largest trading partner, followed by the European Union, then Japan and South Korea, and then Southeast Asia and Latin America. China's largest trading partner now becomes ASEAN, with a trade volume of 6.6 trillion yuan, followed by the European Union with about 860 billion euros, and the United States with $750 billion, taking third place. According to U.S. statistics, China's exports to the U.S. as a percentage of its imports once rose to 22 percent, and after several years of trade wars and technology wars, it has now fallen to 14 percent. As a result, the impact of changes in trading partners, especially between China as the second largest economy and the first largest economy, is significant.

It should be added that China has fallen from a high of 22 percent to 14 percent and is no longer the United States' number one trading partner. Currently, Mexico is the largest trading partner of the United States, followed by Canada, and Vietnam has also filled some of the voids left by China. In fact, the 7 to 8 percent decline in China's exports to the United States has been effectively filled by countries such as Mexico and Vietnam, either through entrepot trade or by opening factories in these countries.

This is the first challenge, and economic globalization is facing headwinds. For China, this is a very real problem. The different levels of development of our trading partners will have an impact on our trade structure, specific products and even investment in the industrial chain, not just the impact of orders.

Challenge 2: Climate change

A few days ago, the World Meteorological Organization welcomed its first female Secretary-General, which is a positive sign. The interim report on the state of the global climate, released at COP28 last year, pointed out that global warming should be kept to 1.5 degrees Celsius in accordance with the Sustainable Development Goals, but the current data shows that the temperature will rise to 1.4 degrees Celsius and the variance or fluctuation is 0.12, so the target is already difficult to achieve. The Secretary-General said that climate change is the greatest global threat we face today. At the same time, rising inequality is also exacerbating climate change, which in turn further exacerbates global development inequality.

In 2020, China put forward the "3060" strategic goal, which aims to peak carbon emissions by 2030 and achieve carbon neutrality by 2060. China is actively accelerating the development of trade, new energy and other aspects, and it is possible to achieve carbon peak ahead of schedule, but this is only a preliminary forecast for individual aspects.

Climate change is a global and indeed universal challenge, especially for major countries. China has always adhered to the principle of common but differentiated responsibilities. While we are currently only the country with the largest incremental emissions, we will soon be the largest emitters in history, which will also be a huge change.

Challenge 3: Investment growth continues to decline

Earlier this year, we made a forecast for China's economic growth. At the China Chief Economist Forum, I personally made a prediction. We believe China's economic growth in 2023 should be above 6%. In reality, however, it was only 5.2% in the end, due to the downward pull in exports and investment.

Mainland investment data has been published since 1995, with the highest point occurring in 2008. In the aftermath of that economic shock, China implemented a 4 trillion yuan stimulus package, including 10 major industrial revitalization plans, which led to a 30.5 percent growth rate in investment. Then it fell all the way to last year, when urban fixed asset investment fell to 3.0 percent. In academic research, we have been exploring the relationship between production and consumption. Investment and consumption may affect each other, and without investment, consumption upgrading may not be achieved without industries, enterprises, production capacity and products. However, if we blindly attach importance to investment and our products are mainly exported, domestic income will not be able to rise generally, domestic consumption will not be able to effectively increase, and investment and consumption will not be able to develop in a balanced manner, which is also one of the fundamental starting points of dual circulation.

Judging from the intra-year data, except for rural household investment, fixed asset investment increased slightly in December 2023, with real estate investment being the biggest drag. The proportion of real estate investment is already quite large, the willingness of private investment is not strong, and the growth of investment in the tertiary industry is not enough.

China's economy is in a stage of transformation, and the main driving force is constantly changing from the primary industry to the secondary industry and then to the tertiary industry. The tertiary industry will play an increasingly important role in stimulating economic growth. However, the growth of investment in the tertiary sector was also insufficient last year.

In addition, the "troika" pattern of investment, which we used to refer to in the past, has changed, and investment in services has surpassed investment in real estate. Is this the result of active behavior or an objective fact? It is difficult to draw conclusions, but this is also the actual situation in the process of industrial transformation and upgrading.

Challenge 4: Consumption fluctuations and differentiation are significant

Currently, the consumer sector is experiencing significant fluctuations and divergence.

The first is volatility. Judging from the total data, the retail sales of consumer goods have already exceeded 40 trillion yuan, and this year it has exceeded 46 trillion yuan, but there was a decline last year. In terms of growth rate, since the mainland switched to a market economy in 1994, the supply of consumer goods has generally exceeded demand, bidding farewell to the era of shortages. With the advancement of the commercial housing reform in 1998 and the transfer of residents' wealth to real estate, consumption began to be released. However, in recent years, affected by multiple factors such as the impact of the epidemic, the growth rate of consumption has shown a fluctuating downward trend.

The second is the differentiation of consumption. Divergence has become more pronounced in recent years. From the heterogeneity of urban and rural groups to the rich and poor groups, and then to the differentiation of consumer goods, there are differentiation phenomena.

Behind the fluctuation and divergence of consumption, it reflects the intertwined effects of multiple factors such as income, employment and demographic changes. Although the growth rate of rural residents' consumption is relatively fast, their consumption capacity is limited because there is still a gap between their total income and that of urban residents. In addition, the gap between the median and average incomes of urban and rural residents reflects the degree of equity between different levels. Although rural consumption is growing rapidly, the most important consumption is still concentrated in urban areas, which is also in line with the general trend of urbanization in the mainland.

In response to the above challenges, the CPC Central Committee has already made a strategic decision to build a new development pattern with the domestic cycle as the main body and the domestic and international cycles reinforcing each other. The just-concluded Central Economic Work Conference also made specific arrangements for this, and pointed out that insufficient effective demand is one of the important problems currently faced, and there are shortcomings in consumption and investment. At the same time, some industries still have the problem of overcapacity, and it is urgent to upgrade industries and find new growth points.

Even at the level of specific industries, the Central Economic Work Conference for the first time mentioned the development priorities of specific industrial fields, including three strategic emerging industries such as biomanufacturing, commercial aviation, and low-altitude economy, as well as two future industries such as quantum and life sciences. The development of these areas will help promote the high-quality development of the mainland economy.

High-quality development is the key to solving the problems encountered in the process of progress. In order to achieve high-quality development, it is necessary to adhere to the general tone of seeking progress while maintaining stability, so as to promote stability. In terms of specific tasks, the construction of a modern industrial system, the expansion of domestic demand, the deepening of reform, and high-level opening up are all important points of focus for promoting economic development. Among them, the construction of a modern industrial system needs to rely on investment and innovation drive, the expansion of domestic demand needs to stimulate the potential of consumption and investment, the deepening of reform aims to break down institutional and institutional obstacles, and the high-level opening up is to promote institutional opening up and integrate with international standards.

In general, in the face of the challenges of consumption fluctuation and differentiation and the complex changes in the domestic and foreign economic situation, we need to adhere to the direction of high-quality development unswervingly, and promote the sustained and healthy development of the economy with the general tone of seeking progress while maintaining stability.

To this end, I propose three initial response strategies, which are mainly based on a long-term development perspective, while taking into account the short-term economic operation. In the interweaving of current challenges and responses, we should take high-quality development as the leading factor and stable operation as the support to build a modern economic system.

Countermeasures 1: High-quality Belt and Road cooperation

The Belt and Road Initiative (BRI) is particularly important in the current context of de-globalization. In the face of the obstruction of information, capital, products, industries and people-to-people exchanges, we urgently need to open up new cooperation space through the Belt and Road Initiative to achieve sustainable economic development. President Xi Jinping's meeting with President Biden also emphasized that "the earth is big enough for China and the United States to develop separately and together." This concept also applies to countries along the "Belt and Road", through joint construction and sharing, to achieve mutual benefit and win-win results.

In trade with countries along the Belt and Road, we have achieved remarkable results, accounting for 45.4% of total exports. However, there are differences in trade with developed economies such as the European Union and the United States compared to the trade structure of these countries. Therefore, we need to strengthen trade cooperation with countries along the Belt and Road, promote the implementation of relevant projects, and provide necessary financing support, such as the Silk Road Fund.

At the same time, the United States and Europe have launched similar infrastructure investment programs, such as the Global Infrastructure Investment Partnership (PGII) at the G7 summit and the Global Gateway program in Europe. To a certain extent, these plans overlap with our Belt and Road Initiative, such as clean energy, information and communication technology, health systems, etc. There is no need to regard it as confrontation, but rather to jointly promote the construction and development of global infrastructure through competition and cooperation.

In the construction of the Belt and Road Initiative, we should give full play to China's competitive advantages in basic industries such as energy, transportation and telecommunications, and promote the layout and development of these industries in countries along the Belt and Road. At the same time, we should also strengthen exchanges and cooperation with countries along the Belt and Road in the fields of culture, education, science and technology, and enhance the comprehensive benefits and international influence of the Belt and Road Initiative.

In short, promoting the high-quality development of the Belt and Road Initiative is one of the important measures to address economic challenges. We should strengthen our confidence, take positive actions, and work hand in hand with countries along the Belt and Road to create a better future.

Countermeasure 2: Accelerate the construction of "new kinetic energy"

Although there has been no official definition of the term "new driver", it has shown an important role in economic development. According to the National Bureau of Statistics, since 2014, the new momentum index of economic development has continued to grow, and by 2022, it has increased by 28.4% over the previous year.

An in-depth analysis of its sub-indexes shows that the network economy occupies an absolute dominant position, contributing 91.6% of the new momentum index, while the transformation and upgrading index contributes only 0.2%. This shows that during the epidemic, the network economy has played a key role in promoting economic development, while the process of transformation and upgrading has been relatively slow.

When looking for new industrial fields, digitalization, digital economy and digital-real integration have become important directions. Industry, as an important force in the traditional driving economy, is still important. But at the same time, the rise of the digital economy cannot be ignored. In 2022, the scale of the digital economy has exceeded 50 trillion yuan, and the growth rate has been higher than the GDP growth rate for 11 consecutive years, accounting for 41.5% of the total economic output. This fully demonstrates the important role of the digital economy in promoting economic development.

To build new momentum and support the development of the digital economy, scientific and technological innovation is the key. At present, the increasingly fierce competition between China and the United States in the field of digital technology has highlighted the importance of scientific and technological innovation. The CPC Central Committee and the State Council attach great importance to scientific and technological innovation and place it at the core of leading development. According to the Global Innovation Index released by WIPO, China ranks 22nd in 2023, a significant improvement from previous years. At the same time, the innovation index released by relevant domestic research institutions also shows that China's performance in the field of innovation is increasing.

However, the transformation from technological innovation to new kinetic energy is not an easy task. This needs to go through a series of processes such as technology transformation and industrial formation. In this process, enterprises play a key role as the specific bearers of technology transformation and industrial formation. The intervention of financial capital is an important force to promote enterprise innovation, accelerate technological transformation and industrial formation. Therefore, in the process of building new momentum, we need to give full play to the role of financial capital, guide its flow to enterprises and projects with innovation potential and market prospects, and promote the rapid formation and development of new momentum.

Countermeasure 3: Accelerate the construction of a financial power

At the heart of building a financial power is to enable the mainland's financial system to cope with the current challenges and provide strong support for the two major coping strategies. Recently, at a special seminar for major leading cadres at the provincial and ministerial levels, the general secretary emphasized the importance of taking the road with Chinese characteristics and put forward the "eight insistences". These "eight insistences" have pointed out the direction of the road of finance with Chinese characteristics.

In October last year, the Central Financial Work Conference for the first time put forward the goal of building a financial power and defined a financial power. Compared with the economic powers, China still needs to further improve its economic strength, scientific and technological strength, and comprehensive strength. The 13th Five-Year Plan also puts forward the concept of a modern financial system, including marketization, internationalization, rule of law, informatization, modernization and eight systems. The six aspects of the system proposed this time are all major strategic arrangements.

However, it should be pointed out that if traditional bank credit is the dominant factor, it may be difficult for the financial system to give full play to the efficiency of supporting scientific and technological innovation and industrial transformation and upgrading. To better support entrepreneurship and innovation, we need to accelerate the cultivation of best-in-class investment banks and investment institutions, including angel investment, venture capital, private equity investment, and modern investment banks. At present, China's financial assets and liabilities mainly come from banks, while the assets of securities companies account for less than 3% of the entire financial system, and insurance accounts for more than 6%, and the two together account for only 10%. Therefore, relying on investment banking institutions such as securities companies to promote industrial venture capital innovation and support China's modern financial system is still relatively weak.

In view of this, we need to vigorously develop investment banks, learn from the experience of financial transformation in the United States in the 60s of the last century, and shift from the traditional banking field to the market field, led by fund companies and investment banks. Peter Drucker, a master of management, expounded on the importance of mass ownership of fund shares in his book "The Pension Revolution", which realized the people's holding of listed companies, the transformation of wealth and the transformation of finance, thereby promoting scientific and technological innovation and industrial upgrading in the United States. It is expected that in the construction of China's financial power, first-class investment institutions can rise rapidly and make important contributions to China's high-quality development and modernization.

The above views are my own.

整理：何又夕 |编辑：王贤青 白尧