Lin Yifu: We must have confidence and determination in China's economic growth

　　From the end of 1978 to 2023, the size of the mainland's economy has increased 47 times, which is a miracle. In such a miracle, we will soon be able to enter the ranks of high-income countries. The threshold for high-income countries is now $13,845 per capita, while China's GDP per capita is now close to $13,000, and I estimate that by 2025 or 2026, we should be able to cross this threshold and become a high-income country. This is a very important milestone in the great rejuvenation of the Chinese nation.

　　Why has China's economy achieved miraculous growth?

　　Over the past 45 years, we have not only developed rapidly, but we are the only country that has not experienced a systemic financial and economic crisis. This was due to the concept of "emancipating the mind and seeking truth from facts" that we implemented in the reform at that time, and adopted the reform method of a gradual dual-track system, that is, "the old methods for the old and the new methods for the new people".

　　At that time, there were many large, heavy, capital-intensive state-owned enterprises (SOEs), which were generally inefficient, and although they were inefficient and incapable of self-sustaining, we adopted the "old old method" when we reformed, and continued to provide the necessary subsidies and protection from the state to maintain their survival and maintain economic stability. For some industries that were previously suppressed but were in line with our comparative advantages, we have adopted "new people and new methods". The government has allowed township enterprises, private enterprises, and foreign-funded enterprises to enter these new industries that are in line with their comparative advantages, and not only has these enterprises been allowed to enter, but the government has also actively guided them according to the situation and helped them develop.

　　At the same time, we needed to enter the international market for products that met our comparative advantages, but at that time, the domestic enterprises were not able to attract investment. Foreign capital not only brings capital and technology, but also access to the international market. In this way, these industries that are in line with comparative advantages can develop rapidly, and in the process of development, they can also take advantage of the latecomer advantages formed by the gap with the developed countries to introduce, digest, absorb and re-innovate in technological innovation and industrial upgrading, which is lower in cost and less risk than their own invention.

　　Through "new people and new methods", we have enabled many industries to achieve rapid development, not only creating jobs, but also accumulating capital. Foreign exchange, so that our industry from labor-intensive to capital and technology-intensive upgrading, so into a positive cycle, not only so that the industry continues to upgrade and iterate, and the early stage of the reform of those capital-intensive large-scale heavy industries also have a comparative advantage in line with the mainland's national conditions, improve efficiency, enterprises have the ability to generate themselves, the transition period of protection subsidies can be eliminated, the market can play a decisive role in the allocation of resources, the government can also play a better role.

　　What are the reasons for the misjudgment of China's economy?

　　There is an interesting contrast between China and the United States: When the US economic growth slows down, it usually blames other countries, and before the 80s of the 20th century, it is blamed on Japan, and now it is blamed on China; when China's economic growth slows down, the international academic community generally believes that the root cause is China's own institutional problems. This is not only the case in foreign academic circles, but also in domestic academic circles.

　　China does have problems caused by the lack of gradual dual-track reforms, but many times the economic downturn may be due to external or cyclical factors. At the same time, because the problems of the system and mechanism are not easy to change, cannot be changed, and are unwilling to change, some people are pessimistic about China's economy, and even believe that China's economic collapse is imminent.

　　Since 2013, China's economic growth has dropped from 9% and 10% to 6% and 5%. This is true, but there is a lot of talk about this continued decline, both internationally and domestically.

　　Many people believe that this is due to the "advance of the country and the retreat of the people". From the perspective of property rights theory, it is generally believed that state-owned enterprises are inefficient, while private enterprises are efficient. In the early days of reform and opening up, China was basically 100% state-owned enterprises, but now the proportion of state-owned enterprises is only 25%-30%, and private enterprises have basically not existed in the past, and now they account for 70%-75%. In this situation, there has been a theory in the past that China's rapid growth is due to the efficiency gains brought about by property rights reform, and many theoretical articles have also supported this theory. However, since 2003, the proportion of state-owned enterprises in the national economy has been rising, and the proportion of state-owned enterprises in bank loans has also increased, while the proportion of private enterprises in both aspects has decreased simultaneously. Many people believe that the decline in the proportion of private enterprises is due to policy suppression. Those who hold this view believe that the problem is basically unsolvable, because it is the policy of the state to make state-owned enterprises bigger and stronger, and in such a situation, China's efficiency will decline, so they blame the policy for the continuous economic decline. If we hold this view, we are prone to pessimistic expectations and lose confidence in future development.

　　What are the reasons for China's economic growth?

　　Judging from the statistics, the share of state-owned enterprises in the economy and in loans has indeed increased. The problem is that "economic growth is declining," "the proportion of state-owned enterprises is rising," and "the proportion of loans to state-owned enterprises is rising." These phenomena exist at the same time, and what is the cause and what is the effect? Is it the increase in the proportion of state-owned enterprises that has slowed down the economic growth rate, or the slowdown in economic growth has led to the increase in the proportion of state-owned enterprises? If this causal relationship is not clear, the judgment on the future will be different, the policies adopted will be different, and the results will be different.

　　In my view, the increase in the share of state-owned enterprises and the increase in the proportion of loans to state-owned enterprises are the result of the slowdown in economic growth, not the cause. The low investment in private enterprises and the decline in the proportion of loans to private enterprises are due to external shocks and the slowdown in the growth of demand for private enterprises.

　　After the international financial and economic crisis in 2008, the developed countries have not been able to fully recover. At the same time, international trade in developed countries has not fully recovered. In the 30 years from 1978 to 2008, our exports grew by 18% per year. After the international financial and economic crisis in 2008, due to the decline in international trade and the slow growth of developed countries, the import demand was low, and our exports were slow, and the growth rate dropped from nearly 20% to only about 5% now.

　　In this situation, the most affected is the export sector, that is, the sector of private enterprises, which now account for 97 percent of the mainland's exports. After the international financial and economic crisis in 2008, the sudden decline in export growth caused overcapacity in private enterprises, and the recovery of developed countries is still far away, and even declining. In such a situation, private enterprises will have poor expectations for the future, and of course they will not be willing to invest, so they will receive fewer bank loans.

　　These sectors, which now account for the majority of the sector in line with the comparative advantage, have overcapacity, are not doing well, and do not invest, which has an impact on employment. If employment is affected, income growth will be affected, so household consumption growth will be affected, and the economy as a whole will decline.

　　In such a situation, the government must of course take some counter-cyclical investment and do a lot of infrastructure construction to stabilize the economy. These projects are large-scale, externally oriented infrastructure, so they are carried out by state-owned enterprises, and the proportion of state-owned enterprises has increased counter-cyclically. State-owned enterprises (SOEs) have to borrow from banks to do these projects, and the bank loans of SOEs have also increased. These are basically measures to stabilize economic growth due to the economic downturn and the adverse impact on private enterprises. The inputs to these investments are generally produced by private enterprises, which also create jobs and increase household income and consumption, and these consumer goods are mainly produced by private enterprises. Therefore, if the government does not invest in these infrastructures, the life of private enterprises will be more difficult than it is now.

　　Without an accurate understanding of China's economic downturn and the corresponding causal relationship, it is easy to have a pessimistic view. As long as we have a clear understanding that the current pressure on economic growth is mainly due to the weakness of external demand, take necessary buffer measures, and carry out necessary reforms to mobilize the enthusiasm of entrepreneurs for technological innovation and industrial upgrading, China can still maintain a growth rate of 5% or even higher.

Read the link: What is a "high-income country"?

　　The World Bank generally groups the level of economic development of countries and regions in the world according to the level of gross national income per capita. Countries around the world are usually divided into four groups: low-income countries, lower-middle-income countries, upper-middle-income countries, and high-income countries.

　　Gross national income per capita is defined as gross national income divided by the average annual population. Gross national income (GNI) is the total amount of raw income received by all permanent resident units of a country in a certain period of time (usually one year), such as workers' remuneration, production taxes, subsidies, depreciation of fixed assets, operating surplus, and property income. Gross national income per capita and disposable income per capita are different concepts. To put it simply, per capita gross national income includes both corporate income and government income, as well as the income of individual residents. The per capita income we usually talk about refers to the per capita disposable income of residents, which only includes the personal income of residents. Generally speaking, the level of per capita gross national income, which is inversely proportional to population growth and directly proportional to national income growth, can be used to measure the economic strength of a country or region and the affluence of its people. The higher the per capita gross national income level, the stronger the comprehensive economic strength of a country or region, and the richer the living standards of the people.

　　On July 1, 2023, the World Bank released its updated global economic classification. The latest economic classification criteria released this time are: the upper limit of per capita GNI for low-income economies has been raised from US$1,085 to US$1,135, the per capita GNI range for lower middle-income economies has been raised from US$1,086-4,255 to US$1,136-4,465, the per capita GNI range for upper middle-income economies has been raised from US$4,256-13,205 to US$4,466-13,845, and the lower limit for per capita GNI for high-income economies has been raised to US$13,845.

(Source: Beijing Daily, April 15, 2024, page 10; author: Lin Yifu, Boya Chair Professor of Peking University, Honorary Dean of the National Academy of Development, and Dean of the Institute of New Structural Economics; reading link part of the author: Gao Gao; picture source: original article with pictures; original title: Confidence and determination in China's economic growth - and analysis of the reasons for the misjudgment of China's economy)