The following article comes from the City of Dreams, written by Hangzhou Venture Capital Association
The All Things Growth Conference is a bridge linking the world and an ecological platform for fission growth. For the first time, the 8th Conference on the Growth of All Things launched the "Global Ecological Partnership Program", inviting innovative entrepreneurs from all over the world to participate, strengthen exchanges and cooperation, and share the achievements of scientific and technological innovation by jointly building a global cooperation ecosystem.
Chen Xingdong
Senior Economic Advisor of BNP Paribas, Member of the Academic Committee of the International Finance Forum, Former Managing Director of BNP Paribas, Head of Global Economic Research (China) and Chief Economist of China, Vice Chairman of the China Chief Economist Forum
From April 24th to 25th, the 8th Conference on the Growth of All Things was held at the Hangzhou International Expo Center. Mr. Chen Xingdong, Senior Economic Advisor of BNP Paribas, Member of the Academic Committee of the International Finance Forum, Former Managing Director of BNP Paribas, Head of Global Economic Research (China) and Chief Economist of China, delivered a keynote speech entitled "Focusing on New Quality Productivity, Innovation and Entrepreneurship, Promoting Economic Structural Adjustment, and Forming New Momentum for China's Economic Growth".
Mr. Chen graduated from Peking University with a degree in economics and studied at Corpus Christi College, University of Oxford. He joined the National Commission for Economic System Reform in 1985 and participated in the research, design and implementation of reform and opening up policies. Chen Xingdong has worked twice at the World Bank as an economic consultant and economic researcher. He joined the investment bank in 1993 and is a business economist with more than 30 years of experience in macroeconomic research and investment strategy analysis.
The following text is based on the transcript of the speech.
Chen Xingdong: First of all, thank you for your enthusiastic introduction, and thank you for the invitation of the Organizing Committee of the All Things Growth Conference, and for the opportunity to participate in the All Things Growth Conference. I am very encouraged that the theme of this year's conference, "Breaking Through the Clouds – Not Afraid of Floating Clouds", is a fantastic topic. China's economy is indeed facing many challenges, especially now that the self-media is talking about various challenges and fog all day long. We need to jump out of the fog, and only by standing tall can we see far. From attending the welcome dinner last night to attending this conference today, I have been deeply touched to hear the sharing of scientists, entrepreneurs, investors, and entrepreneurial innovators. There is a saying that when you stay in Beijing, you are worried and anxious, and when you leave Beijing and go to various places, you will find that you are full of vitality and vitality when you come into contact with investors and entrepreneurs.
In the next few minutes, as a business economist, I'd like to share with you some of my thoughts on the current economic situation. One is the theme, which is "Focusing on New Quality Productivity, Innovation and Entrepreneurship, Promoting Economic Restructuring, and Forming a New Momentum for China's Economic Growth". In other words, the first stage of China's high growth has passed, so China is now transforming to the next stage, which is to continue to develop into a developed country after completing the moderately developed and achieving a moderately prosperous society. How can China modernize and become a developed country, we need to transform and develop, and we need to effectively respond to several major challenges.
Here are four points to share:
1
The lack of aggregate demand is a decisive factor constraining growth
First, China's current challenge is the lack of aggregate demand. The lack of aggregate demand is a decisive factor constraining growth. In the past, China has been facing a shortage of supply for a long time, and the problem solved by reform and opening up is how to solve the supply problem, but now supply is no longer a problem, the main thing is the lack of effective demand.
2
To achieve modernization, we must improve the quality and effectiveness, but there must also be a sustained increase in quantity
I personally believe that there is still a rather arduous road to go to achieve modernization, and this process must not only improve the quality, but also have sustained growth in quantity. Only with qualitative and quantitative growth can China achieve modernization.
In the process of modernization, China is facing not only cyclical challenges, but also structural problems. Structural adjustment is a major issue facing us in the future. But meeting the challenges is a great opportunity for our country's future development. Where does this opportunity come from? From innovation, from entrepreneurship, from the capital and investment in your hands, to meet the needs of constant renewal and growth, and more importantly, to create demand.
I have three charts here, the first chart, on the whole, China's economic growth has maintained a sustained and high-speed growth from the early 80s to the present. But the upward trend is a gradual downward movement to the lower right. Of course, this is normal, because when the economy is larger, the growth rate will naturally slow down. However, our economy is far from being developed, and continued development will be where our hope lies and the direction of our efforts.
The second chart shows that it is indeed difficult for the economy to grow steadily. After the relaxation of pandemic restrictions in December 2022, we were expecting a strong rebound in China similar to other economies in the world. However, after a relatively strong rebound in economic growth in the first quarter of 2023, the recovery of growth momentum has not been sustained. Economic growth was lower than expected after the second quarter. There are short-term factors in this, as the epidemic has lasted for three years and has caused significant damage to China's economy in all aspects. However, what is more important is that in the past few years, the collective effect of industrial policy, industrial management and structural adjustment has had an adverse impact on economic operation. Several unfavorable factors bump into each other.
In the last chart, China's economic growth in the first quarter of this year was reported to be 5.3%, and the official figure did exceed market expectations, but we note a major feature here: First, nominal growth is lower than real growth, which means that China's economy is still deflationary. Why deflation? Deflation is a lack of demand, and the level of deflation should not be low now. Deflation began in the second quarter of last year, and the deflation level reached 1.4% in the second, third and fourth quarters, and the deflation level in the first quarter of this year was -1.1% according to the official figure, and if last year's statistics are not lowered, its deflation rate is 1.3%. From this point of view, although the growth rate in the first quarter exceeded the 5.2% growth rate of last year, the level of deflation is still serious, indicating that the current economic situation is still relatively grim.
What does this mean? Is China's economic growth just going down? I'm not so pessimistic. I once heard a foreign economist say that fundamentally, the Chinese are a business nation. Chinese stand on the street not doing nothing, but standing there thinking about what business opportunities and how to develop.
Despite the rapid growth over the past 40 years, China's per capita GDP has increased significantly, but in 2023 it will be a little more than $12,000, which is only 16-17% of the United States.
What level is this? This is the process of economic development has just walked through the middle developed and just reached the threshold of high income. From the experience of international development, it should be said that the risks we face at this stage are quite high, that is, the middle-income trap is ahead of us. How to skip the middle-income trap and successfully become a developed economy, structural adjustment, focusing on improving efficiency, improving total factor productivity, and promoting the development of new quality productivity is the only way.
As can be seen from the second chart, the overall trend of economic growth is downward. Remind everyone that since 2023, what has been talked about a lot on the Internet is whether China's economy will have Japanese-style changes, and China's economy will be Japanized. Why? After the bursting of Japan's real estate bubble in 1992, coupled with Japan's declining birth rate and aging society, Japan's economic growth continued to be low for 30 years, that is, the Japanese economy lost 30 years. To be honest, on the surface, China's economy does show some characteristics similar to Japan's, with real estate in deep adjustment, population growth has begun to decline, population aging, and economic growth continues to slow down. Here are a few major phases of economic growth, with GDP growing by an average of 9% in real terms over the 43 years from 1980 to 2023, but growth varies greatly from one stage to another. From 1980 to 1996, the average annual growth rate reached 10.2%; From 1997 to 2001, the average annual growth rate was 9.4%; From 2002 to 2007, the average annual growth rate was 11.5%; From 2008 to 2012, the average annual growth rate was 9.4%; From 2013 to 2019, the average annual growth rate was 7.2%; From 2020 to 2023, economic growth fell sharply due to the pandemic, averaging only 4.7%. What are the trends for future growth? It depends on a number of factors.
3
Economic restructuring is not only a challenge but also an opportunity
If we talk about the fact that China's economy must move toward modernization in the future, China's total economic output will surpass that of the United States, and our road should still be quite arduous. I'm not making this table to say that this is necessarily the case, that is, if we think that China's total GDP in 2035 will surpass that of the United States and reach the level of the United States, there are several major fundamental assumptions, and what are those assumptions? That is to say, in the next five years, the average real growth from 2024 to 2025 cannot be less than 5%, inflation, that is, the average index must reach 3%, the nominal growth must reach 8%, and the exchange rate of the RMB against the US dollar will not be higher than 7.2 yuan. In the 15th Five-Year Plan from 2026 to 2030, the average GDP growth will reach 4.5%, inflation will also be 3%, and the exchange rate between the RMB and the US dollar will remain at 7 yuan. From 2031 to 2035, GDP growth will continue to maintain 4%, inflation will be 2.5%, and the exchange rate of the RMB will appreciate to 6.8 yuan.
On this basis, the long-term growth of the United States is 2%, and inflation is also 2%, in this case, our total GDP in 2035 can reach 43.1 trillion US dollars, the United States is 43.9 trillion US dollars, at this time, China's total GDP is equivalent to 98% of the United States. But the per capita GDP was $31,400, which was only 24% of the United States at that time. Why do we mention that GDP31000 dollar per capita is an important node? Because in 2021, South Korea's per capita GDP reached 30,000, and in 2022, the United Nations Council for the Promotion of International Trade recognized South Korea as a developed country, so from this point of view, there is a long way to go to achieve the basic combination of the three conditions just mentioned.
4
Innovation and entrepreneurship to meet demand, but also to create demand
How can we get to this state? By what? It is necessary to rely on new quality productive forces, innovation, structural adjustment, domestic demand, and the formation of new growth forces. As can be seen from the first chart, China's exports have become the first driving force for China's economy, and exports are very important. When we talk about dual circulation, the internal and external circulation promote each other, in fact, the external circulation actually plays a leading role. Our existing industrial structure, especially manufacturing, is export-oriented. Export is the final demand, and export orders drive the development of upstream and downstream industries.
On the other hand, since 2023, there have been significant changes in both the structure of the export market and the structure of export products. From the beginning of last year to the first quarter of this year, China's export trade to Western societies dominated by the United States, Europe, the United States, Japan, Australia, and New Zealand all showed negative growth. Some of the main regions where we are growing our exports now are ASEAN, Latin America, Africa and Russia, so the market structure of our exports has changed significantly.
The second major change is that the proportion of exports of export products and final products is declining, while the proportion of exports of intermediate goods is rising. In other words, the demand for final products must and can only rely more on the development and expansion of the domestic market in the future.
The second chart wants to illustrate that China's future economic growth must emphasize the promotion of consumer demand, which is the ultimate first driving force of China's economy in the future. The share of consumption in the troika of current demand is too low. For an international comparison, China's total consumption accounts for 53% and 54% of GDP, while residents' consumption accounts for only 38% and less than 39%, while the United States' consumption accounts for 84-85% of GDP, of which residents' consumption accounts for more than 70% of GDP, Germany's consumption also reaches about 50%, and India's consumption also reaches more than 50%. This shows that China's consumption potential is huge, and consumer demand will inevitably be the driving force for China's next economic growth, just as Dr. Yu Guoliang said that scientific and technological research should be people-oriented, and future economic development must also be people-oriented. Looking back now, in the past, many times the best things were used for export, and the things that were bought on the street were exported to domestic sales. In the future, it is necessary to regard Chinese consumers as the biggest and main target of producers. China's consumer market of 1.4 billion people is a huge international market that needs to be tapped.
But how do you turn this potentially huge market into a real source of growth? I think it's urbanization. China's urbanization is far from sufficient. From the point of view of political economy and from the point of view of international comparison, the actual urbanized population must be measured by household registration. In fact, the urbanization of hukou accounts for only 47% and 48%. At the current level of economic development in China, the urbanization of hukou should reach at least 60%. Based on international experience, if China completes urbanization, 70-75% of the urban population will be urbanized, and 27% or nearly 300 million rural people in China will be urbanized, which is a huge number. The process of urbanization of these 300 million people will be a powerful force to stimulate domestic demand, stimulate consumption, and drive China's economy to continue to modernize.
Then there is the last picture when it comes to innovation and entrepreneurship venture capital. When this picture was made, I was amazed. Although we have continued to increase our investment in R&D over the years, it can be seen that we have not caught up with the world average, let alone the United States. In 2023, China's R&D will account for 2.64% of GDP, which is not yet up to the international average of 2.71% in 2022 and 3.44% in the United States. This shows that China's investment in scientific research can continue to increase substantially. I firmly believe that when new quality productivity becomes the core pursuit of China's political economy in the future, scientific research and technological innovation will flourish.
The last picture is the future of China's economic development, and when I see this chart, I am full of confidence in China's future economy. Because China is going to carry out regional structural adjustment, the future development of China's metropolitan areas and urban belts, there are currently four vertical and two horizontal urban belts, and there are 19 metropolitan areas for China's economic development, which will be the concentration of China's consumer demand in the future.
That's all for my point of view. To repeat, the current difficulty of China's economy lies in the lack of aggregate demand; To achieve Chinese-style modernization, there must be qualitative improvement, and there must be sustained quantitative growth; To get out of the middle-income trap and become a developed economy, institutional adjustment is a task that must be completed; Only by promoting the urbanization of migrant workers can we expand consumption and make consumption the first driving force for economic development.
Thank you!