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China’s Evolving Miracle: Looking for Normal

Jun 14, 2024
  • Huang Yiping

    PKU Boya Distinguished Professor and Former Member of the Monetary Policy Committee, People’s Bank of China

 INTERVIEW with Professor Huang Yiping

In this interview, Professor Huang Yiping discusses with James Chau, president of the China-United States Exchange Foundation, the trajectory of China’s economy and the factors that influence it. He also discusses the end of China’s so-called economic miracle and explains why the country is now working to transition to a more normal economic growth model. Will China’s local government debt lead to a systemic financial crisis? Huang elaborates on “three perils.”

Huang Yiping.jpeg

Click to watch the full interview here 

James Chau: Professor Huang Yiping, we thank you for your time today. China, as you know, has set a GDP growth target of 5 percent. Some analysts, including economists, say the number is ambitious given the very challenging environment, both geopolitically and also geoeconomically. I won't ask you if 5 percent is achievable or not, but I will ask you this: What will be the consequences if China misses that mark? 

Huang Yiping: Number one, I think China’s GDP growth potential is probably around 5 percent or slightly above. So a target of 5 percent is not particularly ambitious. But of course we saw the difficulties last year, and given last year’s low-base effect, this year at 5 percent would be more ambitious. But I think it’s probably achievable, with the structural policies already announced and still being implemented. But most important, the macroeconomic policy will be more aggressive and more active this year — particularly the fiscal policy.

But your question about whether or not it will be a bigger issue for China or for the rest of the world if China misses 5 percent — I guess the question we need to ask is “by how much?” If it’s slightly below 5 percent, I don’t think the impact will be material. If it misses by a bigger margin, it could be an important issue, first of all for confidence, but second for the market. We still need some kind of recovery for the Chinese economy, and if we miss it, there will be some other chain reactions in the market. Finally, for the rest of the world, China currently is contributing around 1 percentage point to GDP growth. So if China misses its target, it will be a negative factor for the global economy. But as I said, it really depends on how much. 

James Chau: May we take a look at the new growth in stimulus measures, including those that were unveiled by Premier Li Qiang in his report to the National People’s Congress? Again, there is concern that this is not enough at a time when millions of people, including young people in China, are looking for jobs. What do you think? 

Huang Yiping: Well, there’s probably never enough stimulus in the eyes of investors and other market participants. But I will tell you this: This year’s macroeconomic policies will be much more aggressive than last year’s. If you look at last year’s fiscal policy (and by definition you’re looking at the net expansion of fiscal spending), it was actually a contraction. The monetary policy eased to some extent, but if we take into account the low inflation rates, the real interest rate actually became higher. So compared with what happened last year, I actually think the macroeconomic policy is much more aggressive.

Monetary policy will continue to ease, particularly if the U.S. Federal Reserve stops hiking, and especially if they started easing and cutting down the rate. That will create a more favorable environment for the People’s Bank of China to ease its monetary policy.

Regarding fiscal policy, people are looking at the deficit coming down from 3.8 percent of GDP last year to 3 percent this year, and they’re thinking, “Well, this is much smaller.” But that’s the wrong interpretation. If you’re putting together the direct official spending, plus the spending coming out of some other funding (like the special government bond), total government spending will rise by around 8 percent this year, compared with a 1.3 percent expansion last year.

If you look at what we call expansion — that is, the aggregate net spending, or spending minus revenue — this year will probably rise by 25 percent compared to minus 1.3 percent last year. So macro policy-wise, there’s no question. It’s much, much more aggressive this year. 

James Chau: Well, I’m in Hong Kong many miles away from where the two sessions took place in Beijing, and where the buzzword this year was a new phrase: “new productive forces.” What exactly does that mean? 

Huang Yiping: While it might be difficult for everybody to accurately understand what this means, I will tell you this: The Chinese growth model is changing from input-driven growth to innovation-driven growth. The so-called new productive force, in my view, is about innovation — scientific innovation, industrial upgrading. … And so at the end of the day, the question is, how can we improve total factor productivity? These are older words we can use to explain a new concept. The question comes back to what the government and the market have been emphasizing for years: whether or not China can escalate its efforts in promoting productivity growth through more innovation. 

James Chau: Let’s turn our focus now to China’s growth trajectory. For decades now, China has been the economic miracle story of the world — even if we look at the whole of human history, as a matter of fact. But now there are deep worries that China’s growth has peaked and that there are no good stories coming in the short-term future. If that is accurate, how should we all prepare in China and outside of China? 

Huang Yiping: Well, the first point I like to make is that if economic performance over the last 40 years were described as a miracle — and we know the English word and the Chinese word miracle. A miracle is something you cannot explain under normal circumstances. So even for China, it’s not a strange thing for a miracle to end at some stage.

What I think we hope and need to work very hard on is for the growth model to transition from a miracle to more normal growth. But normal growth can still be very robust, strong growth, like many other successful high-income economies have experienced in the past. So that’s what I think the whole entire country has been working on, and that growth rate is coming down. That’s a fact. And that’s something we have to accept. But hopefully it’s not a collapse, which some pessimistic analysts are predicting.

I don’t buy that argument or people worrying about a loss, or risk in the Chinese economy. But you should look at the innovation, the new productive force that is emerging in China. It is happening everywhere. Remember, people started to worry about exports like EVs, solar panels and so on. But it means the productive force is being upgraded quite effectively. And in some cases, the magnitude and the scale of this upgrading are starting to worry some foreign countries. Of course, we need to be careful about the smooth expansion. But I’m not too worried. As long as innovation is happening, we’re going to have a smooth transition to a high-income economy, even if the economic miracle is behind us. 

James Chau: Professor Huang, allow me to tap into your insights for one last question. For that, let’s talk about China’s so-called three perils, one of them being the property sector, another being local government debt and the third being risks for small banks. One by one, is there a solution for each? Or is there a general fix that we can apply? 

Huang Yiping: I think these are all big problems that we’re facing and need to address. However, if you think of these issues as the causes of a systemic financial crisis, that might be a wrong assessment. I’ll give you an example. So people worry about lots of local government debt and think, “Well, if you have a debt crisis, the economy will collapse, right?” But we have lots of local government borrowing, which amounts to something like 40 percent of GDP. If you add the central government to that, total government liabilities at the moment are around 60 percent of GDP. If you know the numbers for other countries, you would know this is not excessively high. In fact, this is still lower than many other countries.

Now, we need to reconfigure the fiscal system; then more revenues could be reallocated to the local governments. But the liabilities themselves could be an issue for lowering efficiency going forward. But even that would not lead to a financial crisis because the central government alone would be able to support or withstand 60 percent of GDP as a total liability.

So the scenario I see is more like some loss of efficiency going forward. It could have some negative impact on economic growth, but it’s not going to lead to a systemic financial crisis, as many pessimistic analysts envision. They might be right for other countries when they see these problems. But I think we need to realize that for the central government, the liabilities at the moment are still only 20 percent of GDP and still have the capacity to expand or take on some more responsibility to stabilize the local problems. 

James Chau: Professor Huang Yiping, it has been fascinating conversing with you and learning from you today. 

Huang Yiping: Thank you.


Notes from James Chau: 

Well, that was a fascinating conversation for me as a journalist and a broadcaster. I love how people walk around a question and look at it from a 360-degree perspective. And that is exactly the value that we got from that interview with Professor Huang Yiping.

I also thought it was very good to hear — and encouraging to hear — that he not only thinks there’s a potential to achieve 5 percent economic growth, and maybe even surpass it by some margin as well.

Why is it good? Well, it’s good for 1.4 billion people in China itself, but it’s also really good for 8 billion people around the world. I think also, what’s interesting is that coming off the other interview we did with Jia Qingguo the other day, he talked about telling the story of China, and I think he does very well both in explaining complex ideas and making them understandable but also his ability to communicate so fluently in English.

Stories are important because they allow us to understand. They reduce misunderstanding, and they create space for dialogue and tolerance as well. So that’s what I think we received here, and I'll be back with more interviews.

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