The stable and good momentum of economic growth in recent months will ensure that China is able to fulfill its expected growth target. The question is how long this growth momentum can last. The consensus is that China’s economy is undergoing a transition from a high growth rate of around 10 percent to a relatively high and medium growth rate, but it is unclear where the bottom is. Given its unbalanced economic development, China’s average growth rate should not be too low, and it could be at 7 percent or between 6 and 7 percent.
The transition needs to be completed in one or two years, and then the growth can be stabilized. To be exact, we will know where the bottom is (say 7 percent) and it will be able to sustain for a relatively long period, say five or more years.
This state of economic growth should have the following characteristics. First, the high growth rate will gradually slow down to a new balanced growth rate, say 7 percent. Second, the economy will take on a new structure, with growth primarily coming from consumption, the service industry and domestic demand. Third, industrial upgrading and innovation has been expedited, pressure on resources eased and growth sustainability promoted. The accompanying rise in productivity will effectively offset the rise in cost. Fourth, economic growth will be able to create enough jobs, and industrial restructuring will adapt to a mix of human resources and capital. Fifth, enterprises will make a stable profit, government revenue and resident income will maintain a stable increase, and the size of the middle class will expand.
Chinese business profitability is an issue that is likely to be ignored. It is typical that these companies are profitable when the growth rate is high and that their profit rate drops along with the decline of the economic growth rate. Studies indicate that their profit and loss ratio will exceed 40 percent when economic growth rate is below 7 percent, as long as the profit-making mode remains unchanged. That means that nearly half of enterprises will make a loss. So, something must be done to alter the profit-making model so that most enterprises can be profitable when economic growth rate stays at 7 percent. This is the essential problem that needs to be solved in the transformation of economic development.
First, a developed East China has gradually adapted to the macroeconomic environment with a slower growth rate, which has already dropped to around 7 percent. With the accelerated restructuring of enterprises and stable development, economic operation quality and profitability of enterprises have greatly improved. With the elimination of some low efficient enterprises and the reduction of those making losses, most companies’ performance has improved. High-tech and new industries show that the good momentum of development and private investment has regained its vitality. PMI in East China is higher than that in central and western China.
Second, employment in China is stable. The demand for jobs is a bit higher than the supply. Our estimate shows that employment pressure will not be very prominent unless the economic growth rate is below 6.5 percent.
Third, the number of loss-making enterprises is decreasing. The growth rate of industrial added value has been at around 10 percent since May 2012, but the total loss accounts for 0.8 percent of the income from main business, lower than the average 1.4 percent since 1997, and also lower than the average 0.9 percent during the rapid growth period since 2003. This shows that most enterprises can maintain a normal production performance when the economic growth rate stays at 7 percent and the growth rate of industrial added value is at 10 percent.
Fourth, most enterprises have a reasonable expectation of economic growth in the future. A survey in September showed that entrepreneurs believe that economic growth rate will continue to drop from the current 7.2 percent in the next five years. 81.4 percent entrepreneurs believe that the government should strengthen its policy stimulus only when the growth rate is below 7 percent. Of them, 34.4 percent maintain that the government needs to implement a stimulus plan when the growth rate is below 6 percent. Most enterprises hope that the government can keep the current macro economic policy stable. What is noteworthy is the fact that most enterprises are more willing than before to adjust their production mode and to strengthen innovation.
If the decisions adopted at the third plenum of the 18th Central Committee of the Communist Party of China are put into practice, and reform is deepened, it will create advantageous conditions for the economy to develop and grow. Three policy targets and reform measures for the realization of this target are as follows.
First, growth should be stabilized. Incomplete as the transition is, the impact of the economic downturn in 2014 cannot be underestimated. The focus of maintaining steady growth should be on investment, which needs a new mechanism in order to control risk and increase efficiency. A preliminary estimate shows that the increase rate of investment in fixed assets should be at 18 percent to maintain a growth rate of 7 percent. At present, 50 percent investment goes to infrastructure and real estate. As such, reform in the infrastructure sphere is badly needed in order to break the monopoly, introduce competition and attract new investors. For example, there is the great potential for the development of high-speed railway and also enough social capital for investment in this area. But the railway system is in heavy debt and therefore is difficult to get funding. It needs to open itself to social capital and to offer some programs for restructuring and financing.
The government also needs to pay attention to the real estate market. Residential housing occupies 40 to 60 percent of all construction land in such international metropolises as New York, London and Seoul, while such a percentage is only 23 on average in Beijing, Shanghai, Guangzhou and Shenzhen. The short supply of housing primarily accounts for continuous hikes in housing prices. The proportion of land for residential housing needs to be increased, and such plans should be made and published. At the same time, the system of rural land for residential housing needs to be reformed, the design of property tax should be accelerated, and should be levied on a trial basis before it can be levied nationwide.
Second, there needs to be a greater degree of efficiency and enterprises should be more profitable. The cost of labor, land, capital, circulation, the protection of property rights and access needs to be reduced in order for enterprises to restructure and upgrade.
Third, access must be expanded. Negative list management is a reform of great importance. This should take place as soon as possible to bring about a fundamental change in the government’s management of market access. Access should be expanded to basic industries and service industry. Major efforts need to be made in such basic industries as energy resources, telecommunications and finance, and in such service sectors as culture, healthcare and education so that the potential that has been depressed because of access control in the past can be tapped. For example, international petroleum futures market can be established through the Shanghai Free Trade Zone, which will result in a competitive petroleum market. In the sector of telecommunications and finance, access should be given to non-State capital so that a market for effective competition can be established to reduce the cost and promote innovation.
The realization of the three policy targets mentioned above will be conducive to steady growth in the short term and in the mid- and long- term structural adjustment and upgrading. As a result, the economy can rapidly shift to a period of stable medium and high growth rate.
Liu Shijin is deputy director of the Development Research Center of the State Council in China.