China_Report_Issue_51_August_2017

technology gap between China and advanced economies. However,

it will be more difficult for China to expand on the world market as

it has already become a major trader. This decreased the potential of

technological progress.

Finally, declining productivity has pushed corporate costs higher.

China’s manufacturing enterprises still lag behind major developed

countries in terms of labour productivity. Given that labour shortages

and labour cost increases have intensified, Chinese producers face the

risk of losing their existing advantages and market share.

Key and Pillars

In this context, the tasks set by the central government – remov-

ing overcapacity, reducing excessive inventory, decreasing debt ratios,

lowering corporate costs and strengthening any weak points – is the

prescription for tackling urgent supply-side problems.

China’s long-term reform must be based on “one key and two pil-

lars.” The key is to reshape the relations between the government and

the market. The old relations resonated with the old growth model

which was driven by investment in labour and capital. New relations

must facilitate innovation, the new growth dynamics.

One pillar is to adjust the relations between the central and local

governments, particularly in terms of the fiscal system. The other pil-

lar is the ownership reform of SOEs which encourages private inves-

tors to hold stakes in SOEs.

These reforms are expected to fix the blocked channels in the econ-

omy and improve productivity. Success of the reforms in the context

of the “new normal” depends on the following conditions.

Firstly, a GDP race should not be used as an incentive for local

governments. In the “new normal,” the quality of growth is regarded

as more important than its speed. Quality is assessed by various in-

dicators other than speed alone. In the pursuit of speed as the only

standard, local governments would compromise other development

goals, such as the environment, as they did in the past few decades.

Secondly, the central government has to lead this round of reform.

As quality-oriented growth involves many more goals, the priorities

of these goals will vary nationwide, and have to be decided by policy-

makers at the top level, taking into consideration of the national over-

all development goal.

Thirdly, stricter scrutiny has to be put on local governments’ imple-

mentation of reform policies set by the central government.

Fourthly, the Central Leading Group for Deepening Overall Re-

form of the CPC Central Committee needs to play a bigger role in

coordinating jobs between different ministries and between different

places, if one or multiple ministries are responsible for a particular

reform task. This coordination can be a part of the routine operation

of the Group.

In the short term, proper fiscal and financial policies are necessary

to provide time and space for the new round of reform. Better fiscal

policy can be designed to boost growth. High debt ratios, the biggest

problem choking the economy, must be reduced. However, if regula-

tors rush to compete to wield their sticks on the market during the

process of deleveraging, there is a risk of triggering a systematic finan-

cial crisis. This has to be avoided by coordination at the higher level.

When drafting monetary policies in this period, more atten-

tion has to be paid to changes in market interest rates. In fact, the

process of making market interest rates the benchmark rates can be

accelerated.

The author is professor and researcher at the National Academy of De-

velopment and Strategy of Renmin University of China

Year-on-year gross profit increase by ownership, January – May 2017

Year-on-year change in sources of capital in place for fixed asset

investment, January to June 2017

Year-on-year change in capital in place for fixed asset investment

Source: National Bureau of Statistics of China

Source: State Administration of Foreign Exchange of China

Source: National Bureau of Statistics of China

Source: National Bureau of Statistics of China

0

10

20

30

40

50

60

-15

-10

-5

0

5

10

15

20

s tate-holding companies

Collectively-owned enterprises

Joint-stock companies

Companies funded by overseas investors

Chinese private companies

Government budget

Domestic loans

Foreign capital

self-financing

Others

-8

-7

-6

-5

-4

-3

-2

-1

0

1

2

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