What Is the Next Step for the Chinese Economy?

On July 31, the Political Bureau of the Communist Party of China (CPC) Central Committee held a meeting to analyze China’s current economic situation and deploy the economic work in the second half of the year.

The meeting revealed an important signal for the next step in the development of the Chinese economy. We interviewed three experts for an in-depth interpretation of the hot topics in the meeting.

Invited Experts:

Yuan Youwei, Deputy Director of the Exchange Department of China Center for International Economic Exchanges

Xu Hongcai, Deputy Chief Economist at China Center for International Economic Exchanges

Jiang Jiang, Director of the Innovation Strategy Research Office at the Institute of Industrial and Technology Economics, National Development and Reform Commission

China Focus: The meeting of the Political Bureau of the CPC Central Committee mentioned that, faced with new problems and challenges, the current economic performance maintains steady growth despite the significant changes in the external environment. So what are these new problems and challenges for the Chinese economy? Exactly what are the obvious changes?

Yuan Youwei: Let’s talk about this issue from the perspective of foreign environment.

First and foremost, the world economic environment has undergone significant changes. At present, unilateralism and trade protectionism are on the rise, creating huge uncertainties to the world economy and seriously affecting investors’ confidence. International Monetary Fund (IMF) recently lowered its expectations on global economic growth in the second half year.

Second, the United States recently launched a trade war against China. The Trump administration defines China as the largest strategic competitor to the US and tries to curb technological development in China.

Third, Western economies including the US, Japan, and the EU have increased their interactions in reshaping global trade rules around the world, such as the economic partnership agreement between Japan and the EU, and the zero-tariff trade agreement intention recently announced by the US and the EU.

Xu Hongcai: From the perspective of China’s internal environment, the “three carriages”—investment，consumption, and net export all dropped significantly in the second quarter.

From January to June this year, investment increased by 6%, consumption increased by 9.4%, and the trade surplus markedly narrowed. Therefore, the downward pressure on the economy can be quite intense. Besides, the financial market has also experienced dramatic fluctuations, including stocks, foreign exchange, and bonds. The financial stability has to be maintained.

At the same time, it is necessary to boost the domestic demand. The decline in consumption in the first half of the year was closely related to the slowdown in income growth of Chinese people. In the first half of this year, the growth of the per capita disposable income of urban and rural residents was lower than the actual growth rate of GDP.

The 6% ROI also marks a new low, which includes a sharply reduced infrastructure investment. In the second half of the year, we must expand the investments, make up for the shortcomings in infrastructure construction and livelihood, promote economic restructuring, and cut taxes.

China Focus: The meeting called for the protection of the legitimate rights and interests of foreign-funded companies in China. In the context of the Sino-US trade war, what are the implications behind this?

Yuan Youwei: There are many misunderstandings about China’s attitude towards foreign-invested enterprises within its territory, including intellectual property protection and the so-called forced technology transfer. Many companies are worried that their rights and interests in China might be affected by the trade war that the US inflicted on China.

In this case, it is very important to send a positive voice from the highest level, which also demonstrates China’s determination to further open up to the outside world. Helping these enterprises stay confident is particularly important for the further development of Sino-US relations. At the same time, China’s recent measures to further expand its opening-up to the outside world are in accordance with what the high-level leadership said.

It is worth mentioning that, I talked with many American entrepreneurs in China, and most of them hope that the Sino-US trade war will end as soon as possible. After 40 years of the reform and opening-up, China has equipped itself with complete supply chains and industrial chains. It is not easy for the American companies to spot such a huge market and such an efficient production base in any other country.

China Focus: The meeting proposed to take making up for the shortcomings as the key task in deepening the structural reform of the supply side, and to enhance innovation and develop new engines of growth. Then, what are the “shortcomings” to make up for? And what are the “new engines of growth”?

Jiang Jiang: The public is likely to think of new engines of growth as new technologies and new formats such as digital economy, sharing economy, bio-economy or energy-saving, environmental protection and green low-carbon. These industries have great potential for development and represent where the future development goes. In the first half of this year, the growth rate of traditional industries continued to decline.

In this context, however, emerging industries including the bio-industry, information industry, and especially the Big Data, Internet, cloud computing performed well, injecting new momentum into the economic growth. But in a broader sense, new engines of growth refer to new driving factors and capabilities. There doesn’t have to be an industry limit. Even the traditional clothing industry, chemical industry, and agriculture can be revitalized for exceptionally higher added value and stronger brand recognition as long as there is innovation.

In cultivating new engines of growth, China has problems such as poor core competitiveness, weak technological innovation, and insufficient ability to industrialize laboratory technology. The shortcomings are not only reflected in hardware infrastructure such as roads, factories, land resources and environment, but also in system design, which includes scientific research environment, intellectual property protection, transformation of scientific and technological achievements, and attraction of experts. Long-term efforts are required to solve those problems.

Interview: Ning Jing

Editor: Elena