Abstract: Under the combined influence of cyclical rebound force, favorable policy environment and pickup in global economy, China's economy is expected to recover in 2020. However, the endogenous growth momentum of the Chinese market amid economic structural transformation remains rather weak, while the old forces of economic growth are being phased out, so we are in lack of growth drivers. To maintain macroeconomic stability, we need to implement proactive fiscal and monetary policies. The building of metropolitan areas is very important to stimulating new drivers of future medium and long-term economic growth, while it also helps to maintain the stability of aggregate demand in the short term. Therefore, we must press ahead with supporting policymaking efforts. We could attempt to promote related reforms by establishing pilot zones for metropolitan areas drawing from our past experience in building pilot free trade zones.
I. China's economy will pick up under the combined influence of three major factors
China's economy is seeing positive changes in three major perspectives. First, the economy is ushering into the rebound stage in its cycle. During the past six to seven quarters, the cyclical downward pressure has been driving the economy downward, but in 2020, it is expected that the cyclical rebound will exert positive influences on economic growth. Second, the policy environment is marginally improving. The Phase I deal between China and the United States will help boost China's exports in 2020, and more importantly, it helps avoid further deterioration in China-US economic and trade relations and will underpin investors' confidence; in terms of China's internal economic policies, the emphasis of policy-making in the next stage will be to foster new drivers of economic growth after efforts in the past years focusing on deleveraging, rectifying the shadow banking sector and managing the invisible debts of local governments. Third, the external economic environment is improving, as the global economy is also seeing a cyclical rebound, which is reflected in the following aspects. The manufacturing sector is picking up. Related indicators such as manufacturing PMI, the year-on-year growth rate of the manufacturing sector's profits and the cumulative year-on-year growth rate of finished goods inventory of manufacturers have been stabilizing and bouncing back after continuous declines over the past six to seven quarters. Judging from the cyclical fluctuations of the above indicators in the past, rebounds are highly probable after continuous declines over such a long period of time. If we examine the various industries in the manufacturing sector, the year-on-year growth in sales of automobiles and electronic communication equipment, which are in relatively large scale, have been on the rise and contributing much more to the total profits of the manufacturing sector. Listed companies in the automobile and electronic communication equipment industries have also seen 20-40% increases in their stock prices. Exports are likely to increase slightly. Manufacturing in all major economies, including China, have been picking up driven by cyclical economic development. Our experience over the past decade tells us that manufacturing in China, manufacturing around the globe, global trade and China's exports rise and fall together. China's exports will benefit when its manufacturing and global manufacturing as a whole recover. Consumption has been rising mildly, with automobiles and 5G mobile phones as two expected highlights. Over the past year and a half, because of industrial adjustments, the production and sales of automobiles have been rather sluggish, but the industry has now picked up momentum for further development as demonstrated by the continuous rise in the year-on-year growth rate of automobile sales. The automobile industry may never experience remarkable growth anymore like it did in the past, but in the next two years, it is still likely to maintain positive growth and be less of a drag on consumption growth. There are huge demands for electronic communication products in China, and 5G mobile phones may attract a great many consumers in 2020. Recent improvements in the capacities of communication semiconductor providers in Chinese mainland, Taiwan, Japan and the South Korea have secured necessary part supplies for the production of 5G mobile phones, and the prices of their products have been on the rise. Nonetheless, although sales of automobiles and mobile phones - the two major non-durable consumer goods - are likely to improve, the continuous decline in consumption growth in the past decade can hardly be reversed because fluctuations in the sales of non-durable consumer goods are not likely to exert significant influence on the long-term trajectory. Real estate investments may be sustained despite downward pressures. Stimulated by big discounts that some of the major real estate developers offered, house sales in China in 2019 was better than expected. It is estimated that commodity houses of 1.7 billion square meters were sold in 2019 – about the same as in 2018. However, in 2018 and 2019, despite the mounting pressures on house prices and sluggish house sales, the pace of building new houses has always been quite fast. Before 2018, when houses sold well, there were more houses built subsequently, while when house sales were sluggish, less houses would be built as a result. But currently, there is a deviation between newly-built houses and previous house sales, and this has put much pressure on the number of houses to be built in later periods. Land transaction is also a useful indicator to predict the total floor area of new houses to be built in the next two to three quarters. In the second half of 2019, land transactions grew much slower and even declined, which indicated that there may not be a large number of houses to be built in the near future. That said, China has a three-year plan for the period from 2018 to 2020 to renovate houses in rundown urban areas, and the target for 2020 is to renovate 6 million houses, 3 million more than in 2019, which will result in new houses of about 150-180 million square meters to be built and support real estate investment in 2020 to a certain extent. Fixed asset investment in the manufacturing sector is picking up slightly. After eight years of continuous downfall, growth rate of fixed asset investments in the manufacturing sector has fallen to as low as 2.6%. As the sector picks up as a whole, fixed asset investments will not further decline, but we do not expect it to improve too much, as this round of pickup in manufacturing mostly features upward adjustments in inventories. Amid China’s economic upgrading drive, the service sector is given a bigger play, while the traditional manufacturing sector is seeing aggravated market competition and sluggish sales, so it is quite hard to see much improvements in fixed asset investments.
As old forces of economic growth are phased out, we are in lack of growth drivers because the endogenous growth momentum of the Chinese market amid economic structural transformation remains rather weak even if the economy picks up in general. This entails proactive fiscal and monetary policies. In 2019, the real estate sector performed better than expected, which helped offset the impacts of the downturn in the manufacturing sector; but in 2020, it might turn out the other way around – the slight pickup in manufacturing may help cushion the negative impacts of the downturn in the real estate market. In terms of its magnitude, there is not much to anticipate in the endogenous growth momentum of the Chinese market in 2020 – it will remain rather weak in general. The weak endogenous economic growth driver is directly caused by insufficient willingness to spend. Since 2012, China's economy has been cold for a longer time and hot for a shorter time. This is in contrast to the characteristics of the macroeconomic operation between 2003 and 2011. The direct reason behind the phenomenon is the insufficient spontaneous purchasing power of the market. The broad credit of the whole society determines the increase of the financial assets of the whole society, which supports the emerging purchasing power. In the past, the credit growth of the corporate sector strongly propped up broad credit growth, as well as the purchasing power growth of the entire society. Before 2012, more than 50% of the broad credit increase of the whole society came from enterprises, excluding local financing platforms. Since 2012, the broad credit of enterprises has fallen sharply, only less than 20% of the broad credit increase of the whole society has come from enterprises. The decline of corporate broad credit has drastically lowered the endogenous growth of broad credit and purchasing power of the market, leading to the lack of endogenous purchasing power in the market and the need for government expenditure expansion. The underlying reason is that we are short of new economic growth drivers. Before 2012, China's economic industrialization witnessed its peak time, especially the heavy asset industries represented by steel, coal, chemicals, and equipment manufacturing. High Corporate profitability and strong investment willingness, booming supply and demand of broad credit, drove the rapid growth of financial assets and the purchasing power of the whole society. After 2012, capital-intensive industries naturally slowed down. The old economic growth engine decelerated without the new engine being able to fully exert its power. The deeper root for the sharp decline in corporate credit is the lack of new economic growth driver. The stable growth of local financing platforms' debt and government debt is the basic guarantee of current macroeconomic stability. Given the fact that the local financing platforms and the government account for more than 50% of the new broad credit, once the debt expansion of local financing platform and the government decreased significantly, the broad credit, the purchasing power of the whole society and the economic climate will drop immediately, dramatically and accordingly. The economic performance of the second half of 2018 is a case in point. At this stage, the market alone is not enough to support sufficient credit growth and corresponding purchasing power growth, or to maintain macroeconomic stability. To avoid the ups and downs of the macro economy in the short run, we need to maintain the stable growth of local financing platforms' debt and government debt to achieve the stable growth of broad credit and purchasing power of the whole society. Proactive fiscal and monetary policies still need to be upheld. It is necessary to adopt fiscal expenditure policies that take into account both macroeconomic stability in the short term and fostering of new long-term economic drivers, while it is also necessary to pursue monetary policies that stimulate endogenous credit demand of the market and reduce debt pressure. In the context of weak endogenous growth momentum of the market which is difficult to improve in the short run, the government must not withdraw its supportive policy for the economy, to avoid the potential risk of economic double dip that forces policy to step in again. Both China and developed countries have learned that lesson in the past few years.
II. Foster new source of economic growth based on metropolitan area construction
The new economic growth driver lies in human-capital-intensive industries. With rising incomes, demand of Chinese household has shifted from general industrial products and food to human-capital-intensive products and services. Higher-quality and more personalized manufacturing products, as well as medical, education, scientific research, entertainment industries, are all human capital-intensive industries. China is experiencing a structural transformation of consumer spending covering manufacturing and services, along with the industrial structure transformation caused by it. These transformations are also quite common in similar stages of development of high-income countries. The experience of high-income countries also tells us that the driver of future economic growth lies in human-capital-intensive services. Only by developing human capital-intensive industries can we better satisfy the people's pursuit of a better life. The development of human-capital-intensive industries needs to rely on the development of metropolitan areas. Compared with rural areas and small cities, large cities have huge advantages in creation and disseminating knowledge, serving as indispensable supports for improving human capital and living standards. Metropolitan areas provide the opportunity of living in large cities at low cost, allowing more people to approach these large cities. Judging from the urban development of high-income countries, the metropolitan area is a universal choice. The construction of the metropolitan areas will bring greater chances for the development of China's human-capital-intensive industries. There are still many shortcomings in China's urban circle construction. First, the transportation infrastructure and relevant management and services are inadequate. Compared with Tokyo and New York metropolitan areas, commuting from the central city to the suburbs is not convenient enough and takes too long. Second, housing prices in metropolitan areas are too high. Although the housing prices in downtown areas of most international metropolis are very high, the prices in the outer areas of the cities decline sharply, which is acceptable for middle-income families. House prices in China's metropolitan areas, whether in the central or suburban areas, are well beyond the acceptable range of middle-income households. Third, the services are below residents' expectation. Public services of the metropolitan area obviously lag behind that of the central urban area. As for basic education, medical services, cultural and entertainment services, the gaps are also huge. These shortcomings have restricted the development of the metropolitan area, the process of urbanization in China, and the development of the human capital industry. To make up for these shortcomings in the construction of the metropolitan area, the following aspects need to be implemented. First, guarantee the low-cost, long-term funding sources for infrastructure construction in metropolitan areas. The general debt of local governments is far from enough to meet the needs of public and quasi-public construction projects. Special debt needs to be flexibly used to expand financing channels. It should be noted that shadow banking can no longer be used to finance public and quasi-public construction projects, since it has been the main cause of rising financial risks in China in recent years. Second, guarantee the residential land in the metropolitan area. Within the metropolitan area, there is no need for agricultural land or specific requirement on the industrial land proportion. Ensure the supply of residential land in the metropolitan area can effectively reduce the housing prices in the area. Third, the government and the market should work together to improve their services. The government should take responsibility for general public services and pursue higher quality of public services. Social capital should be encouraged to participate in the provision of basic education, medical services, entertainment and other services. Building a metropolitan area requires a series of major reforms. A reference is to follow the experience of the pilot sites, and build the pilot zone of the metropolitan area, in which the local policies, especially the land policy, the provision of various public services, and regulations towards the services enjoy high degree of autonomy. With the transformation of China's economic structure and the change in the focus of economic development, the significance of building such a pilot zone is not less than the previous construction of the pilot zones that promoted the development of China's manufacturing and foreign trade.
