Abstract: In this paper, the author discusses the meaning and implication of China's recently announced "dual circulation" economic strategy and provides advice on how to accelerate the establishment of the new growth pattern. Specifically, he suggests that China boost domestic demand by building comprehensive innovation chains, advancing Industrial 4.0, creating new demand for industries with overcapacity, and stimulating personal consumption. As for improving the international circulation, China needs to build efficient and world-oriented industrial chains, take advantage of its huge market, create a cooperative innovation network under the Belt and Road initiative, reduce tariffs, actively participate in the making of international economic and trade rules, and promote a higher level of opening-up.
Boosting domestic demand and accelerating the formation of a new development pattern in which domestic and international markets reinforce each other should be the focus for China's economic strategy in the next stage, as the country is standing at a historical juncture facing profound changes unseen for a century and with the 14th Five Year Plan being contemplated.
I. The implication of "building a complete domestic demand system"
The definition of a "complete domestic demand system" is not simply about what domestic demand is. Instead, it must be discussed against the historical background in which the strategy of "building a complete domestic demand system" was put forward and understood systematically from such dimensions as the foundations, conditions and mechanisms needed to create and boost domestic demand.
1. To build a complete domestic demand system, we must focus on stabilizing market expectations and increasing investment enthusiasm of the private sector.
The willingness of entrepreneurs to expand production and engage in innovative and risky business activities is largely determined by their outlook on the economy, fairness of market competition, and the effectiveness of property rights protection.
Small and medium-sized enterprises (SMEs) have been hit the hardest during the COVID-19 crisis so far. While governments at all levels are making efforts to ensure the "six priorities" and stability in six areas, the key issue should be to stabilize the confidence of entrepreneurs and create a long-term positive expectation on the Chinese economy.
To this end, it is crucial to implement the six requirements put forward at the recent Private Enterprise Symposium: first, to effectively reduce taxes and fees for enterprises; second, resolve the financing difficulty for private enterprises; third, level the playing field, particularly encouraging private enterprises to participate in the reform of state-owned enterprises (SOEs); fourth, improve the implementation of policies such as "strengthening the protection of property rights"; fifth, build a new type of cordial and clean relationship between government and businesses; sixth, ensure the personal and property safety of entrepreneurs.
Actualizing these six requirements will be critical to mobilizing the massive private capital.
2. Building a complete domestic demand system must focus on improving the efficiency of resource allocation through supply-side structural reform.
Economic theory suggests the existence of a reasonable proportion between consumption and investment, the two major drivers of domestic demand, which is only attainable when supply is effectively matched with demand and resources are allocated efficiently.
At present, there are many weak links on the supply side with the ongoing consumption upgrading. For instance, there are still many obstacles to the free flow of production factors like capital, land and labor; logistics costs are still too high and the "last kilometer" problem still exists between the rural market and e-commerce; in terms of the services sector, industries including catering, shopping malls, culture, tourism, and housekeeping have suffered heavily from the pandemic, and the reform in areas like education, medical care, and elderly care must be further deepened.
It is under such a background that the Chinese government has announced to further promote the market-oriented allocation of production factors and improve the socialist market economic system. The core idea is to increase the flexibility in matching supply and demand and the efficiency of resource allocation by deepening supply-side structural reform.
3. Building a complete domestic demand system must be based on more employment and sustained increase in personal income.
The foundation of domestic demand is income and employment, without which there would be no domestic demand. China has 400 million middle-income and 600 million low- to middle-income population.
So far, the impact of the COVID-19 on the real economy has been significant in areas concerning people's livelihood and employment. Unemployment has soared, some residents' income has dropped, while some of those who were lifted out of poverty are teetering on the poverty line again. Under such a background, the government should further improve relevant policies to encourage and promote employment and accelerate the formation of a new pattern of employment driven by entrepreneurship; deepen the reform of income distribution, further lower personal income tax rates and increase the proportion of wage in the income without considering transfer payment, so as to double the middle-income population and halve the low- to middle-income population in the next few years.
Such efforts can help form a consumption structure led by middle- and high-income consumers with low- to middle-income consumers as the mainstay. Meanwhile, consumptions by low- to middle-income groups should gradually increase.
4. Building a complete domestic demand system must give better play to the role of government in expanding domestic demand and maintaining market integrity.
The government can play two direct roles in expanding domestic demand: one, prompt consumption demand instantly through government procurement; two, create effective investment demand through government-supported investments. Currently, there is still room for further reform in both aspects.
The starting point could be establishing and improving the implementation mechanism of government procurement, further promoting the role of government procurement in boosting and guiding the expansion of domestic demand. It's necessary to improve and optimize the efficiency and structure of public investment by tilting toward public areas such as public health, urban and rural infrastructure, ecological and environmental protection, and major science and technological advances where the market cannot effectively allocate resources, to leverage the multiplier effect of public investment on aggregate demand.
At the same time, it should be noted that the relationship between government and market is not simply substitutional or complementary. A strong market needs a sound legal system, and an "action-driven government" can help foster an "efficient market". One of the goals of "better playing the role of the government" is to "let the market play a decisive role in the allocation of resources". An "action-driven government" and an "efficient market" are the foundation of a "harmonious society", which together help provide legal support and promote full employment.
5. Building a complete domestic demand system requires a new pattern of development in which domestic and external demands are compatible and complementary, and domestic and international circulations can boost each other.
Domestic demand is not an isolated issue. In an open economy, the formation of domestic demand and effective supply also depends on the effective operation of global supply chains. Amid the devastating impact of the pandemic on global trade and investment, China will continue to expand imports to meet the diversified domestic demand and be deeply integrated into the global supply chain by further opening-up. With a population of 1.4 billion and a middle-income population of 400 million, China has entered a stage of development with a per capital income of $10,000-$30,000. There is huge room and potential to unleash economic vitality and promote development.
In the next few years, by relying on domestic circulation, China can boost its economic growth by a few more percentage points. By increasing imports, it can also help stimulate the growths of neighboring countries and the international community, contributing to the recovery of world economy and the global economic cycle, and ultimately the formation of a new development pattern in which domestic and foreign markets can boost each other.
II. Deepen reform and accelerate domestic circulation
In short term, building a complete domestic demand system needs to streamline domestic circulation as soon as possible and accelerate the recovery of domestic economy.
1. Strengthening weak links, invigorating the economy, and building comprehensive innovation chains that can support the development of a science and technological power.
After the pandemic, international competition in the field of science and technology will become fiercer, especially amid the ongoing US crackdowns on Chinese tech firms like ZTE and Huawei and its campaign for technology decoupling. Against such a backdrop, it is imperative to accelerate the innovation-driven development and enhance China’s competitiveness in science and technology, which will require the accelerated formation of comprehensive innovation chains that can support the development of a technology powerhouse. Basically, there are three phases for innovation, from zero to one and to industrialization. Innovation-driven development relies on the differentiated policies targeting the three stages of innovation and the allocation of fiscal and financial resources.
In the first phase of “0 to 1”, original scientific and technological ideas occur. Major participants of this stage are high-skilled professionals working in laboratories of research institutes, university engineering centers, and R&D centers of large enterprises, who often need the support of research funds provided by government and businesses, as well as seed and angel funds.
However, China still have many shortcomings in this regard. Although China's overall R&D investment accounts for 2.2% of GDP, ranking second in the world, these investments are scattered across different fields. For instance, investments in some basic research fields that need long-term input (such as core electronic devices, high-end general-purpose chips and basic software products) are still insufficient, hovering around a mere 5% of total R&D investments for a long time, far lower than the 15%-20% of major innovation-driven countries in the world. To fill the gap, superior resources should be focused on strengthening weak links and increasing investment in basic research so that the proportion of basic research investment in total R&D expenses can be raised from 5% to about 15% in the next five years, and continue to increase in the following years.
The second phase of innovation involves the process of going from "1 to 100", which is characterized by the transformation of basic ideas into production patents. Such a process covers various stages such as lab trials, pilot production, the development of functional prototypes, or the establishment of production procedures.
The major participants in the second phase are various science and innovation centers, incubators and accelerators. In this phase, it is necessary to mobilize talents from various areas with high IQ and EQ who are knowledgeable, diligent and acquainted with market operations to set up technology transfer organizations or serve as technology managers. As a bridge between R&D and commercial production, their mission is to mobilize scientific manpower to carry out in-depth research and provide advanced technological solutions for the business sector by transforming science into technology and verifying and improving technology through various pilot tests. One example is the Fraunhofer Society in Germany. There are many such institutions in Germany, which are key to the country’s technological innovation.
We should learn from international experience and follow the law of innovation to speed up the cultivation and development of technology transfer institutes and technology managers and strengthen the weak links in developing and utilizing technology.
The third phase of innovation is "100 to 100,0000", during which the technology enters mass production. For instance, how can a cellphone prototype achieve mass production and then be sold all over the world? It is necessary to have mass production bases which will require investment from development zones and large enterprises, and the formation of internationally competitive industrial clusters through horizontal and vertical integration of value chains. In this phase, the focus of financial services includes follow-up investments by PEs, IPOs or acquisition by large listed companies, and financing through bank loans and bond issuance, etc. This is where the capital market comes into play.
In recent years, China's capital market has achieved significant progress in establishing foundational and key institutional arrangements. In particular, the launch of the registration-based Scientific and Technology Innovation Board (STIB) has provided a convenient channel for many tech firms to go public, which should serve as an example of effectively channeling capital into innovation. The priorities of STIB should include supporting the commercialization of bottleneck technologies and projects which can help reduce the external dependence of core technologies, promoting domestic circulation, and enhancing industrial competitiveness. We should strive to develop the STIB into a market comparable to NASDAQ and activate the innovation chains in China so as to boost technology innovation throughout the whole nation.
2. Advancing Industrial 4.0 by accelerating the industrialization of digital economy and the digitization of the traditional industry through the development of new infrastructure.
New infrastructure, as a technological pillar of a digital, intelligent and life-oriented economy in the future, will not only create trillions to tens of trillions of investment demand, but also unmeasurable multiplier effects through the industrialization of digital economy, digitization of traditional industries and the scale-up of R&D and innovation.
First, it will help promote the industrialization of the digital economy and build an independent digital platform worth trillions of yuan.
The information infrastructure within new infrastructure, such as 5G networks, big data, artificial intelligence, Internet of Things, cloud computing and blockchain, will bring massive investments. It is estimated that during 2020 to 2025, the commercial use of 5G in China will directly drive a total economic output of 10.6 trillion yuan and create 3.3 trillion yuan of economic value added. There will be 5 to 6 million 5G base stations, each of which will cost 200,000 yuan, equivalent to trillions of yuan of investment.
Another example is the construction of data processing centers everywhere. Last year, 180 large data processing centers were under construction around the world. Generally, a large data processing center has more than 100,000 servers, which means that there could be at least 18 million servers under construction around the world last year. China is expected to add 10 million servers in the next five years, which, along with the construction of computer rooms and power facilities, will drive an investment of at least 1 trillion yuan. Take the Internet of Things as another example, it is estimated that in the next 5 years, there will be at least 3 to 5 billion terminals connected to the Internet, forming the Internet of Everything (IoE), which will entail an investment of 200 million to 3 trillion yuan. And so will artificial intelligence and blockchain. We suggest that firms investing in or operating new infrastructure-related projects should enjoy the same 15% preferential tax rate as high-tech enterprises.
Second, it is conducive to promoting the digitization of traditional industries and forming a revolutionary Industrial Internet.
The so-called Industrial Internet refers to the use of digital technology to digitize all elements and links of an industry, promote the reorganization and reform of business processes and production models, thereby forming a new system for industrial cooperation, resource allocation and value creation.
At present, there are over 60 trillion-dollar industrial clusters around the world, which can be further upgraded through digital transformation. It is estimated that digitization in five areas including aviation, electricity, healthcare, railway, and oil and gas could save nearly $300 billion over the next 15 years, or about $20 billion per year on average, assuming a 1% increase in efficiency. If digital transformation can increase the industry value by 10%, it will create additional value of over $200 billion value every year.
If China's consumer Internet market can only accommodate a few trillion-yuan enterprises at present, it is possible that Industrial Internet will be able to accommodate dozens or hundreds of innovative enterprises of the same size. Industrial Internet is a huge blue ocean from which high-value Internet enterprises will emerge in the future.
Third, it will help improve China's innovation system and lead the Fourth Industrial Revolution (Industrial 4.0).
In recent years, China's innovation capacity has been improving rapidly, especially in the field of 5G where it has the capacity to participate in and even lead the Industrial 4.0. However, when compared internationally, China’s basic research capacity still needs to be further improved and its national innovation system still needs to be explored under a market economy. In the context of COVID-19 which has brought huge impact on global economy, only through technology and innovation can we overcome the crisis and take the initiative to address more entrenched difficulties.
Speeding up the development of new infrastructure, especially innovation infrastructures represented by major science facilities and test platforms, while deepening the systemic reform of science and technology innovation, will help build a collaborative innovation system in which basic research, regional innovation, open innovation and cutting-edge innovation are deeply integrated, further stimulate an innovation-driven mentality throughout the society, and enable China to lead Industrial 4.0.
3. Reduce policy obstacles for certain industries and promote balance between supply and demand by absorbing overcapacity with new types of demand.
In the past few years, sustained supply-side structural reform has made remarkable progress in reducing excess capacity in some industries, significantly improving the quality of the “major domestic circulation” of the Chinese economy. Under the impact of the pandemic, overcapacity might emerge again in some traditional industries, and we should no longer resort to compulsory measures to cut overcapacity. Instead, we should resolve overcapacity by making appropriate policy adjustments and creating new types of demand. After all, overcapacity has always been a relative term, subject to specific technological and institutional circumstances. As environment changes, the relationship between supply and demand will naturally change.
Take the steel industry as an example. According to data released by the Ministry of Industry and Information Technology, the output of pig iron, crude steel and steel production in 2019 were 809 million tons, 996 million tons and 1,205 billion tons, up by 5.3%, 8.3% and 9.8% year on year (yoy), respectively, a sign that capacity had already been growing too fast. On the production side, considering that outdated and small-scale output as well as output which could lead to pollution have already been reduced in the last round of "cutting overcapacity”, existing capacity is comparatively advanced even when compared globally. On the consumption side, the demand from the construction industry accounts for more than 60%, but the use of steel in construction only accounts for 7%-8%. The ratio is about 40% in Europe and the US.
At present, China builds more than 1 billion square meters of houses every year. If the standard on the proportion of steel used in the construction can be moderately raised, or the use of steel is encouraged, an additional 100 million tons of steel will be consumed every year, which can help absorb the excess capacity. In addition, the life cycle of reinforced concrete houses currently is 30 years, while that of steel houses can be as long as 70-100 years. Requiring and promoting the use of steel can greatly improve the quality and extend the lifespan of houses, thereby not only forming a circulation between steel scrap and steelmaking, but also helping improve the disaster resistance of houses.
Another example is the automobile industry. In 2019, China's automobile production and sales were 25.721 million and 25.769 million, respectively, remaining the world’s first but down by 7.5% and 8.2% compared with the previous year, a sign that consumption had already begun to contract. According to World Bank data, car ownership per 1,000 people in 2019 was 837 in the US, 589 in Germany, 591 in Japan, and 433 in some Asian countries such as Malaysia, but only 173 in China, which indicates a promising market prospect in China. But an important reason for the weak auto consumption in China is various policies that restrict car consumption.
In some regions, people may have strong demand for cars, but they may not be able to buy just because of restrictive policies. If restrictions on car purchase are removed, car ownership in China might be able to reach 50% of that in developed countries. On the one hand, this can help meet consumption demand for cars; on the other hand, it can force cities to improve transportation facilities and expand three-dimensional parking garages. In fact, there are signs that office buildings are already in excess in some first-tier cities in China, while three-dimensional parking garages are insufficient. Transforming some of the excess office buildings into parking lots will not only help drive consumption, but also balance the market.
The third example is the energy and chemical industry. In 2019, China imported 500 million tons of crude oil, which corresponded to a 70.8% of external dependence. Natural gas imports amounted to 96.6 million tons, with an external dependence ratio of 43%. China's external dependence on oil and gas will continue to rise in the coming years. Such a high degree of dependence has always been a major risk to national energy security. Most of the imported crude oil and natural gas is used in the production of chemical products. Meanwhile, China has the richest coal reserves in the world, with an annual production capacity of 5 billion tons and an actual output of about 4 billion tons. Although there appears to be an overcapacity in the coal industry, given that coal is a natural chemical raw material, it can be used to substitute any additional crude oil to be refined in the future to develop coal chemicals, coal to oil and coal to gas products, rather than serving the sole purpose of generating electricity (which can be obtained through renewable sources in the future).
Large Chinese enterprises like the Shenhua Group already have such ability. By increasing coal chemical raw materials by 800 to 1000 million tons, we will be able to reduce annual import of oil by 200 to 250 million tons, thereby absorbing the "excess" coal capacity and reducing the dependence on foreign oil and natural gas.
At present, the main constraints in developing coal chemical are high cost and underdeveloped clean technologies, both of which could be gradually addressed through the innovation and application of technologies. The government should encourage and guide large and qualified SOEs to step into this field to develop clean technologies with continuous capital investment, reduce costs and improve competitiveness through innovation of technology and management.
4. Adopt a multi-pronged approach to stimulate consumption, promote employment, improve social security, and accelerate the formation of a spindle-shaped income distribution pattern.
In 2019, China's per capita GDP exceeded $10,000, indicating that the country may soon cross the middle-income trap. Nevertheless, the task of transitioning to a high-income country remains challenging given the coexistence of 400 million middle-income population and 600 million low- to middle-income population. There is still a possibility of China falling into the middle-income trap under the blow of the COVID-19 pandemic if inappropriate policies are adopted. Special measures should be taken to stimulate consumption, promote employment, strengthen social security, expand the size of the middle-income group, reduce the size of low- to middle-income group, and accelerate the formation of a spindle-shaped income distribution pattern.
First, lower personal income tax to stimulate personal consumption. At present, China is implementing a 7-level progressive taxation system for personal income, among which the highest tax rate is 45 percent, a relatively high level in the world. China's annual personal income tax accounts for 7% of total tax revenue, much lower than that of developed countries (20%) and other developing countries (15%), and even lower than that of Russia. An important reason for this is that at a high marginal tax rate, many private business owners do not take wages, but instead leave their personal income in their firms to pay the 25% corporate income tax. Some high-income earners have either decided to emigrate or relocate their businesses to regions such as Hong Kong and Singapore to avoid taxes.
According to international practice, the individual income tax rate should be less than or equal to the corporate tax rate. The corporate tax rate has been reduced to the current level of 25%, the top marginal individual income tax rate should also be reduced from 45% to 25%, with the remaining marginal rates reduced correspondingly. This move will not reduce the total tax revenue, but will instead expand the tax base, stimulate consumption, and increase the total tax revenue. The proportion of individual income tax in tax revenue will also increase gradually.
The second is to implement the preferential tax policy for small and micro enterprises so as to protect people's livelihood and employment. Small and micro enterprises, which account for 80% of the total number of businesses, have created 70% of total employment. In 2018, China rolled out a preferential corporate tax regime for small and micro enterprises that would span over three years: from January 1, 2018 to December 31, 2020, companies with annual taxable income equaling or less than 1 million yuan could enjoy a preferential income tax rate of 20% on 50% of their income.
This is a policy introduced before the COVID-19 outbreak. Now a wider range of small and micro enterprises are facing unprecedented pressure for survival due to the pandemic. Against this background, and considering the strategy of taking domestic circulation as the main body, this preferential policy for SMEs could be institutionalized or even made into law so as to stabilize market expectations. The rationale behind it is the same as that of the preferential income tax applied to special economic zones and high-tech enterprises. Once small and micro enterprises successfully survive the pandemic, they will surely create more jobs and promote economic development.
The third is to revitalize rural construction land and increase farmers’ property income. The 600 million low- to middle-income people mainly reside in rural areas. Unlike urban residents who possess properties such as houses with clear property rights and appreciation chances, farmers cannot enjoy property income due to the vague property rights of collective land and difficulties in market transactions. This is also one of the main reasons why the income gap between urban and rural residents has widened in recent years. Over the past 40 years of reform and opening-up, the proportion of farmers’ property income in total income has remained at about 3%. Statements such as "adhere to collective ownership of rural land", "protect farmers’ contracted management rights to rural land in accordance with the law," and "give farmers more property rights" were made on the Third Plenary Session of the 18th Central Committee of the Communist Party of China in 2013. But after seven years, what the farmers possess now are still no more than collective land ownership and contracted management rights. To narrow the income gap between urban and rural residents, the most direct way is to carry out reforms to convert the wealth attached to house sites and collective construction land for commercial use into tradable property, thereby increasing farmers’ income.
The fourth is to increase expenditures on social undertakings and gradually improve social security system. In 2019, the per capita consumption of Chinese residents stood at 21,559 yuan. If we look at its components, the expenditures on housing, medical care, and education, culture and entertainment together accounted for 43.9%, up by 3.7% over 2015, which restricted the improvement of residents' consumption. Therefore, the government should increase fiscal expenditures on housing, education, and medical care so that people can reduce their spending in these areas and use the savings for other consumption.
For example, in big cities, local governments can increase the supply of affordable housing, provide more public rental housing, and stabilize the housing prices and rents. Concerning education, governments should include pre-school education into public services as soon as possible, include high school in compulsory education, and encourage students to attend medical schools by reducing or exempting tuition fees, so as to increase the supply of medical staff to cope with the shortage of medical services caused by China’s aging population and increasing prevalence of chronic diseases.
The fifth is to cultivate new growth poles and drivers for regional development, and develop high-quality regional economies with complementary advantages. Balanced development of different regions plays an essential role in forming the domestic circulation. Under the new situation, the central and eastern regions should further enhance their economic carrying capacity through the construction of city clusters. The western region should break away from the constraints of resource endowments, seek innovation-driven development by taking advantage of high and new technologies, and form a regional economic pattern featuring complementation of advantages and high-quality development.
The central and eastern regions must lay priority on the development of city clusters. At present, the urbanization rate in China has exceeded 60%. Many cities are moving from isolated development to the stage of forming city clusters. The Beijing-Tianjin-Hebei region, the Yangtze River Delta, the Pearl River Delta, and the middle reaches of the Yangtze River have already started this process and the potential benefits can amount to tens of trillions yuan.
Far-sighted, scientific and sound planning is fundamental for fully realizing the benefits of infrastructure connectivity within city clusters, promoting synergized and coordinated development and optimizing resource allocation. We must understand and use the "economics" behind it. First, arrange the structural layout of city clusters to form a new pattern where the mega-city, its immediate surroundings and other cities clustering around overlap in space but specialize in different functions. Second, adopt a planning strategy featuring multi-nodal functional areas for the central city. Third, prioritize the formation of a highly efficient and seamlessly connected transportation network to support the low-cost movement of people and goods.
In the western region, it is necessary to free our minds and seek new sources of growth with the systemic development and application of new technologies. Despite the tremendous progress made over the past two decades, the problem of unbalanced and insufficient development remains prominent, and the task of poverty alleviation remains tough. The gap between the western and eastern regions in economic development is still rather large.
In the past, we simply copied the development model of the eastern region in developing the western region, which has proved to be unsuccessful. The reason why the western region still lags behind is largely due technological and institutional constraints. Without the development of technologies, institutional reform alone cannot address the overdependence on natural resources in economic development and thereby can hardly narrow the development gap.
Under the new situation, making plans for the development of the western region requires unconventional thinking. For example, as the western region features smaller population and more land, it is not appropriate to adopt the labor-intensive model of the coastal areas for agricultural development. A firm-led, tech-intensive and automated model is more suitable. We can learn from the experience of Israel and Singapore, and apply drip irrigation, multistory cropping and soilless cultivation techniques to develop new Gobi agriculture. The vast Gobi Desert can be transformed into a mega vegetable and crop production base, and the products can be transported to Europe through Central Europe Express trains as well as other parts of China. Development of 100,000 square kilometers (with 15 million-yuan output per square kilometers) of such bases can produce an output of 1.5 trillion yuan. At the same time, this is equivalent to an increase of 100,000 square kilometers of arable land quota which can be sold to the eastern region. Such a transaction can not only raise funds for the west, but also increase construction land for the development of city clusters in the eastern region.
For another example, the western region boasts rich resources of hydro, solar and wind power. But the slowdown in electricity demand, limited capacity of peak load regulation, and poor transmission channels have resulted in the abandonment of such resources in recent years.
To deal with this, first, efforts should be made to develop pumped storage and chemical energy storage and other technologies to balance the gap of energy use at different times, and transform the energy into a stable and sustainable power resource. The second is to increase investment in UHV power grids so that surplus power can be transmitted out through these grids, thereby improving the ability to absorb renewable energies. The third is to build cloud computing data centers in the western region to provide low-cost cloud computing services to the eastern region. In short, through these new technical means and systematic projects, surplus clean energy in the western region can be fully exploited to provide support for high-quality development in the western region and even the whole country.
The six is to deepen fundamental institutional reform, stimulate social investment and establish a high-quality market system.
Deepen the reform of the market-oriented allocation of production factors. "Opinions of the Central Committee of the Communist Party of China and the State Council on Building a Complete System and Mechanism for Market-oriented Allocation of Factors" was released on March 30, 2020. This policy paper puts forward many reforms concerning wealth creation and optimization of resource allocation, which are pertinent, forward-looking, and strategically important. For example, measures such as “establishing a national mechanism for cross-region trading of construction land quotas and supplementary quotas for arable land”, “relax restrictions on residence registration in cities other than a few megacities, and pilot a system of granting household registration based on habitual residence” can improve the flow of production factors and achieve greater productivity.
In addition, in the context of slower economic growth and reduced fiscal revenue caused by the pandemic, this kind of reform costs little but brings huge benefits. It can also facilitate the resumption of work and production, stimulate business vitality and restart the economic circulations.
Speed up the establishment of state-owned capital operation companies. In 2018, the total state-owned equity of Chinese enterprises was 58.7 trillion yuan, and 99% of the equity capital belonged to industrial and commercial investment companies. We should speed up the "formation of state-owned capital investment and operation companies" proposed on the Third Plenary Session of the 18th Central Committee, and transfer approximately 10 trillion-yuan worth of equity assets from the existing state-owned industrial investment companies to form a number of state-owned capital operation companies. These companies can focus on alternative investments and equity investments just like what Temasek, Buffett or PEs do. Their business decisions will be based on the performances of the investee companies. Through the integration with the capital market, state-owned capital can be revitalized.
An investment of 10 trillion yuan can bring about 1 trillion-yuan income every year with an annualized return of 10%, and form a continuous and stable source of funds for national security and public services among other fields that require the support of state-owned capital. It can also help relieve fiscal burdens. The 10 trillion yuan of capital withdrawn from the industrial and commercial sectors can free up market space worth more than 20 trillion yuan for the private sector. In this way, we will be able to activate the fund circulation between the state-owned economy and the private economy, which is conducive to mixed ownership reform and the invigoration of the overall economy.
Promote the reform of the logistics and transportation system. Total logistics costs in China account for 15% of GDP, compared with 7% of GDP in the United States, 6% to 7% in Europe and Japan, and about 10% in developing countries in Southeast Asia. It is already a consensus that logistics costs in China are too high. One of the important reasons is the low proportion of railway transportation, which only accounts for 9.5% of the total volume, while roads and waterways account for 74.3% and 16.2% respectively (the proportion of US rail freight is 20%). Generally speaking, the cost of railway transportation is 1/3 of the cost of highway transportation. If the proportion of railway transportation can be increased to 15% to 20%, it will greatly save logistics costs.
For this reason, China needs to increase the proportion of railway transportation. One approach is to extend the railway lines to various development zones, factories and mining enterprises as soon as possible to connect the “l(fā)ast mile” of railway transportation. Second, with the increasingly extensive coverage of high-speed trains, previous express lines can be turned into specialized freight lines to increase the utilization rate. Third, accelerate reforms in some transportation hubs, and improve the efficiency of multimodal transport. Fourth, promote the application of the latest information technology and build intelligent transportation with integrated, efficient and smooth flow of people, goods and information.
Promote integrated domestic and foreign trade supervision. Cross-border e-commerce, seeing the rapidest growth in the Internet era, will become the mainstream of international trade in the future. In recent years, although the total import and export volume of cross-border e-commerce has grown at an average annual rate of more than 50%, it accounts for less than 2% of the total import and export trade. Part of the reason is the split between supervision of domestic trade and that of international trade.
For example, cross-border e-commerce cannot engage in wholesale trade and retail at the same time. For another example, retailers are divided into four types: bonded import, bonded export, general import, and general export. Retailers can only choose one of the operation models. But there is no such restriction on domestic trade. This kind of supervision restricts business operations. Recently, the General Administration of Customs has allowed B2B to be piloted in the cross-border e-commerce pilot zones. It is recommended to further break the boundaries between retail and wholesale trade, allow all cross-border e-commerce companies to do 2B and 2C businesses, and integrate retail and import / export trade. Enterprises should be allowed to freely choose business models such as retail or wholesale according to their own needs, paving ways for them to integrate the global supply chain.
III. Boost the international economic circulation with high-level opening-up
With the Belt and Road initiative, China's opening-up has shown five new features in recent years:
1) The priority has shifted from attracting foreign capital to laying equal stress on bringing in foreign capital and investing overseas.
2) The priority has shifted from expanding exports to encouraging both exports and imports.
3) From opening up the coastal regions, to overall opening-up of the country, including coastal regions, border areas and inland areas.
4) The priority has shifted from boosting trade in goods stipulated by the General Agreement on Tariffs and Trade under the WTO framework to promoting trade in goods and services.
5) China has shifted from integrating and adapting to the global economic governance system to actively participating in and even leading the formulation and revision of international investment and trade rules.
These five changes in opening-up forms a basis for China to promote international economic circulation. At present, in the context of rising trade protectionism and unilateralism across the globe and global economic contraction under the blow of COVID-19, it is necessary for China to continue its strategy of opening-up and make new advances amid changes. China should counter anti-globalization attempts with high-level opening-up, fight against withdrawal of investment by improving business environment, and foil the decoupling attempt by providing benefits of a super-large market. These moves will accelerate the formation of an international economic circulation that is beneficial to China.
1. Speed up the introduction of foreign capital, expand and strengthen China’s industrial chains so as to provide the world with stable and efficient industrial and supply chains.
Currently, the world is suffering excessive liquidity. From a global perspective, China has done the best in containing the COVID-19 outbreak and is also one of the regions with the lowest investment risks. As long as we continue the strategy of further opening-up, industrial capital will inevitably flow into China. Not only will foreign enterprises drop plans of moving out of China, they will also help China quickly improve its industrial chains.
Recently, the executive meeting of the State Council released the 2020 negative list for foreign investment. Compared with the previous version, the number of sectors that are off-limits to foreign firms have been reduced from 40 to 33, and those on the list for the pilot free trade zones have been reduced from 37 to 30. In particular, in the financial sector, restrictions on the foreign shareholding ratio of securities firms, fund management companies, and life insurance companies are cancelled; in the manufacturing sector, restrictions on the foreign shareholding ratio of commercial vehicle manufacturing are lifted; and in the agricultural sector, the requirement of shareholding ratio of Chinese companies in the selection and breeding of new wheat varieties and seed production has been relaxed to not less than 34%. All these moves have created conditions for China to seize the opportunity to attract foreign capital and fill in the gap in its industrial chains.
China should further expand the opening of service industries such as logistics, R&D, and digital economy to attract more foreign companies along the industrial chain to settle in China and join regional clusters, so as to create trillion-yuan-scale strategic industrial chain clusters featuring high spatial concentration, great efficiency and close collaboration between upstream and downstream businesses. When foreign demand is weak, we can run a small industrial circulation driven by local and domestic demand; when foreign demand recovers, we can strengthen international cooperation, expand the scale and improve the quality of industrial clusters, and promote the global industrial chain circulation by strengthening regional cooperation along the chain.
2. Take advantage of China's huge market and accelerate the construction of Belt and Road cooperation and innovation network.
The pandemic has dealt a heavy blow to the economies along the Belt and Road. A large number of new technologies and products in these countries need to find capital and markets to be commercialized. China should seize this opportunity to attract these technologies and projects.
To achieve this, China needs to relax foreign exchange control over ODI, and encourage private and state-owned capital to go global together. At the same time, China should choose regions with good foundation for opening-up, innovation atmosphere, and a comprehensive industrial system to build demonstration platforms aimed at strengthening cooperation and innovation among Belt and Road countries. These platforms could carry out pilot programs in areas such as intellectual rights protection, and innovation rules, and have the best practices generalized once proved successful.
3. Steadily lower the level of tariffs, increase imports appropriately, and increase China’s voice on the global economic stage.
In today's world, large exporting countries may not necessarily be economic powers, because their export products may be labor-intensive and preliminarily processed. However, large import countries are usually economically powerful. The foreign exchange needed for imports may come from trade surpluses in technology and services. Their currencies are often included into the SDR basket, which allows them to settle with their trade partners directly.
In the next 3 to 5 years, China should cut the overall tariff level from the current 7.5% to about 5%, roughly the same level as that of developed economies. Actively lowering tariffs can achieve many goals with one action. First, it can directly reduce import costs, which can contribute to industrial transformation and upgrading, and benefit ordinary consumers. Second, it can help increase imports, and thereby balance import and export and achieve a balance of international payments. Third, it can allow China to take the initiative in the new round of economic and trade negotiations. As the scale of imports expands, China will have a bigger say in global economic affairs.
4. Speed up FTA negotiations and actively participate in the negotiation and formulation of international economic and trade rules.
Recently, the revised United States Mexico Canada Agreement (USMCA) came into effect. The "poison pill clause" was aimed at China, which was an important step by the US to weaken China's position in the global trade and supply chain. Next, the US may continue to seek similar FTAs with the European Union, the United Kingdom, and Japan. These new approaches can actually isolate China.
In response, we should seize this window of opportunity when China is recovering rapidly to accelerate BIT negotiations with other countries and join the CPTPP in due course. The purpose of conducting such negotiations is to, on the one hand, fight against US attempts to isolate China, and on the other hand, attract technologies, industries, capital and talents.
5. Further opening-up by establishing f free trade zones and free trade ports.
China currently has formed a new opening-up pattern featuring 18 free trade zones and 1 free trade port. An important mission of free trade zones and ports is to conduct pioneering trials that facilitate free trade, investment, capital flow, transportation, employment, and data flow. They can elevate China's economic opening-up to a new level.
A higher level of opening-up will rely on the free trade zone (or free trade port) to cultivate industrial strength and capabilities of the manufacturing and service sectors, and create advanced manufacturing clusters, strategic industrial bases, trading and distribution platforms for factors and bulk commodities, and hubs for trade and shipping that are internationally competitive.
The depth of opening lies in creating a business environment featuring international standards, rule-of-law, and high convenience. More efforts are needed to reduce the entry barriers for foreign investment in fields such as finance, insurance, logistics, R&D, education and health, and digital economy, adopt pre-establishment national treatment and a negative list approach, and build a competitive market.
The breadth of opening calls for reproduction of successful measures for reform, opening-up and industrial upgrading nationwide.
The world economy has fallen into recession because of the pandemic. Against this backdrop, we should continue to uphold globalization, give more play to the market in optimizing the allocation of resources, and improve the division of labor around the world, so as to maintain a positive international economic circulation. Beggar-thy-neighbor, unilateral, and anti-globalization actions and attempts to shirk responsibilities go against the general trend and are destined to fail. The trend of globalization will not change, and the principle that optimal allocation of resources will benefit the development of all countries will not change.
Globalization itself develops in a spiral manner, and advances through addressing problems. We firmly believe that the new pattern that China is developing with the domestic circulation as the main body and with dual circulation of domestic and international economies boosting each other will bring high quality development and push globalization to a more profound level.
