Abstract: After reaching the threshold of US$10,000 GDP per capita, structural potential should be the focus. Structural potential is the potential that China has as a latecomer economy in upgrading the structures of consumption, technology, and industry as well as urbanization. Moreover, we should not concentrate all efforts in carbon reduction, but instead, based on China’s current conditions, coordinate efforts to reduce carbon emissions, cut pollution, go green and achieve growth at the same time.
I. STRUCTURAL POTENTIAL SHOULD BE THE FOCUS AFTER REACHING THE THRESHOLD OF US$10,000 GDP PER CAPITA
“A per capita GDP of US$10,000” is a sensitive and special mark in the development of an economy. When an economy reaches the threshold, the most visible change is that its growth rate will turn from high speed to middle-to-low speed. The reason behind is changes in drivers of growth from imitating to innovating, from scale to efficiency, and to solve problems such as the ever-widening social inequalities. Since tackling these problems are quite challenging, some countries’ economies fell out of the rank after exceeding US$10,000 per capita GDP while some countries have not been able to pass the threshold. For example, Russia’s per capita GDP once surpassed US$10,000 but fell back to lower category a while ago.
In terms of macroeconomic policy, when economic growth shifts to medium to low rate and the problem of insufficient demand becomes more acute, expansionary monetary policy and loose fiscal policy seem to be quite appealing and needed in practice.
This poses great challenges to the macro policymakers, as they not only need to understand what monetary policy is capable of, but more importantly what it is not.
Just now, Zhang Bin from CF40 mentioned the problems and challenges facing other countries when they pass the threshold of per capita income of US$10,000. In China, such challenges also occur to varying degrees.
Macro policies mainly solve problems related to short-term stability and balance. More importantly, we need to pay attention to structural potential, which is the real source of China’s growth potential. Structural potential is the potential that China has as a latecomer economy in upgrading the structures of consumption, technology, and industry as well as urbanization. Currently, per capita income in China reaches US$10,000 while that in developed countries is US$30,000 and over US$60,000 in the US. The gap is our structural potential. If we prioritize China’s growth drivers, structural potential will rank first while macro policy is in the second or even the third place.
As for the growth drivers during medium-rate growth, we propose a “1+3+2” framework of structural potentials. “1” refers to metropolitan areas and city clusters as the leading force which provides physical space and impetus for China’s next stage of medium and high-quality growth. This area will inject 70%-80% growth potential into China’s economy in the coming five to ten years.
“3” refers to the “three new weaknesses” that need to be addressed, i.e., low efficiency in basic industries, small scale of the middle-income group, and weak ability in basic R&D.
“2” refers to two main drivers, digital economy and green development, which are global impetus. China is rather strong in both fields and has an edge in some respects.
The framework of structural potentials mentioned above can be boiled down to “l(fā)et one leading force guide the way, three weaknesses be addressed, and two wings act as enablers”.
In the past four decades, China’s high-speed growth has mostly relies on infrastructure, the real estate market, and export. Now, these drivers still play a part but will gradually fade away in the future. Next, we should focus on how to unlock the “1+3+2” structural potentials. The key is to deepening supply-side structural reform. Otherwise, some potentials may be “visible but unuseful”.
II. STRUCTURAL REFORM REQUIRES “LONG-TERM PLANNING, HARD MEASURES, AND SOFT LANDING”
Based on recent data, China’s economy between January and August generally continued to recover, but some indicators in September fell sharply. From the recently published two-year average growth rate for the first three quarters, the growth of three major components of aggregate demand in the fourth quarter might be lower than expected.
Should the economy face low demand, high PPI, squeezed profits of mid- and downstream enterprises, and accelerating risk exposure, it would suffer “quasi-stagflation” defined by “l(fā)ow growth rate, soaring prices, decreasing returns, and increasing risks”. Now is an important time for macroeconomic control which requires us to judge the situation and take measures to avoid the occurrence of quasi-stagflation. Early this year, the government set a growth target of more than 6%, which leaves much room. Under normal circumstances, we should strive for more than 8% growth with a two-year average growth rate of 5%. Based on this, we can aim for more than 5% growth for the next year.
In terms of the long-standing structural problems in the economy and society, we should employ a cross-cycle perspective and strategy to solve them. Recently, some real estate companies are mired in dilemma due to overexpansion; some local governments are overwhelmed by hidden debt caused by excessive pursuit of growth. These structural problems should be tackled without delay. But when dealing with these challenges, we should balance short-term and long-term measures as well as ends and means by adopting the approach of “l(fā)ong-term planning, hard measures and soft landing”.
Long-term planning is to define goals and tasks for a long period of time as well as set up clear expectations and room for cushioning and correcting mistakes; hard measures mean not wavering from or compromising on policy measures, especially market disciplines, which is also part of the expectations; soft landing is the desired outcome, which means the goal is to be achieved at low costs, avoiding rocking the entire economy even if some bubbles burst.
When tackling the structural problems, it is important to stabilize expectations and improve communications between government agencies and the market as well as society. More importantly, we should deepen reform and unleash structural potentials to expand domestic demand and realize steady growth. Recently, China officially applied to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which received positive response at home and abroad. In the following stage, China could take some landmark, ground-breaking measures such as enabling the two-way flow of factors between urban and rural areas among metropolitan regions and city clusters, providing more basic public services like government-subsidized housing for migrant workers and education, and broadening market access to basic industries to promote fair competition. These measures can boost confidence and demand in the short run and expand the middle-income group in the mid to long run so as to help achieve the goal of common prosperity.
III. CARBON REDUCTION, POLLUTION CUT, GREEN TRANSITION, AND ECONOMIC GROWTH MUST BE COORDINATED
In the first half of this year, PPI rose sharply. The initial judgment is that the price hike is a transitory phenomenon due to short-term imbalance between supply and demand instead of big changes in fundamental factors. However, in reality, the price increase becomes more persistent influenced no longer by the demand side but the supply side. Part of the industries and regions even faced power cuts and rationing as well as the suspense of production.
One issue that has attracted much attention and debate is how to deal with the relation between the long-term goal of carbon peaking and carbon neutrality and short-term measures. The dual carbon goals demonstrate the requirement that China’s socioeconomic development should realize a comprehensive green transition, which must be accomplished without any wavering.
But given the recent developments, first, we should not concentrate all efforts in carbon reduction, but instead, based on China’s current conditions, coordinate efforts to reduce carbon emissions, cut pollution, go green and achieve growth at the same time. This is an important difference between China and developed countries. While they mainly focus on carbon reduction, we must give equal importance to all four tasks.
Second, carbon reduction cannot be carried out in a “campaign style”. To realize the goals of carbon peaking and neutrality, the key is to replace traditional technologies with green ones in order to cut carbon emissions rather than to cut production capacity, slow down the growth rate, or even artificially disrupt the normal order of supply and demand without having the green technologies and supply in hand. Usually, we advocate the idea of replacing the old with the new or “out with the old, in with the new”. But during the green transition, we should champion the idea that “without the new, keep the old”, which is what the central government has emphasized, i.e., “establishing before replacing”. In this process, we must follow the rules of green transition and the market. Otherwise, it may backfire even though we are doing the good things.
Third, carbon reduction should not be measured by the wrong indicators. From the perspective of economics, if we adopt quantitative index of physical things like the output of an industry or the input including energy consumption as the indicator for macro evaluation and regulation, it will be easy to distort the allocation of resources and cause a whack-a-mole situation with more problems popping up. This is also one of the deeper reasons why we should shift from planned economy to market economy. Thus we should refrain from using administrative methods but adopt more market-based measures like liberalization of coal-fired power pricing, which will stimulate the internal impetus of businesses to save energy and reduce emissions.
The current carbon prices vary greatly among different sectors and regions. As carbon-based resources keep shrinking, the distribution of such resources needs to abide by the principle of productivity, meaning that more carbon-based resources should be allocated to regions and sectors with higher carbon productivity. However, currently we set up targets of carbon reduction according to sectors and regions, which may let places with low carbon productivity gain more carbon-based resources. This practice will neither solve the issue of efficiency nor fairness. At present, we should shift our focus towards technological and institutional innovations to pave the way for future benefits.
As for institutional innovation, we should first ask a fundamental question about whether and how to let the market play an important or even a decisive role in green development. Objectively speaking, the market is far from being ready.
The current stage of emission reduction mainly adopts a top-down approach which breaks down missions and targets and implements them with administrative measures. In a rather long period of time, this approach is here to stay. The advantages of this method are that it enables quick actions and results within a short time. But the problems are unreasonable and unfair allocation of targets, insufficient incentives, free-riding, high implementation costs, poor balance, etc. After entering the phase of green transition under the goal of carbon neutrality, it is possible to develop micro foundations to let the market play a decisive role.
Institutional innovation requires us to do a lot of work. One basic task is to create a carbon account, ecology account, and green responsibility account. First, we should promote carbon accounting and ecology accounting, as accounting is the foundation of green transition. In fact, whether we use administrative or market-based measures, the prerequisite is to have a set of sound accounting methods to facilitate accurate calculation. This is an important and pressing task which remains one of our weaknesses and has not caught enough attention.
Based on carbon accounting and ecology accounting, we can create a carbon account and ecology account, and then green responsibility account for all levels of government (national, provincial, municipal, and regional), businesses, and individuals, covering areas like emission reduction, conventional pollutant control, ecological restoration and economic growth, so as to define each entity’s responsibility to reduce emissions. Once the rights and responsibilities are specified and everyone does their due part, the world will become a cleaner place. We should encourage local governments to explore creative ways to break down the national target of carbon neutrality and implement it through green responsibility account so as to effectively push forward green transition.
This is the comment made by the author at the 3rd Bund Summit on October 22nd, 2021. The views expressed herein are the author’s own and do not represent those of CF40 or other organizations. It is translated by CF40 and has not been reviewed by the author.
