Abstract: In this article, the author discussed how China could realize its growth target in 2022 in the face of triple pressures, i.e. demand contraction, supply shocks, and weakening expectations. Specific suggestions included interest rate reduction, tax and fee cuts, and rejecting the household registration system among others.
The Chinese economy is continuing to improve as it enters the second year of the 14th Five-Year Plan (2021-2025).
The Fifth Session of the 13th National People's Congress (NPC) was held in Beijing On March 5. The Government Work Report (the Report) proposed several targets for the economic and social development in 2022: GDP growth of around 5.5%, over 11 million new urban jobs, a surveyed urban unemployment rate of no more than 5.5%, CPI increase of around 3%, and growth in personal income that is basically in step with economic growth.
How do we understand the economic and social targets set for 2022? While pursuing stable progress this year, how can the Chinese economy address the triple challenges of demand contraction, supply shocks, and weakening expectations and boost growth momentum? How to promote consumption and optimize the investment structure? How to increase the confidence of market players and provide the necessary relief to them? What other directions can be explored in addition to the reform of the household registration system in the quest to build common prosperity? What conditions should be created in order to promote the shift from the "double control" of energy consumption and intensity to that of total carbon emissions and intensity?
I. REALISTIC AND PROACTIVE TARGETS
Q: China sets its GDP growth target at around 5.5% and deficit at 2.8% for 2022. How do you interpret the two targets?
A: I think these two targets reflect the guiding principle of giving more prominence to stable growth. The GDP growth target is both realistic and proactive, not impulsive or conservative. Why? Last year, China’s GDP grew at 8.1%, and 2.2% the year before, with an average of 5.1%. As you can see, the 5.5% target for 2022 is based on the average of the previous two years, not just last year's performance. Then, if you look at the economic performance of the third and fourth quarters of 2021, you'll see that we have to work harder to meet the goal.
The 2.8% deficit ratio is a decrease from the 3.2% last year. Why have we reduced the deficit ratio when there is so much downward pressure on the growth rate? Is the proactive fiscal policy less active? I believe we cannot determine whether fiscal policy is active or not by looking at the deficit ratio alone. The current GDP is over 114 trillion yuan (about $18.1 trillion), a 2.8% deficit means debt of about 3 trillion yuan (about $471 billion). Besides, the Report states that this year's fiscal revenue will continue to rise, which, in combination with the carried-over earnings of specific state-owned financial institutions and franchised institutions, as well as funds transferred from the budget stabilization fund, will push China’s fiscal spending up by 2 trillion over last year. So there will be a total of 5 trillion yuan for fiscal spending, accounting for 4.4% of GDP. I think the scale is quite massive. It will provide strong support to policy measures such as tax and fee reductions, preserving grassroots government spending, and moderately advanced infrastructure construction. It also emphasizes the guiding notion of stabilizing growth.
Q: While pursuing stable progress in 2022, how can the Chinese economy turn pressure into momentum and achieve improvements in both quality and quantity?
A: Since last year, China's economic development has been under the triple pressures of demand contraction, supply shock, and waning expectations. Especially after Q3 of 2021, the growth rate slowed quarter by quarter. Finding the problem is half the battle, and determining where the pressure is coming from is crucial to solving it. The economy will be able to grow naturally if these triple pressures are relieved.
The drop in demand was primarily attributable to sluggish domestic consumption and investment growth. Consumer demand was mainly affected by the pandemic, with sporadic outbreaks at various locations and times since last August. While we hope to see improvement in the pandemic situation this year, it’s critical to be more precise and scientific in COVID-19 prevention and control, so as to minimize the interruption of commercial activities and population movement. The economy’s vitality depends on people’s mobility. We say that the economy is created by people, but for the economy to come alive, people must be mobile. Therefore, the recovery of consumption depends on precise prevention and control of the pandemic.
The biggest problem with investment lies in the real estate sector. Infrastructure, manufacturing, and real estate are the three key investment sectors. Over the previous year, there have been risks in the housing market, primarily from large developers, shifting outlook on the entire industry. In the long run, the triangular cycle of real estate, finance, and local government infrastructure investment is no longer sustainable. In the short term, a variety of factors have influenced the expectations of residents and real estate companies for the housing market. Therefore, preventing a hard landing of the housing market is, in my opinion, a critical aspect in stabilizing the real estate sector, investment, and ultimately overall growth. Real estate policies must be more targeted and effective. It is essential to enhance collaboration among various departments, set long-term strategic goals, and develop a new model for the real estate sector.
Last year’s supply shock was a shortage of coal, electricity, containers, chips, and labor. The shortages of coal and electricity have now been alleviated. Data show that economic growth decreased after Q3 2021, owing to a halving of the manufacturing industry’s growth rate in Q3 compared to Q2. When it recovered after Q4, it meant that electricity shortage was eased and no longer a restraint on manufacturing growth. However, weak domestic consumption and investment brought about another fall in manufacturing growth. The lack of containers is easy to cope with once the pandemic is under control. The lack of workers and chips are longer-term problems that we have to face. Of course, as the world situation and China's innovative capabilities improve, the chip shortage will gradually diminish.
Labor shortage is actually a structural problem. On the one hand, the manufacturing industry is experiencing a general shortage of skilled workers; on the other hand, the youth unemployment rate is high. According to data from the National Bureau of Statistics, in January this year, the national urban surveyed unemployment rate for people aged 16-24 was 15.3%, while that for people aged 25-59 was 4.6%, indicating a serious structural issue with employment.
What can be done to make the manufacturing sector more appealing to young people? I think this is a problem that has to be addressed.
Weak expectations are more complicated. Whose expectations have weakened? Mostly entrepreneurs and investors. I think the waning expectations are partly caused by some inappropriate policy measures implemented last year. In response to these issues, the Central Economic Work Conference last year emphasized a thorough and correct understanding of the economic work, theories, and practices, which I believe will boost expectations when properly implemented. The deteriorating expectations are also related to people’s outlook on the economic situation. With the economy gradually picking up this year, the electricity consumption and purchasing managers' index (PMI) both improved in January and February, so will economic expectations.
II. INTEREST RATE REDUCTION IS NEEDED IN ADDITION TO TAX AND FEE REDUCTION
Q: It is said in the Government Work Report that China will continue to implement the strategy of expanding domestic demand this year. What can we do to increase the proportion of consumption in domestic demand and the proportion of household consumption within consumption?
A: Building a new development pattern is a long-term strategy proposed in the 14th Five-Year Plan, for which the general direction is to expand domestic demand and I think expanding household consumption is at the core. Weak consumption is the main problem for last year. To expand consumption this year, I believe more efforts should be made in the following areas. The first is to control the pandemic with more targeted measures. The second is to research policies to boost consumption. The Government Work Report has mentioned measures such as improving the income distribution system and promoting the deep integration of online and offline consumption, which are all very important. The third is to reform the income distribution system. For example, reducing the loan interest of the residential sector can boost consumption and adjust the income distribution. One of the characteristics of China’s income distribution pattern is that the operating profit of the financial and real estate industries accounts for a relatively high proportion of the total corporate profit. Last year, the average interest rate for corporate loans was reduced by 0.1 percentage points. This year, I think it is still necessary to reduce the interest burden on the real economy. Tax cuts and fee reductions are important, but interest rate cuts are also important, which will reduce the burden on companies. If this policy can be extended to the residential sector, it can help reduce the proportion of the financial sector and increase that of the residential sector in the national income. For another example, if the auction price of land can be lowered, it can actually contribute to the income distribution reform as it will lead to a fall in the government revenue and a rise in the income of the residential sector. Implementation of the aforementioned two measures can be rather difficult as they will affect vested interests.
Q: In terms of investment, how to optimize the investment structure and boost the vitality of investment?
A: We placed investment at a very important position during the Asian financial crisis in 1998 and the global financial crisis in 2008. We increased investment and carried out infrastructure construction, which played an important role in stabilizing the economy and preventing major economic fluctuations. We can say that increasing investment is an important measure to deal with external shocks, and we have a lot of experience in this respect. Now, we need to make proactive investments in infrastructure as appropriate, and at the same time, we should research how to better link the aforementioned five trillion yuan of fiscal expenditure to household consumption. In terms of investment, in addition to the major projects proposed in the 14th Five-Year Plan, new infrastructure and new urbanization projects as well as major transportation and water conservancy projects promoted last year, this year's Government Work Report has also mentioned a new aspect, which is to speed up the renewal of urban gas pipelines, improve flood prevention and drainage facilities, and promote the construction of underground utility tunnels.
In addition, we should pay more attention to green and low-carbon investment. The implementation of power rationing last year exposed the hardware deficiency in addition to the ‘soft’ problems such as relevant policy mechanisms in achieving the carbon neutrality goal. For example, while we are vigorously developing wind power and solar photovoltaics, where is the adjustable, supporting power supply? This requires us to upgrade existing coal power plants to serve as flexible backup energy sources. The Government Work Report has also proposed to strengthen the flexibility of coal power operations, which is intended to let coal power play a better role as a supporting power source. In addition, we have to pay attention to the investment in the digital transformation of enterprises.
Q: It is emphasized in the Government Work Report that this year, it is necessary to improve bailout and relief policies, and consolidate the foundation for stable economic operation and quality improvement. What substantial benefits will the combined tax and fee reduction policy bring? How to further boost the confidence of market entities and provide tailored relief for different types of market players?
A: It is the market entities that boost economic development and create wealth. To maintain the stable operation of the economy, we have to, on the one hand, expand fiscal expenditure, and on the other hand, reduce taxes and fees. This is also the policy we have been implementing since the outbreak of the pandemic. Last year's tax cuts and fee reductions exceeded 1 trillion yuan. This year's new arrangement is to combine tax reductions and rebates to further reduce the burden of enterprises. The total amount of tax cuts and rebates is 2.5 trillion yuan, with the scale of tax reductions remaining at around 1 trillion yuan and an additional 1.5 trillion yuan of tax rebates being added. This will play a very important role in alleviating operational difficulties of enterprises.
In addition, I think that monetary policies can play a role in supporting the development of the real economy and reducing the burden on enterprises. That is to say, we should cut interest rates to further reduce the overall cost of the real economy. At the same time, we need to make all kinds of policies widely known and understood by the private enterprises so as to change their weak expectations.
The difficulties faced by enterprises vary from one to another. In terms of foreign-funded enterprises, the most important thing is to ensure equal and fair treatment. For small and medium-sized enterprises, tax and fee reduction and interest rate cuts have brought material benefits, but for some private enterprises, they are more worried about policy directions. For example, since last year the Chinese government started to strengthen market supervision, roll out anti-monopoly measures, and crack down on disorderly expansion of capital. These policies and measures are in line with the requirement of developing a socialist market economy, and won’t change the party's basic theory, route and strategy. It won’t change China’s economic system, one that is with public ownership as its main body and allows for the development of all types of ownership.
III. REPLACE THE HOUSEHOLD REGISTRATION SYSTEM WITH ID CARD SYSTEM
Q: It is mentioned in the Government Work Report that we have to further promote balanced and coordinated regional development this year. The report has also clarified the goals and priorities of economic development in regions with different economic capacities. How to understand balanced and coordinated development?
A: To promote coordinated regional development is not to require all regions to achieve the same GDP goal, but to allow the regions with strong economic strength and suitable for concentrated economic activities, such as those provinces and municipalities on the eastern coast, to exploit their advantages and develop their economy as much as possible. Economic development in these regions can drive economic growth of the whole country. For areas with relatively poor conditions, it is necessary to give full play to their advantages in agricultural products and ecological environment, and tap their potential according to their distinctive advantages. It is necessary to allow a slower pace of development in these regions, rather than requiring all regions to maintain the same rate of growth. Different growth goals should be set according to the situations of different regions. This is what coordinated regional development really means.
Regional gap is not defined by GDP alone. Rather, we should consider more indicators such as per capita GDP, residents' disposable income, level of public services, and so on. Therefore, solving regional gap and pursing common prosperity is a very complex issue. It is impossible to use a single indicator to measure whether the gap is widened or narrowed.
Q: How to narrow regional, urban-rural and sectoral inequalities to an acceptable range?
A: These inequalities are in different dimensions. We can use GDP to gauge regional inequality, but that does not apply to urban-rural or sectoral comparisons. Some suggest using disposable income as a measure of urban-rural inequality, but I think it is flawed given the different levels of living costs. Urban disposable income is now 2.56 times that of rural disposable income, but there is a much larger difference in the level of house price in urban and rural areas. There is no simple answer as to a proper level of income gap to enable common prosperity. Of course, this remains disputed and needs to be discussed further. For example, Shanghai has the highest per capita income, while Gansu Province has the lowest. Shanghai’s number is 3.55 times that of Gansu. But look at their house price. Thus, the divergence in average household income alone is far from enough to reveal the full picture of inequality. We need to look at a full set of indicators to measure the progress toward common prosperity across the board.
Q: You recently proposed that to improve the quality of the new type of urbanization, China should deepen reform with the ID card system and the housing system. Could you elaborate on the highlights of this reform? And how will it promote urbanization and common prosperity?
A: The urbanization of rural migrant workers is a major challenge. We need to protect the 300 million rural migrant workers moving between urban and rural areas as well as other populations migrating across cities so that they don’t fall behind in our shared pursuit of common prosperity.
Our focus of reform as of now has been the household registration system, but there could be other possible solutions.
The proportion of registered urban residents is rising, but we know that in reality few of the migrant workers actually settle down in cities. First is because they don’t want to. They are entitled to property rights with the estates back at their rural homes. Second is that some of the cities don’t want them registered, because that would increase government spending to provide them with social security, employment, living, education and medical services, etc.
That leads me to think if there is another way out. We should not stick with household registration system reform, because it is exactly the household registration system that underpins the rural collective ownership in our country, which must be preserved. Only when you are registered at a rural village, are you entitled to the homesteads and contracted land there. We could turn to an ID card system instead. One may have his/her household registration in rural areas or other cities, but after he/she has lived and worked in a city for a certain period of time, the municipal government would issue a local ID card to him/her registered with his/her address in the city. We would then distinguish between rural and urban population based on the ID card. One with an urban address is part of the urban population, entitled to local treatments while preserving his/her rural household registration.
The address can be a rented apartment, but not necessarily one’s property. An important reason why the house renting market remains depressed in China is the inconvenience with household registration. In this way, homeowners and tenants would enjoy the same services, supporting both the house sales and house renting markets.
This is a problem never seen in any other countries. Household registration system and rural collective ownership are both local to China. We must probe into this issue in a more in-depth manner.
Q: What benefits would the reform bring?
A: First, it closes the income gap between people with rural and urban household registration, with equal access to old-age care. Second, it provides a clearly defined basis for population statistics, eliminating ambiguities when we apply three easily confused concepts of “registered population”, “resident population” and “managed population” at the same time. To be people-oriented, a city government needs to at least know exactly how many people it has, so that it knows how much work it has to do, and how many houses, kindergartens and schools it needs to build. Third, in case of emergencies, such clearly defined population management methodology can help us figure out the exact number of people impacted and where they are from immediately. That’s an important step forward in promoting social governance.
IV. INDUSTRIES SHOULD PLAY THE MAIN PART IN CARBON REDUCTION, WHILE LOCAL GOVERNMENTS PLAY A SUPPORTING ROLE
Q: You emphasized that China should work to create conditions to accelerate a shift in the focus of green transition, that is, from controlling total energy consumption and intensity, to controlling total carbon emission and intensity. This echoes China’s Government Work Report this year, calling for enhanced incentives for pollution and carbon reduction to promote green production and lifestyles. How is China doing in creating conditions to this end? What are some of the key aspects to watch during this process?
A: The Central Economic Working Conference proposed to “create conditions”, which means we don’t have the conditions yet. But that should be no excuse for not striving for the shift.
Carbon peaking and neutrality are of great significance. Our current focus on total energy consumption and intensity makes sense in that it controls total consumption of fossil energy, but at the same time it controls the use of renewable energy, too, and that is undesirable. Our Central Economic Working Conference and the Government Work Report have both highlighted a shift in this regard, removing energy consumption intensity control from our annual planning to comprehensive evaluation under the 14th Five-Year Plan, and allowing for greater flexibility. Additional renewable energy consumption and energy used as raw materials will no longer be capped as part of total energy consumption control. I think such policy adjustments are pragmatic, scientific and problem-oriented.
Q: In what aspects do we need to create the abovementioned conditions?
A: Some parts of China had power cuts last year out of many reasons, one of which was the ill-established control mechanisms on energy consumption and intensity. I believe we need to create at least the following three conditions.
First is a proper methodology to calculate total carbon emission. At the moment, we look at total energy consumption, but energy consumption does not necessarily equal to carbon emission. This gauge is inaccurate. We need to conduct actual measurement of the de-facto carbon emissions of businesses, and to that end we need a set of standards, equipment, and technicians. I know some of the power companies are already doing that, but those in other emitting sectors have yet to start to do so. We need to move forward at this front.
Second is a reasonable way to implement total carbon emission and intensity control, which should be different from what we do with energy consumption. With energy consumption, we decompose the total reduction target into various quotas and distribute them to local governments, but that results in the problem of “bad businesses driving out good”. Places with lower quotas could force out a high-emission business which happens to be the best in the sector, while its less advanced peers could survive just because they are located in places with higher quotas. In addition, over time, the industrial structure of different places could become increasingly similar. Thus, I believe the main role of controlling carbon emission and its intensity should be given to industries and businesses, with local governments only playing a supporting part.
Third is a carbon market. Control of total carbon emission and intensity is indispensable to enabling the 2030/60 carbon reduction goals, but it alone is far from enough. More importantly, we need a carbon market to drive businesses to reduce emissions. Businesses with emission quotas today should all be incorporated in the carbon trading market in the future. Without a sound market mechanism, government-led control is always imperfect. What we need is a system that can coordinate the roles of the market and the government.
This article was first published by the 21st Century Business Herald, written by reporter Bu Yule, reposted on CF40’s WeChat blog on March 6, 2022. The article is translated by CF40 and has not been reviewed by the author. The views expressed herein are the author’s own and do not represent those of CF40 or other organizations.
