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Lin Yifu: China Remains the Engine of the World Economy

Source: People's Daily Date: 2016-06-22
In its 13th Five-Year Plan, the Chinese government set a 6.5% growth target from 2016 to 2020. As a result of weak external demand, realizing such a goal relies on investment and domestic demand growth, including consumption. In these two areas, China enjoys good opportunities.

First, industrial upgrading has enormous space on the supply side. China is a medium-level developed country. While there is severe overcapacity in steel, cement, glass, electrolytic aluminium and ship building and China is losing competitive advantage in traditional labor-intensive industries due to the rising labor cost, China can move up the value chain, where investment opportunities abound and returns are high.
Moreover, the demand for infrastructure investment is huge. China has made enormous investment in infrastructure, mostly on highways, high speed railways, airports and ports that connect cities. There is a severe shortage of infrastructure within cities, for example subways and underground pipelines and networks. More investment in these areas will help reduce congestion and improve public health, while generating high social and economic returns.

Third, there are many opportunities in environmental protection. The fast economic development in China has caused severe environmental pollution, the investment in which will produce very high social benefits.

Urbanization requires enormous investment. Urban population accounts for about 56% of China’s total population, in contrast to 80% in western countries. As China continues to develop and urbanization advances, there needs to be enormous investment in housing, urban infrastructure and public services.

These are all good investment opportunities with high economic and social benefits. In the short term, projects in these areas can create demand and jobs. Once completed, they can help improve the efficiency and quality of the economy. They are all part of the structural reforms on the supply side and go beyond Keynesianism.

Though the growth is moderating, there are still good investment opportunities in China, which distinguishes it from developed countries. Developed countries are already on the cutting edge of industries and technologies. Once their economy slows and overcapacity occurs, it is hard for them to find new growth drivers. Even though they have 3D printing and electric vehicles, the investment in these two areas is not enough to get the economy out of the difficulties. Developed countries, by comparison, have complete infrastructure, hence less demand for investment. They also have better environment and have completed urbanization. When the economy is under downward pressure, it is not wise to simply draw parallels with developed countries, as China has the potential, resilience and maneuvering space for further growth.

Besides opportunities, China has good conditions and advantages for investment.

Government debts at both the central and local levels are less than 60% of the GDP, compared with over 100% in most developing countries and developed countries. This therefore gives China more space to use fiscal policies to spur infrastructure investment. The main problem is maturity mismatch as local governments borrow short-term debts through investment vehicles or shadow banks to finance long-term infrastructure. Since last year, the Ministry of Finance has allowed local governments to issue bonds for urban construction to pay for their debts owed to banks and shadow banks. This is a very good measure which could be increased as appropriate to support infrastructure investment.

Second, household savings in China account for about 50% of the GDP, one of the highest in the world. With this, the Chinese government could use fiscal policies to leverage private investment, for instance using PPP to encourage private investment in infrastructure.

Third, to make investment, China needs to import technologies, equipment and raw materials. It has US$3.3 trillion of foreign exchange reserves, the largest in the world.

China has relatively high interest rate and required deposit ratio. By lowering such rates, China can increase money supply to encourage investment. This puts China at a better position than Europe, America and Japan, where interest rate is close to zero or even negative, posing liquidity pitfalls.

The favorable conditions mentioned above will remain unchanged in the 13th Five-Year Plan period. If China could fully utilize these conditions and make investment accordingly, jobs would be created, income raised and consumption boosted. Even if exports continue to be weak, domestic investment and consumption alone would suffice to ensure 6.5% growth in the 13th Five-Year Plan period. This would help create a stable macro-economic environment for the supply-side structural reform, double the GDP by 2020 and finish building a society of moderate prosperity in all respects, goals that were set at the 18th Party Congress. Such medium-high growth means that China will remain an engine of the world economy, contributing over 30% to global growth.

(The author is a member of the National Committee of CPPPCC and a counsellor of the State Council.)