Transformation should be urgent and more effective
Supported by reform and opening-up moves, relatively low labor costs in past years in China have not only helped many enterprises realize high returns, but also raised incomes. After a certain accumulation of high returns, demand for real assets－mainly real estate－and financial assets like bank savings management products and stock, began to surge, which has led to capital dividend acceleration in the country.
China has seen capital dividend expansion since 2000, which reached its peak around 2011. However, starting from 2012, the working-age population－16-60 years old－began to decrease on a net basis, and so far there has been a net decrease of more than 30 million. The National Bureau of Statistics said there are 200.56 million people aged 65 and above in the country, accounting for 14.2 percent of the total population, which suggests that China has entered an advanced stage of graying.
It is also expected that China's aging population will further expand this year due to sharp drops in fertility rates. Undoubtedly, China's demographic dividend has been rapidly diminishing. In addition, as rational plans for the future trend of returns on investment are made partly based on the existing age structure of the population, we expect capital dividends will dwindle as aging accelerates.
Given the above factors, it's not hard to realize the mismatch between China's economic size and population structure and the difficulty in bridging these factors－that is, the population has been rapidly aging, but the per capita GDP gap is still very large compared with developed economies.
Therefore, we see two major problems that China's economy is confronting. One is the problem of rapid aging of the population, which is basically a problem of population structure. The other is the problem of economic structure. The former leads to the reduction of demographic dividends, while the latter leads to the reduction of capital dividends. The reduction of demographic dividends and the reduction of capital dividends are related to each other and are mutually causal.
The accelerated graying of the population and declining rates of return are both putting more pressure on China's economy, creating many unprecedented challenges for the world's second-largest economy, which was just what Nobel laureate in economics Robert Shiller once said in reply to a Chinese scholar's question about the most significant risk to China's economy. The US economist said China has not experienced recessions, depressions and crises. The country's development has been so smooth that it is difficult to make correct judgments and responses once a crisis occurs.
It is a widely accepted consensus. China must realize that its economy needs to transform from rapid growth to high-quality growth, as the traditional growth model has become unsustainable. There is a marketable view that as long as the ability of independent innovation is improved, high-tech enterprises are vigorously developed and industry is upgraded, the Chinese economy will be successfully transformed. In my opinion, the development of high-tech is indeed one of the necessary conditions to achieve economic transformation, but it is not enough.
China has called for efforts to promote the new development paradigm of dual-circulation that allows the domestic and overseas markets to reinforce each other, with domestic circulation as the mainstay. Maintaining a smooth flow of such a development pattern should be deemed as the foundation for nurturing economic transformation. However, at present, domestic circulation is less than smooth in some sectors, such as real estate, which is a result of the aging of the population, and a downtrend is expected in property development investment. Some key figures indicating the trend of the sector, such as the balance of residential mortgages, even recorded negative growth in the past two months.
After more than 40 years of reform and opening-up, China has become the world's second-largest economy with outstanding achievements. But it has also seen many problems, including structural distortions in some economic areas. Therefore, in order to achieve economic transformation, China should stick to problem-oriented marketization measures as the main tools to further its reform progress.
To achieve successful transformation, first we must transform our ways of thinking. For example, in the past, most of us were used to analyzing and making decisions with a focus on the three key growth drivers－investment, consumption and exports－thinking that driving investment can be immediate and easy to control. However, due to inadequate research of factors related to government, enterprises and consumers, the vibrancy of each is sometimes compromised for the sake of maintaining economic momentum. Therefore, it is necessary to adjust not only the relationship within each sector, but also the relationship among the three major sectors.
For example, according to the balance sheet of government units, the leverage ratio of local governments is obviously too high. More corresponding adjustments should be made to increase the leverage ratio of the central government.
In real estate, efforts to contain risk, reduce real estate bubbles, keep developers' funding chains healthy and make homes more affordable should be more integrated to safeguard the steady growth of the sector. The government should also better balance industrial land area, which seems to be seeing a surplus, and also residential land area. Also, the government should be clear about effects of regulations preventing risk to avoid damage to the systemic health of the overall property sector.
Looking at the performance of market players in recent years, though sharp revenue rises were seen among State-owned enterprises, we can see that downward pressure on the economy is still increasing, suggesting that only with overall improvement can the economy stay on a steady growth track. Therefore, efforts should be enhanced to make allocations, through market-oriented means, of resources between SOEs and other enterprises more reasonable.
Also, China is seeking a consumption-driven economy, which is consistent with the goal of realizing common prosperity proposed by many top documents, as the goal is to ultimately narrow the income gap, increase the proportion of middle-income earners and promote better public services, which are all conducive to consumption growth. To this end, it is necessary to make adjustments in China's fiscal expenditure structure, in which the major part of subsidies should be steered toward the residential sector, instead of the corporate sector.
Subsidies to the residential sector can promote consumption in a direct and efficient way, and in return, the increase in consumer demand can boost investment in the corporate sector and bolster effective supply, which is more conducive to achieving smoother domestic circulation than offering subsidies directly to enterprises (even some zombie companies). Tax reform and the tertiary distribution can also be conducive to improving household income structure, which can fundamentally stimulate sustainable consumption activity.
In conclusion, the government must have a clear understanding of the current economic situation and the risks we may face. The triple pressures of shrinking demand, disrupted supply and weakening expectations should be given sufficient attention, as it could help prevent downward pressure on the economy from becoming a long-term phenomenon.
China's per capita GDP has exceeded $12,000 and the country has eliminated absolute poverty in 2020－all great achievements for a giant economy with a huge population. But it does not mean that China has completely crossed the middle-income trap. There are cases in history that countries which had already become high-income economies were once again haunted by old troubles due to long-term stagnation.
The writer is chief economist at Zhongtai Securities. This article is part of an op-ed by the writer to the China Chief Economist Forum, a think tank.
The views don't necessarily reflect those of China Daily.
