By Li Wei

Research Report Vol.20 No.5, 2018

Key Points:

● Whether the Chinese economy can adapt to changes and steer them in the direction beneficial for us, and take this opportunity to shift the economy from high-speed growth to high-quality development more quickly is something we have to pay close attention to. In general, the Chinese economic structure is being reshaped at a faster pace, stock problems and risky hazards are being defused gradually, and a new round of reform and opening-up measures is being implemented. Meanwhile, the international economic order is being adjusted more quickly, and the change of development mode and economic driver is coming to the crucial transitional period, in which pressing ahead is our only choice.

● During the fast-growing period and when coping with the financial crisis, the Chinese economy accumulated many prominent stock problems and risks. As we shift to high-quality development, we have to effectively solve those problems and risks, and quickly reshuffle and allocate resources to more efficient areas. To that end, the CPC Central Committee called on us to win three critical battles: preventing and resolving major risks, targeted poverty alleviation, and pollution control.

● In the past, domestic economic policies didn’t have direct international consequences, but now they have obvious spillover effects and draw more attention from the international community. China is changing from a passive follower of international economic and trade rules to be a rule maker. How to think about China’s relation with the outside world as it becomes an open power is a major topic we have to study as we push for high-quality development.

● After 40 years of reform and opening-up, China has significantly enhanced its overall strength and increased its presence and voice in international affairs. It has a firmer foundation for economic development, vast domestic demand, sufficient room for policy adjustment, and greater flexibility to fend off shocks. It has the capability and conditions to maintain high-quality development in the long term.

In the first half of this year, the Chinese economy maintained generally stable development amid notable changes in the international and domestic situation. Internationally, the trade frictions initiated by the United States escalated, economic issues were more seriously politicized, different countries saw economic recovery of various paces, and external uncertainties are increasing. Domestically, the short-term total demand faced downward pressure to some extent, some areas were going through the throes of transformation, and economy was in a critical period of shifting to high-quality development. In face with such a complicated situation that features volatility amid stability, we must be mindful that China’s economic fundamentals remain generally stable and are looking up. In the meantime, all regions and sectors, guided by the Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era, must strive for progress while maintaining stability, implement the new development concept and the requirement on high-quality development, and stick to the central task of supply-side structural reform. They should also resolutely follow the strategic decisions made by the CPC Central Committee on “de-leveraging, debt control, strict regulation, housing price control and tighter environmental protection”, give full play to their advantages, apply the macroeconomic policies flexibly and efficiently, and coordinate different policies. In this way, they can see that China has the capability and conditions to properly deal with all kinds of risks and challenges, continue the sound developing momentum, and steadily promote high-quality development.

I. China is in the Crucial Period of Shifting to High-quality Development

Change is a prominent feature of the current economic development. Whether the Chinese economy can adapt to changes and steer them in the direction beneficial for us, and take this opportunity to shift the economy from high-speed growth to high-quality development more quickly is something we have to pay close attention to. In general, the Chinese economic structure is being reshaped at a faster pace, stock problems and risky hazards are being defused gradually, and a new round of reform and opening-up measures is being implemented. Meanwhile, the international economic order is being adjusted more quickly, and the change of development mode and economic driver is coming to the crucial transitional period, in which pressing ahead is our only choice.

Economic structure is being reshaped at a faster pace. In terms of momentum structure, traditional economic drivers such as heavy chemical industry, real estate and infrastructure construction are growingly at a reduced speed, new economic sectors and drivers grow fast but still take a low proportion, and the associated medium- and high-level production factors need more nurturing. In terms of industrial structure, the proportion of tertiary sector continues to increase and reached 54.3% in the first half of this year. The secondary sector is improving its internal structure, and high-tech industry, high-end equipment manufacturing and strategic emerging industries are growing notably faster than the average. Regarding the supply-demand structure, consumers have an ever higher and more diversified and personalized demand with higher requirements on quality, which forces the supply system to adjust quickly in order to strike a supply-demand balance on a higher level. As to the structure of internal and external demand, in the first half of 2018, final consumption expenditure contributed 78.5% to economic growth, fixed assets investment increased steadily, and surplus of goods import/export narrowed by 26.7% from a year earlier. This means domestic demand contributed more to economic growth and it was more balanced with external demand. Although China’s economic structure is heading in a positive direction, our current economic driver structure, industrial structure, demand structure and factor input structure are far from meeting the requirement for high-quality development, which can only be met by continuously upgrading the economic structure.

Stock problems and risky hazards are being defused gradually. During the fast-growing period and when coping with the financial crisis, the Chinese economy accumulated many prominent stock problems and risks. As we shift to high-quality development, we have to effectively solve those problems and risks, and quickly reshuffle and allocate the resources to more efficient areas. To that end, the CPC Central Committee called on us to win three critical battles: preventing and resolving major risks, targeted poverty alleviation, and pollution control.Since last year, all departments have stepped up the efforts to resolve stock problems and dispel risks, focused on “de-leveraging, debt control, strict regulation, housing price control and tighter environmental protection”. Among these measures, de-leveraging lowers the speed of broad-sense credit expansion and especially makes off-balance-sheet financing keep contracting. Debt control regulates the local government’s financing channels and substantially controls the expansion of local hidden debts. Strict regulation regulates the operating and investment behaviors of financial industry and primarily curbs malpractices in such fields as financial holdings, asset management and Internet finance. Housing price control chills the excessive housing price hike and various real estate stakeholders are in a stalemate. Tighter environmental protection eliminates a group of enterprises failing to meet the environmental standards and gradually fosters the consensus on sustainability among local governments and the enterprises. To lay a solid foundation for high-quality development and get onto that sound track, we cannot delay the solution of stock problems and risky hazards, but have to constantly perfect the policies, properly deal with the relation among reform, development and stability, and continuously diagnose and address problems we encounter in economic operation.

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