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Annual Conference 2015: Finding new engines for growth

On October 29-30, "Annual Conference 2015: Finding new engines for growth " co-hosted by SIFL Institute and Reinventing Bretton Woods Committee was convened in Shanghai. More than 40 experts and scholars including Mr. Li Buyun, well-known jurist and president of SIFL Institute, Mr. Marc Uzan, executive director and founder of the Reinventing Bretton Woods Committee, and Mr. Jean Pierre Landau, the former Vice-President of Bank of France as well as more than 20 financial senior experts including Reza Moghadam, Vice Chairman of Global Capital Market & Head of Sovereign Debt Coverage at Morgan Stanley and David Fernandez, Managing Director of fixed income, currencies and commodities research of Asia Pacific at Barclay, discussing on new engines for the next round of economic growth by centering the topic of the status of China's long-term economic reform and short-term pro-growth. The following are quotes of several lecturers of the meeting:

Li Buyun, president of SIFL Institute

The engine for long-term growth comes from the ongoing reform

In these two years, China’s economy faced major challenges, including demand growth crisis, ageing of population, aggravation of wealth disparity and other problems. Economic growth is shifting down. And this phenomenon has been called the New Normal since 2014.

Absolutely, the engine of long-term growth originates from reform. To achieve sustainable growth in China, we need to transfer from factor-driven to innovation-driven growth, from single economic reform to all-dimensional reform, and from versatile government to rule of law government and limited government. The key point for all reforms is to make the market exert its decisive role and solve the social equity problem.

We are glad to see that this session of government streamlines its administration and delegates power to the lower levels, and lets the market to have the final say in resource allocation. They've also done much in terms of construction of rule of law and gained remarkable achievements. However, restrictions in reality are also obvious. The periodic pains arising out of de-leverage and elimination of backward capacity and industrial anxiety are all reasons why the comprehensive deepening of reform is deferred in implementation. There are gap between the actual state-owned enterprise reform, land reform, household registration reform, factor price and administration approval and the market expectation. Some reforms are moving slowly and some even starts eroding the reform achievements made in the last decade.


Wei Benhua,former Deputy Chief of SAFE

China’s economy contributed 40% to the global growth

China’s economy is an integral part of the global economy. Especially after the global financial crisis, it has provided 30%-40% of the total global economic growth. This is the practical contribution we've made as a kind of supplying side. However, this figure also has another implication, which is, if the demanding side is weakened, China’s economy is bound to be impacted.

Jean Pierre Landau, Dean of School of Public Affairs. Sciences Po (Paris)

China's dominance of the global finance has its explicit pathway

In the past decade, China is the primary stabilizing factor in the global financial system. In the Asian financial crisis in 1997 and 1998 and the latest subprime mortgage crisis, China promulgated effective policies and the leaders of China brought confidence and overall stability to the global economy. During the European debt crisis, many Chinese leaders visited Europe and brought massive confidence to European economy, helping them in overcoming difficulties.

Therefore, China will still be a leading role in the global financial system in future. However, will China still stabilize the market and lead the new system of global finance? This is mainly decided by three aspects: firstly, will China control well the pace of steps for shaping the new currency system, such as capital account liberalization and implementation of floating exchange rate system; secondly, whether Renminbi is qualified to assume relevant responsibilities as an international currency, such as supporting other economies in predicament by currency swap; and thirdly, to what extent will the opening of China to the global economy actually reach.


Reza Mogladam, Vice Chairman Global Capital Markets & Head of Sovereign Debt Coverage at Morgan Stanley

Renminbi has become the third principal currency in international trade settlement

Renminbi has held the balance in global trade. In August 2015, Chinese Renminbi has been listed as the third currency for world trade settlement.

This can be a chance for China's capital account liberalization and China's integration into the global market. After such integration, China's deposit can flow in all directions around the world and other countries and regions may become interested in Chinese investment. This is a mutual benefit.

How can China enter into the global market? One problem is the exchange rate. We've talked a lot on this topic. From the perspective of a financial institute, different countries actually have different exchange rate problems. However, the concern on policy transparency and the sustainability of policies is extremely important. We just talked about the huge changes in August. Indeed, we all feel surprised about the sudden upgrade and wonder if the changes are sustainable and transparent. How to make the choice between fixed exchange rate and liberalization? This consideration is made from the perspective of the financial market. China needs to solve such kind of problem if it wants to integrate into global financial market and open up its capital market. As time go by, we should push forward consideration on this problem.

Anoop Singh, Adjunct Professor at Lee Kuan Yew School of Public Policy

Growth driven by investment won't last long

No doubt, China's economy is decelerating and will be weaker in 2015. Will China rebounds in the next middle-term stage as it did in 1998? One of the risks China is confronting with is investment risk. Credit is a problem. Investors' investment in China is mainly driven by the issuance of loans. However, investment relying on loans is not sustainable. We need to change and to have more efficiency and more sustainable growth.

Lu Ming,Distinguished Professor of Economics at Shanghai Jiao Tong University

New growth engine originates from new balance

The government should promote the entire national development strategy from three aspects: firstly, exert market function of the municipal level. The fundamental solution for urban diseases as a result of population agglomeration is economic development and enhancement of public service, instead of administrative determination of who should reside in where; secondly, further improve free flow of migrant population; lastly, at the level of the entire nation, we should pursue both efficiency and equality. We should stress on relocation between urban and rural areas and between regions. And in terms of equality, China is a natural unified currency area. For a natural unified currency area, if economic policy does not stress on filling the gap between the rates of labor productivity of different regions, the underdeveloped places will face limitation on development and rely more on loans. This is the same story as it is in the Europe.

Shao Yu,Chief Economist of China orient Securities Company

We need to better serve the 300 million migrant laborers

The previous engines driving China’s economy were the troika and the new are certainly to be the upgrade of the troika. The new troika is: firstly, deep urbanization, which covers the ultra-long investment in education and public services and the infrastructure construction of core city circles, including the construction of smart city, sponge city and a series of investment projects, so as to provide real service to the 300 million migrant laborers--this is the origin of new deep-going urbanization. Secondly, consumption upgrades. The reason we bought toilet lids even band-aids from Japan is because we don't believe that China can provide products with corresponding quality, and quality life has become the core demands of the uprising middle class. Thirdly, let us look at TTP and TTIP, the blank space are in the "One Belt and One Road", which means to invest, on the strength of high-speed rail and nuclear projects, in Asian-Pacific areas which are not so developed. Benefits reside together with risks. This is the new troika.

Wei Sen,Director of Institute of Economic Thoughts and Economic History at Fudan University

Watch out for spiral aggravation of debts

As for the radical reason of China's economic downturn in recent years, it is the 2008 stimulation, which issued currency massively and the M2 went up to 29.7% in 2009. Actually, the economic hardship is just because that the repayment of the said stimulation is about to be due. US economy once had no negative growth for 20 years and the economy suddenly halted because the repayment was due in 2007. China should be particularly heed of this spiral aggregation of debts under such situation.

ZHU Haibing, chief economist for China of J. P. Morgan

China should also consider land and household registration reform after "Second-child policy"

Currently, economy has entered a period of downturn, which is similar to some extent with the period before the 1990 economic reform. Then can we bring about the new round of rebound by a new round of so-called reform dividends in the new five-year plan?

Why could the previous reform bring a two-digit rebound? There were two catalyzing factors: first, the reform in real estate market and following which, a series of reforms, including urban land transfer, infrastructure construction supported by land finance, urbanization, industrialization and real estate whipping up a new round of strong economic growth; second, China's entering into WTO in 2000. Although there were controversies about this policy, the result was irrefutable. After entering into WTO, China's export gained a 20% annual growth.

What are the supports for the next economic structure transformation? According to the announcement issued by the Fifth plenary session yesterday, the first key point is innovation, which may bring middle and long-term growth. However, the public's interpretation of innovation is more likely to be “the massive entrepreneurship and innovation by all". Actually, it is more reflected in innovation of business modes, but not innovation in technical upgrade. We can never worry about innovation of business mode in China because Chinese really like to bypass the rules. But we are urgently in need of technological upgrade.

What are the new growth engines for economy in future? We heard the news of approving second-child policy. It is better that this policy comes earlier than later. Population policy adjustment is a very positive measure and I support we move further forward-- to completely release the control on family plan.

However, on the other side, we also see that population policy adjustment is of long-term effect. In the next 5-10 years when population dividends are waning, on which basis should we create new growth? A possible direction is household registration or land reform, which means to initiate collective transfer of rural collectively-owned lands. After the collective transfer of rural lands are completed, what should we do with the money gained? We should allocate more on welfare, education and medical supports after peasants immigrating to cities and thus to support the next round of new urbanization. Peasants can not only find jobs in cities, but also settled down there, which provides driving force for the middle-long-term consumption transformation.


XU Biao, chief strategy analyst of Anxin Securities

Capital market in China will keep its prosperity in future  

“China dream”, an object that represents economic growth speed, is still the object decided on the Fifth Plenary Sessions. In other words, an average annual 6-7% economic growth speed kept from now to 2020 will not be changed as calculated.

Now let’s look out the four major growth engines—land, labor force, capital and technology. Currently, keeping relying on investment will further worsen the excess capacity, the universal two-child policy will “not save the aging problem at present”, while land reformation can hardly make real progress for it needs a large scale of privatization imperative on property right. So the real growth engine for China can only be technological progress.

Technological progress could be divided into two modes on the side of global experience:

One is the German mode: German enterprises could resist the loneliness since they take generations of people to turn the technological breakthrough to advantages on production.

The other is the American mode: “someone always pays for it”. “Someone” here is capital market. The economic bubble in 1990s successfully help the US economy hit another peak, but the ordinary investors paid for it with lots of funds in the end.

In China, technological progress is the “the massive entrepreneurship and innovation by all” proposed by Premier Li Keqiang, which shall also be achieved with the promotion of capital market. Realizing the breakthrough of technology as well as creation of commercial mode supporting by capital market is the only way to keep China in 6-7% economic growth in s short time.

“China dream” will not be realized without starting a business and creation, while the realization of these two elements shall have to rely on capital market prosperity. Although capital market has been in strong shock since June, 2015, its prosperity, including its endurance in next few years may exceed the best imagine earlier.


YAN Se, Associate professor at the Department of Applied Economics, Guanghua School of Management, Peking University

China has a high implicit domestic tariff

For a long time, Chinese market integration degree is worse. It is seriously divided, which is another reason that causes a low economic efficiency. Among the manufacturing industries in China, the average productivity of export enterprises cannot catch up with domestic trade enterprises. In other words, in China, engaging in domestic market may be harder than engaging in international market.

How’s that happened? Imperfect commercial environment makes trade cost high; high regional protectionism standards limit the access; divided market makes region-cross logistics cost and trade cost among different regions very high; sales channel is limited due to high marketing costs.

Regional protectionism is popular as well, especially for industries like tobacco, liquor, automobile, food, drugs and electricity.

What’s more, even if there is no cultural or language limitation for actual trade cost among provinces, the trade cost among provinces is higher than the international one, which approaches to the one among EU and the USA and Canada. The logistics cost in China takes about 18% of GDP, which is higher than the ones of developed countries in the USA, Japan, etc., or even higher than the developing countries. However, the most important element of logistics cost is penalty cost rather than charge cost.

If we regard China as Europe, while each province as a small country, we could regard the trade cost among provinces as a tariff. This tariff is the implicit one as we called. Our research indicates that the implicit tariff in 1992 is 48%, while the one in 1997 is 53%. And the implicit tariff in 2005 is 28%.


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