Is China’s economy declining?
(Professor Hua Min, director of the Institute of World Economy at Fudan University)
On February 18, 2014, Professor Hua Min, director of the Institute of World Economy at Fudan University, gave the speech with the title of “the declining trend of China’s economic growth is hard to be reversed” for the 38th session of “Hongru Forum”. Under the theoretical framework of open economy, Prof. Hua analyzed a series of troublesome problems that China’s economy is facing now due to policy mistakes after 2004.
Though the economy in developed countries has recovering after 2008, it doesn’t mean that China’s external economic environment becomes better. Prof. Hua pointed it out from the international capital flow directions: short-term capitals flow into the emerging markets while long-term capitals flow into developed countries. In such situation, once the fed quits QE, interest rates in developed countries would be raised which would greatly hit the emerging markets. Now, there are aggressive short RMB positions in the financial market.
Why? This is related to China’s monetary policies: when developed countries cut interests and carry out quantitative easing, China carries out tight monetary policies to prevent inflation. Prof. Hua highlighted the key lies in the Yuan funds outstanding for foreign exchange.
Then, Prof. Hua emphasized that China’s economy has faced three major problems after 2004: (1) Decreasing returns (2) Widening income gap (3) Continuous trade surplus. Then wrong coping policies greatly affect China’s future economic growth.
To deal with the problem of decreasing returns, the governmental policies are structure adjustments and industrial upgrading. But the economic structure is restrained by resource endowment, and it is always the result of economic growth, but not the reason. In order to develop high and new technology industries, the government also has actively cut away the industries of steel and cement etc. that are defined as “excessive production capacity.” This has not only indirectly caused the real economy capitals to flow to the fields of real estate and informal finance, more importantly, under the open economy, the market of tradable goods have never been restricted to domestic market, the “excessive production capacity” can never take the domestic consumption ability as the calculation foundation. Hua stressed that aiming at the problem, the government should increase investments in human capital and the labor force such as migrant workers should be trained.
For the problem of widening income gap, the policy put forward by the government is the income redistribution policy. The income redistribution policy means the sharp rise of governmental taxation. The resources within the hands of the government are concentrating, and at the same time, the macro economy efficiency is sacrificed. Prof. Hua pointed out that “once there’s widening income gap, factors there cannot move freely,” and what the government should do is to promote population mobility.
For the problem of trade surplus, the policy put forward by the government is unilateral appreciation (only rise but no decline) and the raise in salary. The unilateral appreciation is bad for the export-oriented economic development. At the same time, the economic growth cannot be stimulated by domestic demands. Because demand is the function for income, that is to say, demand is the result of income increase but not the economic growth engine. On the other hand, the raise in salary leads to the decline of employment. Prof. Hua explained that China should open more fields to foreign capitals to balancing trade surplus. China’s import is the function of export, so the trade surplus problem can not be solved if the strength of market is not used for adjusting the import and export industrial structures.
Though there are such wrong policies after 2004, Professor Hua Min thought that the Third Plenary Session of the 18th Central Committee of the Communist is the best top-level design since the reform and opening up. It has solved the long-term problems of China’s economy in institution: letting the market strength give play to decisive roles internally, aiming at the multilateral trade preference agreements within WTO member states, the decision of continuous opening up has been made, and the pilot area of Shanghai Free Trade Zone has been established.
Therefore, the policy suggestions put forward by Professor Hua Min are: export and industrial businesses should be encouraged again; the too rapid rise of housing prices should be controlled, the holding costs for houses should be increased, but not the transaction costs; under the trend of maintaining long-term economic growth, the capital items cannot be let go, the reason is that the arbitrage opportunities exist for short-term capitals due to the economic fluctuation; we shouldn’t let RMB be offshore, and we should let dollars be offshore. Because when dollars are offshore, the situation of the issuance of funds outstanding for foreign exchange reserves will become better.
“Hongru Forum” is a public seminar jointly launched by Liu Hongru Financial Education Foundation and SIFL Institute, and is held regularly once in two weeks. The seminar pays attention to various issues in China’s finance and macro-economy, and devotes itself to building a platform for cross boundary exchanges among excellent scholars, government and market institutions. Since August 2013, “Hongru Forum” has gained the exclusive support of Chang’An International Trust Co., Ltd.
