Prospects for the Chinese Economy
The Motivating Power of Economic Development
In the past, when China was known as “world factory,” the country’s economic development relied on labor-intensive processing industry and middle- and low-end manufacturing. Rising labor costs, however, lost these industries their comparative advantages. The development mode of expanding quantity and scale and relying on investment to propel economic growth, however, does not suit the new conditions, Li Yining said. In future, economic growth must rely on the people’s innovative spirit and entrepreneurial activities. The people’s creative power will, in effect, provide the motivating force.
As is generally known, the dynamic mechanism of a country’s economic growth lies in the steady rise of labor productivity and in continuous technical innovation and industrial upgrading. Innovation can push forward energy conservation and emission reduction, and optimize configuration of the means of production, Li Yizhong said. Through innovation, we can push forward the intelligentizing, digitization and networking of the manufacturing industry, and improve the efficiency of production tools. And through innovation, labor-intensive industries can realize mechanization and automation. “Machines replace human beings, and human beings control machines,” is hence the mode through which to improve labor productivity. In addition, innovation can also promote breakthroughs in the country’s major scientific and technological projects and industrial generic technologies.
Economist Justin Yifu Lin holds that technical innovation and industrial upgrading are late-mover advantages in the international cutting-edge technologies of developing countries. Their use can accelerate their growth to double or triple that of developed countries.
China’s industrial restructuring has eliminated many enterprises that relied on low costs to develop. Innovative enterprises that generate profits through new patterns of consumption and commercialization, however, are growing rapidly. Consumption upgrading provides broad markets for enterprise innovation.
In his government work report Li Keqiang called for entrepreneurship and innovation by the broad masses of the people. China has a population of 1.3 billion and a labor force of 900 million. The country thus has infinite reserves of creative power which, when pooled, will form a huge source of kinetic development energy.
SOE Reforms Inject Vitality into Economy
Last year’s launch of mixed ownership was the prelude to a new round of SOE (state-owned enterprise) reforms. In July 2014, the State-owned Assets Supervision and Administration Commission announced the first batch of six centrally administered SOEs that would become the pilots for the new round reform. They included China Oil and Foodstuffs Corporation and China National Pharmaceutical Corporation. Meanwhile, reforms have also been launched in the high-speed rail and nuclear power fields.
Gan Lianfang, president of Beijing Xingpai Group, holds that developing mixed ownership has revitalized the economy. He added that the Xingpai Group and China Life Insurance have made greater achievements in their first real estate venture than expected, and that they have begun their second round of cooperation in the health industry. They will eventually establish “China Life · Xingpai Health Management Investment Co., Ltd.,” so making platformization, capitalization, internationalization, chain-orientation, and marketization their development orientation, through using their respective advantages.
“China Life’s advantages are its brand name, comprehensive strength, and reputation, while ours consist in our mechanism, system, and efficiency. Our cooperation thus brings these advantages into full play, minimizing our disadvantages. We have reached consensus on this point,” Gan Lianfang said. “For instance, China Life Insurance’s decision-making mechanism is slow, but I can use our flexible mechanism to offset it. Before the establishment of our joint venture, I pad-funded RMB 30 million to set up a healthcare experience center for seniors. By doing so, I made full use of our flexible decision-making mechanism advantage. So far, the market response is very good.”
Li Yining holds that implementation is the key to SOE reforms. Every enterprise should have its own approach, and methods cannot be duplicated. Various trades, including monopoly industries and competitive industries, are different, and enterprises are on different scales. It is impossible to use one mode for all enterprises.
Further Marketization of the RMB
On March 1, 2015, the People’s Bank of China, China’s central bank, decided to lower its deposit and loan interest rates 0.25 percentage points respectively. This is the second interest cut since November 2014. In addition, on February 4, 2015, the central bank lowered the reserve requirement ratio (RRR). Thus, China has entered the cycle of interest and RRR cuts. Up to now, the RMB has shown persistent weakness against the US dollar, creating an almost two-year low. This has triggered speculation that the RMB is joining the devaluation ranks.
Yi Gang, vice governor of China’s central bank and chief of the State Administration of Foreign Exchange, unequivocally refuted this rumor. “If we take look at the basket of currencies, the depreciation of the euro and Japanese yen both surpassed 10 percent, while the Renminbi only depreciated 2 percent. Both the real effective exchange rate and nominal effective exchange rate of the Renminbi are going strong. If we say that the US dollar is the strongest currency, then the Renminbi is the second strongest currency.”
Yi Gang holds that, fundamentally speaking, the Renminbi has undergone appreciation for a decade. Having remained basically stable, it has thus achieved equilibrium. At present, the prospects for China’s economic growth are optimistic. Although the growth rate has changed from high speed to medium-to-high speed, GDP growth is still relatively fast compared with other world economies. In addition, the current account surplus in China’s international balance of payment is substantial, and exports exceed imports. This is crucial to maintaining fundamental foreign exchange market stability.
Meanwhile, the Renminbi’s internationalization has accelerated. The world has a certain demand for Renminbi in trade, foreign investment and asset allocation. Asset management companies and asset managers of various countries are willing to hold RMB bonds, shares or RMB-denominated assets. Yi Gang holds, therefore, that in the long run, the Renminbi will be a stable currency, and that Renminbi movements are within the normal range. Two-way fluctuations, furthermore, will become normal.
As for Renminbi internationalization, Yi Gang sees this as a marketization process. When conditions are ripe, success will come. “If overseas enterprises, residents, financial institutions and financial markets need Renminbi, this is the proactive choice of main market players out of their own interests. It accords with market forces wherein resource allocation plays a decisive role in the laws of the market. Therefore, whether Renminbi internationalization is fast or slow is the choice of the market. The Renminbi is evermore market-orientated, and the Chinese government has no timetable for Renminbi internationalization.”
