We are very pleased to announce that the premier episode of the Sinical China podcast is now online. Liu Qiao, dean of Peking University’s Guanghua School of Management, is invited to shed light on China’s incoming reform initiatives and their implications in the wake of the Party’s reform-themed third plenum. Xu Zeyu, senior journalist with Xinhua News Agency and founder of Sinical China, hosts the podcast.
The following is the link and a full transcript of the podcast, recorded July 25 and broadcast July 26.
Xu Zeyu:
Welcome to the premier episode of Sinical China. I am Xu Zeyu, senior journalist with Xinhua News Agency and the host for this podcast. China’s ruling Communist Party of China has just concluded a pivotal leadership meeting known as the “third plenary session.” Attended by over 300 Party’s ranking officials, the four-day meeting released an important resolution that is set to project the trajectory of the country’s economic reform in the next five years. In 1978, the first such reform-themed “third plenum” inaugurated a dazzling four-decade-long economic rise. So what about this time? In which direction will the meeting steer the world’s second-biggest economy? How will China tackle a series of institutional issues to break the economic headwinds? And, what are the implications for China’s relationship with the rest of the world? I am privileged to welcome Liu Qiao, who is now a professor of finance and the dean of Peking University’s Guanghua School of Management. Prof. Liu, thank you for joining our discussion today.
Liu Qiao:
My pleasure.
Xu Zeyu:
Before and after this year’s third plenary session, some overseas China-watchers played down the expectations and believed there would hardly be any groundbreaking reform policy coming out it. Judging from the meeting’s resolution, what is your view on the extent and depth of the upcoming reform? And what kind of reform benefits can we expect for the next five years and beyond?
Liu Qiao:
Yeah, actually I think this is a very important meeting. The third plenary session basically set about 300 reform measures. I think it's a very comprehensive set of reform measures, which cover pretty much every aspect of China's economic and social development in the next five to ten years. And also, I think the resolution has made it very clear that all of the reform measures should be completed in five years’ time. Therefore, that is going to lay down a very solid foundation and institutional support for Chinese modernization. I think that is basically the message I take from this meeting now.
Xu Zeyu:
Okay, let's get to some of the details. Compared to the 2013 meeting’s document, the resolution of this year has devoted a lot more to the reforms in the sector of science and technology. It is seen as a move to further develop what the Chinese leadership hailed as “new quality productive forces,” which was said to be characterized by a significant increase in total factor productivity, or TFP. So, according to your view, how has China’s overall TFP changed over the past few years? And has the new reform roadmap offered any policy measures to boost TFP?
Liu Qiao:
Yeah, I think, definitely, TFP growth rate is a fundamental driver of the economic growth. I think in the past three or four decades, we have been seeing the dynamic change of TFP growth in China. I think the first three decades—from 1980 all the way to 2009—China maintained a very high TFP growth rate, which was above 4% per year. That translated into, I think, about 10% of GDP growth rate. But since 2010, because China has more or less completed the industrialization process. Therefore, the TFP growth rate has declined to about 1.5%, but some estimates say it's 1.8% or 1.2%. By any case, it is below 2%. So that actually casts some doubt on China's future growth momentum. If you have only like 1.2% of the TFP growth rate, I think the GDP growth rate will be somewhere around 3% or 4%, which is below the 5% required GDP growth rate for China to basically realize Chinese modernization. So I think this is a challenging phase, and, to a great extent, I believe that the Chinese government proposed the concept of high-quality development, and also President Xi introduced the term “new quality productive forces.” I think the underlying logic is that we need new productive forces. We need technological innovations. We need a comprehensive set of reform measures to unleash the growth of TFP. So I think given that, I somehow believe that in the next 5 years, with all of those reform measures in place, with the development of science and technological innovations, China can recover its TFP growth rate. And I believe it's going to move back to above 2% level, given that a 5% annual growth can be achieved. I think that is the bottom line. That is what we need to basically realize the Chinese modernization by 2035.
Xu Zeyu:
Building on my last question, and, of course, your answer. By heavily investing in the scientific and technological innovation, China has continued to climb up the global value chain. And this third plenum seemed to have signaled China’s resolve to stick to this path. Some people came to worry that this move would incur backlashes from the developed world like the United States and Europe. Do you see this as a valid argument, and will China be subject to more hostile protectionist moves because of its push in sci-tech innovation?
Liu Qiao:
Yeah, actually we're seeing some changes in the global market. The people are talking about de-globalization. Right now, I think the narrative has changed to re-globalization. So in any case, we're seeing that different economies, different countries are trying to restructure their value chains, and industrial chains. In China's case, we rely on the global supply chain heavily, because China is one of the largest exporters and importers in the world. But if you look at the position of China along this global value chain, we are located more or less downstream or midstream. I think in economics we have a term “upstreamness.” Upstreamness basically measures the extent of a country or economy’s position in the global value chain. I think our upstreamness is quite low, which means that we have to rely on foreign countries for very important inputs, key components, important patents, all those things. So I think given the change in the global environment, I think if you rely on other countries for the most important ingredients for your products and services, it increases a lot of risk. So given that, I think it's a must-do for China to move upstream along the global value chain, which means that you’re going to get into the area in which you rely on foreign countries before. So the only way to do that is R&D, and more fundamental research, or input in these areas. So I think that is China's reaction or response to the challenging external environment. You can argue that it's not cost-effective, right? Because basically you deviate from the specialization, which is one of the fundamental laws of economics. But that's not given what is changing in the global environment. This is something China has to plan, has to conduct strategically in the next years.
Xu Zeyu:
At this third plenary session, the Party vowed to finish building a “high-standard socialist market economy” by 2035. Ever since 1992, the Party long used the expression “socialist market economy” in official documents. What does it mean to add a prefix “high-standard” in the phrase this time? What implications does it have for the country’s private sector in the future?
Liu Qiao:
Yeah, I think you're right. The resolution actually emphasizes the goal, the target of reform is to establish a high-standard socialist market economy. “High-standard” actually is one big step further, compared to the simple term “socialist market economy.” I understand, my understanding is that there are quite a few aspects. The resolution of the third plenary session has set up some reform measures, trying to improve the efficiency, trying to improve the performance in different aspects. I want to raise one or two examples. For example, when it comes to private enterprises, I think this time the resolution has made it very clear that the reform is to try to establish a level playing field, so as to deepen the reform in the factor market, such as land use right, from finance and important raw materials to ensure that the market is going to play a decisive role in terms of allocating those production factors. I think that is a very important new message, which means that the market itself right now is playing a very important role in the allocation of final goods. But this time I think it’s turn to see some real progress in the reform of factor market. So that is one example. Another example is about—I said it earlier— is about private firms. It has made it very clear that any firms, regardless of your form of ownership, should have equal access to the market, to different factors. I think that is a very strong message, which means that on top of “two unshakables,” I mean SOEs and private economies, private sectors are equally important and should be treated equally in all aspects. So I think that basically indicates the market economy we try to build in the next years will be a high-standard market economy. I think it has implications for private firms and I think hopefully this is going to recover their confidence level, and strengthen their confidence in the future.
Xu Zeyu：
Now that we talked about the market economy and its environment, there is an unavoidable fact that China has long grappled with a sluggish domestic demand. Do you see any plausible reform initiatives from this third plenum that might meaningfully boost the consumption?
Liu Qiao：
Yeah, I think when we talk about the high-standard socialist market economy, it also implies that the growth model is going to change from the old investment-driven model to a consumption-driven model. Because I think the motivation for reforms is to realize Chinese modernization. So letting people benefit from reform, from economic development is very important. On that front, I think changing the growth model to a consumption-driven model is one big change going forward. The third plenum session has many areas talking about how to improve consumption, how to increase the demand, especially domestic demand that people can benefit from the reform. I think there are a couple of points. For example, you talked about how to increase the disposable income of the household. Currently, household income only accounts for about 43% of China's GDP. Going forward, a very large number of reform measures have been proposed, trying to boost this number. I think that is our one very specific way to boost domestic demand. And once we talk about how to develop and promote the service sector, using digital transformation and other technologies to create consumption scenarios becomes something easier and more accessible for Chinese people. I think those reforms basically can help create an environment which can benefit the consumers, which can help increase consumption. We have quite a lot of reform measures which target this aspect.
Xu Zeyu：
On another note, there is a chapter in this year’s resolution that specifically elaborates on the fiscal and tax reforms. It stipulates that the central government will henceforth shoulder more expenditure responsibility and the local government will be entitled to more sources of revenues. Do you see it as a viable solution to the accumulated debt problems for the local authorities? And how do you think this reform will be implemented?
Liu Qiao：
I think in the past 30 years, we have seen that the local government played a very significant role in local economic development. And in terms of tax revenue and expenditures, I think we're seeing some imbalance. Local governments have largely relied on the central government’s fiscal transfer and also land sales as a source of expenditures. But in recent years, I think we're seeing a drop in the real estate market, both in investment and also the property price. Therefore, the revenue from land sales is declining and that creates some problems for the local governments. Because you used to have much more income source, but right now the income source from land sales and the local government borrowing platforms actually are shrinking, now getting smaller and smaller. So I think this is one of the root causes of the local government debt problem. So to solve this problem, the third plenary session, I mean in the resolution, has made it very clear it's important, it's a must to balance what the local government does and the size of the local government’s tax revenue. You have to build this to be balanced, you cannot overspend. I think there are two ways of achieving this re-balance. Number one, trying to increase local governments’ tax revenue so as to give them some additional tax source. Therefore they can have much more revenue than before. So I think there are people talking about consumption tax which will be shared by the central government and local governments. I think that is one of the directions we're seeing in the resolution. And the other point is probably trying to change the scope of local governments’ operations. I think going forward, we expect our local government will change, probably the KPI will also change. So GDP will not be the only indicator when it comes to performance assessment. There will be more diverse indicators including whether, you know, you can make the local economy develop in a sustainable manner and whether it is a harmonic society and whether you have a very friendly dynamic business environment, which is conducive to private enterprises. So I think those things will be incorporated into the performance assessment going forward. And that will help achieve the balance between what the government has and what local government will do in the future.
Xu Zeyu：
The Communist Party of China’s third plenary session has huge implications, not just for China, but also for the world. So, what do you think are the signals for foreign investors from this meeting? Granted, there are many measures that enable foreign capital to participate in China’s economic activities on an equal footing. There are still concerns that some of the policies will not be thoroughly put in place. Are you expected to see a rise in global investors’ confidence in the Chinese market after this meeting?
Liu Qiao：
So I think as it is stated in the resolution, those reform measures are trying to set up, I think, institutional support for China's modernization in the future. So I think with those reform measures in place, I think that is going to help increase China's TFP growth rate and facilitate China's transition from fast growth model to high-quality growth model. And China right now, I think, accounts for about 30% of global growth. So if China can grow in a sustainable manner, I think that is a good news for the whole world. So given that I think China is gonna be still very important not just because it has a very large market, it's a very important market for global firms, it is also because China's healthy development, sustainable development can contribute to the world, can drag the global goals forward. So I think it's very important for foreign investors. I believe that it's really hard for them to find a market as dynamic, as large-sized as China in the near future. I think in the past years there has been a discussion about who is going to be the next China. And I think pretty much I tend to agree with the judgment that the next China is still China, especially with all those very comprehensive reform measures put in place. I believe that the growth momentum will continue. And China will identify new growth engines in different areas. And new industries, strategic new industries and the future industries will emerge, and that means a huge amount of investment opportunities not just for foreign investment but also for local investors. So the problem is how we can make these reform measures become reality. And I think it takes hard work. It takes determination, takes concerted efforts, from different sectors. I am confident that those reform measures definitely will lay down a solid foundation for China's future development, especially for the next five to ten years.
Xu Zeyu：
Thank you Prof. Liu Qiao for sharing your insights on this issue. Prof. Liu is the dean of Peking University’s Guanghua School of Management. I am Xu Zeyu, with Xinhua News Agency. That is all for this episode of Sinical China podcast.
For more analysis of this year’s third plenum, you are welcome to read the article Xu Zeyu wrote on July 18 upon the meeting’s closure:
Subscribe to Sinical China for more original pieces to help you read Chinese news between the lines. Xu Zeyu, founder of Sinical China, is a senior correspondent with Xinhua News Agency, China’s official newswire. Follow him on X (Twitter) @XuZeyu_Philip
Chen Pu is also a journalist with Xinhua and a researcher at Sinical China. Zhang Congcong serves as an intern at the institute. They have contributed to this interview.
Disclaimer: The published pieces in Sinical China reflect only the authors’ personal opinions, and shall NOT be taken as Xinhua News Agency’s stance or perception.
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