Insights
Author: Fan Gang, President of CDI
Editor’s Note: China and the US have achieved substantial progress following their several rounds of high-level trade talks. The two countries are striving to reach a win-win agreement. What are the causes and effects of the trade frictions? More importantly, what are the solutions to break the impasse?
What are the causes of trade imbalance between China and the US?
The U.S. has run trade deficits for years on end for the following general factors: first, low savings rate contributes to trade deficits; second, the U.S., as an issuer of the global currency, must maintain a certain level of deficits if it wants to make the currency a reserve currency or a trading currency.
Balanced trade between China and the U.S. can be achieved if both countries capitalize on their comparative advantages, for example, with 20 million shirts produced by China traded for a U.S. Boeing airliner. If China needs high-tech products, but the U.S. will not sell them to China, the already existing deficits between the two will grow. Hoping to balance China-U.S. trade by having China import more U.S. soybeans, natural gas and pork will not work, as this is not possible without both countries leveraging their comparative advantages.
What impacts do China-U.S. trade frictions have on China?
The impact that we are actually seeing now is mostly on investment. Last year, investment recovered fast in the first quarter but fell back in the second quarter as soon as trade frictions appeared. Not only China’s investment had to be held back, but foreign investment as well. Against rising uncertainties, everyone stopped and waited, causing a huge drop in investment and fluctuations in the capital market. If frictions were to continue, it would pop a bubble for the stock market.
How can China improve itself to solve China-US trade frictions?
It is not fair to put all the blame on the US, as China also contributed to trade imbalance. China has developed over four decades of reform and opening up. However, several adjustments need to be made in the process.
China does practice mercantilism to some degree and has certain policies encouraging exports. After the Trump administration reduced taxes, the tax burden for American companies was over 10 percentages less than that for their Chinese counterparts, shoring up competitiveness. But China has a policy of export tax rebate, and once taxes on exported goods are refunded, the actual tax paid by the Chinese exporter will be lower. The export rebate policy thus contributes to trade surpluses.
China joined the WTO as a developing country, therefore enjoying a 15-year transition period, after which China must scrap its protection policies and remove unequal conditions regarding labor, intellectual property rights, tariff barriers, and investment restrictions, etc. Fifteen years have passed, objectively speaking, certain protection policies are still being implemented, but the Chinese government has announced its determination to abolish such policies. Chinese companies need to foster international competitiveness with less government protection.
What opportunities have China-U.S. trade frictions brought to China?
It is important to bear in mind other markets in the world, which are increasingly diversified. Chinese exports to the US account for only 17% of its all exports. If China is able to do well in other markets, then the trade volume will not suffer much. The current industrial chain is globalized, and the transnational industrial chain makes everyone share the impact of trade frictions. If China is blocked in the US market, it only needs to look to other markets in the world and our domestic market. If China can make the pie big, then more investment will come from various parts of the world.
Aside from trade frictions, technical restrictions may also curb China's development. Now the US believes that China has stolen their knowledge and technology, and they did not expect China to learn so fast. So they deem it necessary to halt that trend. This is therefore not a short-term trend, but is here to stay for a long time. It is better for inevitable things to come earlier than later, compelling China to think about what to do in future reform and opening-up.
Author: Fan Gang, President of CDI
Editor’s Note: The current slowdown in China's economic growth, while affected by the overall global economic sluggishness, is also inseparable from a number of overheating in China's own development process.
China’s emergence as an economic powerhouse is mainly determined by its own national conditions, not by the international landscape. At present, China faces strong downward pressure on economic growth because of the increasing costs of labor or environmental protection, and more importantly, cutting overcapacity and deleveraging, which have led to tightened monetary policy and lower leverage ratio, seriously constraining the development of private businesses.
The underlying problem is over-investment when the economy is overheated, which generates huge production capacity, whereas such demand is only an illusion, thus resulting in over-capacity. Investors fail to repay debts, resulting in bad debts and increasing leverage ratio.
In the face of economic overheating, the Chinese government has strong regulatory capacity and adopts a soft landing. Its advantage is to suppress bubbles before the full establishment of the long-term mechanism, to ensure that risks do not escalate into systemic ones and maintain sustained growth. The disadvantage is that many problems remain unresolved, with the emergence of more and more zombie enterprises and bad debts.
China's economic fluctuations are similar to those of other countries, with an average of 8% volatility, from 14% to 6%, as compared to 6% of many other countries, from 3% to minus 3%. The difference is that China’s economy is able to maintain growth.
The U.S. was at the lowest point of its economy when its market was cleared out. It arrived at that stage much earlier than China, while the latter is still in the process of digesting and clearing, tackling zombie companies, debt-for-equity swaps, and deleveraging. China has already moved from deleveraging to stabilizing leverage.
Globally, on the one hand, conflicts of interest have widened in various aspects. One important change is heightened trade conflict between the United States, the European Union, Japan and China. On the other hand, there are many uncertainties in the world, such as the U.S. stock market bubble and Brexit.
Considering the situation at home and abroad, we need to be prepared for relative downturns of China's economy. As Chinese economy nears its bottom, the government is adjusting and adopting easy monetary policies, such as lowering the reserve-deposit ratio. When the market is basically cleared towards the end of the cycle, China will enter the next round of growth.
Author: Zhang Yuge, Director, Hong Kong and Macao Research Department, CDI
Editor’s Note: The Development Plan Outline for the Guangdong-Hong Kong-Macao Greater Bay Area has been unveiled. What new attempts and practices in the Outline are worth attention?
The highly anticipated Development Plan Outline for the Guangdong-Hong Kong-Macao Greater Bay Area (hereinafter referred to as “the Outline”) has been unveiled. The new attempts and practices in the Outline can be seen in the following aspects.
Market-oriented and open development
The Guangdong-Hong Kong-Macao Greater Bay Area is characterized by “one country, two systems”, therefore a challenge it faces is that “the market connectivity needs to be further improved with effective and efficient flow of production factors”.
Both infrastructure connectivity and favorable policies for the smooth flow of production factors are essential to establishing an international innovation and technology hub and a globally competitive modern industrial system.
A free flow of various factors lies in leveraging the decisive role of markets in resource allocation. If production factors cannot flow effectively and efficiently, the role of the market will be compromised.
Progressive breakthroughs in policy innovation
innovations can be easily found in the Outline: “to progressively open up to Hong Kong and Macao the major national R&D equipments located in Guangdong”, “to enhance the cross-border management of medical data and bio-samples used for R&D cooperation projects in designated universities, institutes and laboratories in the Greater Bay Area”, “to initiate pilot projects for intellectual property securities”, “banking institutions in the Greater Bay Area may launch cross-border RMB businesses”, “enterprises in the Greater Bay Area may issue cross-border RMB bonds”, “to promote cross-border transactions of financial products in the Greater Bay Area” etc.
The implementation of a single innovation practice will effectively solve a specific problem, and even “compel” other problems to be solved. The combined effect of many innovations will facilitate progressive breakthroughs in policy innovation.
All-around high-quality development
The development goal of the Greater Bay Area is to “develop a vibrant and internationally competitive first-class bay area and world-class city cluster”, which in essence represents high-quality development. The building of the Greater Bay Area focuses growth more on quality instead of quantity.
Author: Fan Gang, President of CDI
Editor’s Note: The structural reform on the supply side and the macro control on the demand side run parallel to each other in face of economic fluctuations.
China still faces institutional defects, which necessitates institutional reform on the supply side. Supply-side structural reform is a long-term measure. In many cases where long-term structural reforms remain stagnant, short-term measures, which target the demand side, including fiscal expenditure, money supply, interest rates, tax rates, etc., need to be taken to maintain sustained development.
The structural reform on the supply side and the macro adjustment on the demand side run parallel to each other. On the one hand, reform must be pushed forward all the time, but in case of economic fluctuations, macro control measures shall be reasonably taken. In the absence of sustained growth, many reforms will find it difficult to move forward.
The adjustment on the demand side must have limits. The central government is responsible for macro control, including preventing inflation and high debt rate, while the local government does not have this responsibility. Thus the central government should be particularly careful about the control and contain local debt so that it can play its due role.
Author: Fan Gang, President of CDI
Editor’s Note: China’s central government has made important adjustments to the urbanization strategy, shifting from the strategy to develop small towns to developing large cities. Crucial to building big cities and large city clusters is the integration of transport and public services.
In the past 40 years of reform and opening up, China has experienced the largest and fastest industrialization and urbanization process in world history. At present, only about 55% of Chinese live in cities, and the process of urbanization is far from over. Recently, during the China International Import Expo, President Xi Jinping proposed to support the regional integrative development of the Yangtze River Delta as a national strategy. Recently, the Central Committee of the Communist Party of China and the State Council issued the “Opinions on Establishing a New Mechanism for More Effective Regional Coordination and Development”, which mandated the integrative development of major regions driven by the Beijing-Tianjin-Hebei cluster, Yangtze River Delta cluster, Guangdong-Hong Kong-Macao Greater Bay Area and Chengdu-Chongqing cluster. These recent developments signal a strategic shift from encouraging the development of small towns to that of big cities and large city clusters.
China will form a “3+N” city cluster layout.
The polarization of China’s real estate market is in essence a result of increasingly polarized population flow, which will lead to the formation of three super city clusters with a population of 100-200 million, and a number of big city clusters with a population of 30-50 million. The Beijing-Tianjin-Hebei region, the Yangtze River Delta, and the Guangdong-Hong Kong-Macao region have the potential for becoming super city clusters, while Wuhan, Zhengzhou, and the Chengdu-Chongqing region will likely see the emergence of big city clusters.
The development of big cities and large city clusters, in itself a response to people’s pursuit of a better life, conforms to the current dynamics of population movement and will contribute to economy of scale and the agglomeration effect. In this process, it is crucial to have a broad vision, for it would be necessary to draw lessons from the development of other countries and proactively make city plans in line with urbanization trends. The first priority is effective transport system that enables people to work and live in separate zones or cities, thus making it possible for big cities and surrounding small towns to have different functions. This also requires that small cities and towns around big cities have different functions to avoid overlaps.
Promoting regional coordination by drawing on China’s historical experience of “Imperial Commissioners” and “Provincial Governors”
To further promote the construction of large city clusters, it is imperative to solve problems of current administrative divisions for effective overall planning so that economic, industrial and research sectors within the region can complement each other in a coordinated way.
Large-scale regional planning is often hindered by administrative divisions, which requires coordination and guidance at a higher level. Compared with the joint deliberative organs such as the council of New York bay among other bay areas, effective coordination mechanisms in many domestic city clusters are yet to be formed. Measures such as holding annual joint meeting among city mayors so that they can share views on their own cities’ development and explore possible solutions for integrative growth are by no means easy to achieve.
In this respect, we can draw lessons from China’s historical experience: all dynasties in China have official positions such as the “Imperial Commissioner”, “Governor of Two Provinces”, “Governor of Guangdong and Guangxi”, etc., which are responsible for coordinating work in a case-by-case approach.
By far several regional coordination mechanisms have formed in China. The State Council has set up a Beijing-Tianjin-Hebei Collaborative Development Leading Group headed by China’s Vice Premier. The Yangtze River Delta and the Pearl River Delta may also require such an arrangement. Within a cluster, cities shall avoid forming similar industrial structure, but instead, develop a range of industries in different areas as well as different small city layouts to ensure coordination and complementarity.
Public services shall be enhanced for city clusters.
Strengthening the integration of public services is also crucial, including ensuring cross-regional coordination of medical services and equal access to education. It is important to minimize the influence of the household registration system and strive to achieve equal access to public services for permanent residents. This process will entail reform in economy, society and governance and will require the efforts of think tanks, research institutions and associations to jointly facilitate the sound development of urbanization.
Author: Fan Gang, President of CDI
Editor’s Note: It is imperative to reexamine fundamental aspects as we innovate the financial sector in order to ensure a bright prospect for its future development and to actually solve current problems.
The further development of China’s financial sector is unstoppable and is also something determined by China’s economic trends. Still, problems such as high leverage, risks and debts remain, which needs further investigation and analysis. Banks are constantly upgrading the technologies they use, such as APPs, networks, the internet, Fintech and big data, which are only natural as new technologies should be embraced by all industries. But the reason why the above-mentioned problems persist or are even worsening, especially regarding debts and the stock market, even as we try to innovate the financial sector, in my opinion is due to weak fundamentals. These fundamentals should be reexamined in the innovation process. As a late-mover, China wants to catch up with and even overtake advanced countries, but tends to only focus on the attractive side of finance but ignore its underlying rationale and past lessons of development. Thus it is important to consider how the financial sector should be developed by revisiting the fundamentals; this is the only way to effectively address the current problems to ensure robust prospect for the financial sector in future.
- Common sense
Money can be generated through investment but can never come out of thin air. The Ponzi scheme and any other financial practices that promise sustained high returns on investment are all frauds. Another common sense is about financial market regulation, especially for public finance. Regulation encourages innovation, provides confidence that risks can be controlled, and thus facilitates the development of new technologies and sound development in general.
- Fundamental integrity
Fundamental integrity refers to basic systems including legislation that punish and take preventive measures against dishonest behaviors. The essence of finance is credit, without which its development will go awry.
Mergers and acquisitions are a notable example. One main mission of finance is to ensure the survival of the fitter enterprises in the economic cycle, as less competitive enterprises are acquired by more competitive ones, so that their productivity can be more effectively used. But endless back-door deals following mergers and acquisitions render projects not operable. It is necessary to establish a credit system, otherwise the market will always face insurmountable challenges. Take for instance block chain, which is designed to make information transmission smoother and ensure privacy, therefore a means to reduce cost of enterprises and individuals in economic terms, including cost to expose false information or overcome information asymmetry. But the essence of block chain is providing information. If it contains false information, or in other words, if fundamental integrity is undermined, then information technology will only bring us disaster rather than progress. This means we should first address the basic issue of integrity.
- Fundamental nature
Finance, which provides money to users by acting as an intermediary based on credit, is in nature a service industry that accommodates the needs of the real economy. Through banks, securities, funds, insurances and financial management, the financial sector channels capital into the real economy to fuel its growth. Starting from investing in funds to developing the capital market is one way to develop the real economy.
4 Fundamental business forms
One important cause for lack of innovation in investment funds is not with finance, but with the property rights system. This goes back to the basic institutional issues, again that of property rights, not finance.
First, personal intellectual property rights can be capitalized and turned into stock rights to attract venture capital and concentrate capital and resources in the fields of scientific and technological innovation. The absence of corresponding systems has resulted in limited investment in new enterprises. Enterprises think that financing is to borrow money from banks, which is both costly and difficult. If funds are robust, enterprises would naturally be invested in by funds. Banks only provide liquidity for enterprises, while investment funds underpin their long-term development.
Secondly, many basic business forms have not been developed, such as financial intermediaries for mergers, acquisitions and reorganizations. This is also one fundamental issue that should be reexamined.
- Fundamental systems
The innovation of the financial sector and its further development depend on a robust fundamental system. Once they find advanced technologies, less developed countries tend to mistakenly focus only those latest technologies while ignoring the systems behind.
It is important to cement fundamental aspects as we embrace new technologies. As a result of the lack of a well-functioning fundamental system, coupled with the absence of fundamental common sense and corresponding means of regulation, new problems and frauds will emerge following the use of new technologies. This does not mean that innovation is bad, but that great importance shall be given to fundamentals in the process of innovation. Only in this way can the whole financial sector develop in a more sound and balanced way to better contribute to China’s economic development, the generation of wealth, and more efficient operations of capital and investment.
On December 11, the 2018 International Trade Forum was held in Shenzhen by China Development Institute in collaboration with Shenzhen Association of Enterprises with Foreign Investment among other institutions, where economists, entrepreneurs and government representatives held discussions on the international economic landscape, as well as opportunities and challenges for businesses amidst rising global trade tensions.
“It is important for China to find new growth momentum in reform.”
Recent years have witnessed the rise of “de-globalization”. It is thus imperative for China to develop a new economic growth model driven by increased productivity. Regarding the supply side, China shall prioritize the supply and allocation of labor, and reform its education and professional training sector in order to facilitate growth of higher quality in future. Regarding the demand side, China shall improve income distribution system and foster higher consumption capacity of its people to further fuel economic growth. In addition, China shall also ensure basic public services as well as equal access to these services.
—— Cai Fang, Member of the Standing Committee of the National People’s Congress, Vice-President of the Chinese Academy of Social Sciences and Chairman of the Board of Directors of the National Institute for Global Strategy.
“The mobility of production factors is the key to building a global technology innovation center for the Greater Bay Area.”
Currently, the Guangdong-Hong Kong-Macao Greater Bay Area faces 5 major challenges in the movement of people, i.e., difficulty for professional accreditation and restricted scope of practice, higher individual income tax in China’s mainland compared to that in Hong Kong and Macao, non-portable social security, difficulty in actualizing equal treatment, and lack of supporting facilities. To address these challenges, the institutional arrangements for the movement of people in the Greater Bay Area shall be innovated, such as unilaterally recognizing the professional qualification of Hong Kong and Macao residents, extending the practice of “separate tax schemes for Hong Kong and Macao people” across the Greater Bay Area, exploring effective ways to link the social security systems of Hong Kong, Macao and the mainland, building Hong Kong and Macao Residents Services Center in the Greater Bay Area, piloting equal treatment for Hong Kong and Macao residents in the Greater Bay Area and fully capitalizing on big data to facilitate the movement of people.
—— Guo Wanda, Executive Vice President of China Development Institute.
The important role of multinationals in economic globalization.
To gain an upper hand in global competition, multinationals shall firstly establish global presence to ensure sustained supply and to establish communication with global clients, and secondly, engage in innovative cooperation in diverse dimensions, and provide more effective solutions for clients, and thirdly, ensure good service and quality commitment to win brand recognition, and fourthly, provide diverse products and one-stop services.
—— Huang Yiyun, General Manager of Dupont China Holding Co., Ltd
“Two-way” asset management competence will be a key advantage in international asset management arena in future.
For a long time in the past, China’s investment in overseas assets has been lacking, and vice versa. This imbalance will be overcome with increased mobility of China’s capital market. Domestic and overseas institutions shall explore different avenues of asset management in search of new systemic hedging strategies to improve resilience in investment and reduce fluctuations.
—— Sun Chen, Chief Executive of Harvest Global Investments Limited
Shenzhen shall seize the opportunity of the development of the Guangdong-Hong Kong-Macao Greater Bay Area and make China’s voice heard in international rules.
Under the Belt and Road Initiative, China’s foreign trade and overseas investment have maintained steady growth. China shall stand up to the new problems that have emerged in international arbitration through legislation or judicial interpretation with even more open mindset. On this front, Shenzhen is dedicated to fostering business environment in sync with international rules, such as internationalizing the governance structure, organization and scope of practice of Shenzhen’s arbitration institution, in a bid to create a new pillar for international arbitration.
—— Liu Xiaochun, President of Shenzhen Court of International Arbitration and Director of Shenzhen Arbitration Commission
Shenzhen’s enterprises shall improve their ability to work with international rules
An increasing number of enterprises in Shenzhen have gone global under the Belt and Road Initiative. These enterprises urgently need to familiarize themselves with local legal system, financial environment and cultural customs. Thus it is important to continue to educate enterprises to ensure their compliance with and respect for international rules, as well as their ability to protect their own legitimate rights using these rules.
—— Gao Zhan, Member of the CPPCC Shenzhen Committee, head of Shenzhen Fair Trade Promotion Administration
European enterprises maintain confidence in investing in China as business environment improves in the latter.
In 2017, European businesses have achieved robust financial performance in China, with 66% of respondent businesses reporting year-on-year revenue increase. Meanwhile, the steady improvement of China’s business environment has boosted European investors’ confidence in operating in China. As to the rising challenges posed by increased production cost, Chinese and German businesses shall deepen high-tech talent training cooperation, so as to provide technical support to cope with labor shortage and faster pace of industrialization.
—— Sven-olaf Steinke, General Manager of TüV Rheinland’s electrical service in China
Businesses shall proactively conduct upgrading to cope with the negative impacts of trade frictions.
As China-US trade frictions continue to ferment, global business operations and investment will face uncertainties. Enterprises shall keep a level head and increase R&D investment in big data and other advanced technologies to boost industrial upgrading, reduce cost and improve efficiency, so as to avert the risks posed by trade frictions.
—— Kang Yong, Chief Economist at KPMG China
The Guangdong-Hong Kong-Macao Greater Bay Area has huge potential, and business complementarity and cooperation shall be encouraged.
The economy in the Greater Bay Area has great potential for growth. Different cities and businesses within the Greater Bay Area shall seek effective cooperation based on mutual complementarity. The Federation of Hong Kong Industries will help its member enterprises in their upgrading process, develop new innovative technology platforms, provide businesses with consulting services and match-making opportunities, and facilitate cooperation between experienced industrialists and start-ups.
—— Sun Qilie, Honoary President of Federation of Hong Kong Industries
https://en.cdi.org.cn/component/k2/itemlist/category/73-insights?start=42#sigProId48c63f73b5
Author: Fan Gang, President of CDI
Editor’s Note: After acquiring the shares of private enterprises, large state-owned capital tends to operate private enterprises with SOE management mechanisms. This practice undermines economic flexibility.
In recent years, state-owned enterprises have become less energetic. New regulations set up in the national anti-corruption campaign have put SOEs under more rigorous supervision, resulting in slower decision-making process and less capacity for risks. Thus the government shall consider how to further develop the private economy. The next round of economic growth needs to be underpinned by independent innovation, which inevitably comes with huge risks. Compared to SOEs, the private sector is energetic and more willing to take risks. A risk-taking spirit coupled with a good decision-making mechanism is prerequisites for fully realizing independent innovation and market flexibility to inject vigor into economic development.
Despite a lot of support given by the central government in legislation and policies to the private sector to protect their interest and create a more enabling business environment, the operation mechanisms of private enterprises are often incorporated into SOE management after their shares are acquired by state-owned capital. Although capital has remained unchanged in the short term, this practice represents an unfavorable trend in the long run as it undermines economic flexibility. To better utilize state-owned capital to serve the private sector, the preferred stocks are desirable as they allows SOEs to invest in private enterprises for profit without imposing their own management system on the latter. In this way, private enterprises can maintain their vigor while assuming risks by themselves.
Author: Fan Gang, President of CDI
Editor’s note: In terms of the recent Sino-US trade friction, Prof. Fan Gang thinks that it can be solved, only not with a single agreement, but step by step with multiple negotiations. In the long run, China should strengthen incentive mechanism for technology innovation to better foster independent innovation.
- On the current economic situation
Over the past 40 years, China’s economy has seen fluctuating high growth, while still in the process of adjustment. There are two views about the current economic situation. Optimists think that a new cycle is coming, while pessimists think that deleveraging and regulation will lead to tight liquidity. I’m not that optimistic, I don’t think that China’s economy is entering a new cycle now, and a lot of problems remain unresolved, including deleveraging and de-capacity. The resent reduction in reserve ratio released liquidity and restored it to its proper level, which is a neutral policy, and should not be interpreted as expansionary or tightening policy. In this sense, I am also not that pessimistic.
- On China’s long-term economic development and Sino-U.S. trade friction
United States trade deficit cannot be solved due to two reasons. First, U.S. savings rate is low. Second, as an international currency, other countries need to purchase goods from the U.S. in exchange for dollars, at the same time do not sell goods to U.S. or spend U.S. dollars, thus creating trade deficit. Among these countries, U.S. has the most extensive deficit problem with China due to the huge trade imbalance. In the trade of productions, China’s strengths are low and middle end manufactured goods, while Unite States are more advanced in high-tech and arms trade. As economy is booming in China, there are more products to be sold. Meanwhile, export control is tightening in United States, giving China less purchase options. As a result, trade imbalance increases. The United States penalized ZTE, at the same time restricted the export of high-tech products, exacerbating trade deficit. Although the two countries are hoping to reach on an agreement, it is always possible that U.S. will exit the agreement as they have done so multiple times recently. Therefore, Sino-U.S. trade fiction cannot be settled through single negotiation or agreement, but in multiple steps and stages.
On the other hand, it is apparent that U.S. is focusing on restricting China’s technology advancement. However, China’s technology and economic development is definite, therefore making the problem irreconcilable. China’s first stage of economic growth depended on cheap labor, i.e. comparative advantage. The second stage of growth depended on relative advantage or late-mover advantage, in other words learning from knowledge and technology spillover of other countries. Establishment of joint ventures is a perfect example. Unites States has noticed this trend and may disconnect the learning process. In the future, our researchers may be restricted from visiting the United States.
China’s economic development is entering a new stage of independent research and development, with multiple measures in effect simultaneously, such as introducing foreign capital, sending students overseas, conducting online learning and exchanges. In other words, giving play to comparative and late-mover advantages at the same time. Meanwhile, the influence of independent innovation mechanism is growing, which pushes and demands us to move on with technological innovation and reform the innovation system. The recent Sino-US trade friction has been a perfect reality check for China. The development of scientific research in United States is closely related to property rights. The implementation of Bayh–Dole Act ensures that even within national research projects, personal intellectual property rights will be protected. As a result, it serves as incentive for both researchers and operators, and also allows capitalization and globalization of intellectual property rights. We must give play to both national function, in terms of basic scientific research and underlying technology research, and market’s effect, in terms of incentive mechanism for intellectual property.
- 3. On the new stage of China’s consumption
In the past, low consumption rate and high savings rate were two major economic problems in China. Since 2004, savings rate has exceeded 40%, reached 52% in 2012, and decreased to 44% in 2016. With rising consumption rate, we can expect a general trend which can be attributed to multiple factors. Firstly, the overall income level continues to rise. Secondly, income level of low-income group is growing at faster pace. For example, migrant workers’ income growth rate has been at a steady 17-18% since 2007. Ninety percent of the extra one thousand yuan will be used in consumption, which is a huge stimulus on consumption growth. Thirdly, social security. Fourthly, consumer finance and e-commerce. Finally, consumption by retirees, known as negative savings in economics, also begins to grow as a result from the retirement of the first generation that became rich after reform and opening-up.
We are now facing two turning points. First, high-tech investment has become critical after entering the stage of independent innovation. Second, the ones that are considered as emerging industries in China are developing rapidly, such as growth in general consumer goods, leisure, fitness, health care, medical treatment, vacationing, spiritual and cultural consumption. The return on both aspects are considerable, making them ideal and important areas for investment. In this sense, China will not lack investment opportunities.
Author: Fan Gang, President of CDI
Editor’s Note: Prof. Fan Gang gave a speech at the first Summit Forum on Financial Risk Prevention which was held in Shanghai. During which, he analyzed the significance and influence of prevention and control of financial risk from macroscopic perspective
Financial risk and debt risk are very serious problems, which should be approached carefully without unnecessary exaggeration since they are still controllable and do not entail immediate financial crisis.
First, the risk in lack of government regulation. Certain basic problems that should have been controlled through financial market regulation are only regulated after lengthy delay, and until being proposed on the Central Committee meeting. As a result, market risk escalates. Such situation should be prevented and resolved.
Second, financial risk in the government. After implementing the stimulus policy in 2009, local financing platform’s annual total amount of financing rose from RMB one trillion to seven trillion. With the steep increase, we need to tighten control on this type of government financing risks.
Third, risk in state-owned enterprises. The debt ratio of state-owned enterprises is relatively high, reaching 68%. In addition, there are many “dead” enterprises, which are difficult to handle.
Fourth, risk in private enterprises. One contributor to the overheated economy seen in recent years is the massive amount of companies. Underneath them, is corporate debt. It is necessary to merge and reorganize these companies seen in various industries, so as to reduce industrial concentration, reduce the total number, in order to expand the scale and improve efficiency of the industry, and essentially letting the industries better develop. Nonetheless, if no action is taken, it may lead to earlier onset of financial crisis.
We need to treat these financial risks seriously, in each node and all industries, in order to improve the quality and efficiency of our economy as a whole.
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Author: Fan Gang, President of CDI
Editor’s Note: Opening up is in line with China’s fundamental interests. A new round of reform and opening up will certainly create more opportunities for China’s development.
Opening up is in line with China’s fundamental interests. Since 1978, China has achieved rapid economic development by opening up its market and introducing foreign investment. China is now implementing the “going global” strategy, which means it will open even wider in future. It will contribute to China’s long-term interest which is to achieve mutually beneficial cooperation in the opening up.
Recent years have seen the retreat of globalization. Under such circumstances, China shall first have a clear understanding of its fundamental interests, which lie in sustaining long-term growth and closing the gap with developed countries. China shall steadily press forward with economic restructuring as it opens wider, for instance, by conducting supply-side structural reform, cutting overcapacity and excess inventory, deleveraging, and defusing financial risks. China should also maintain a prudent monetary policy to ensure steady economic growth.
Author: Fan Gang, President of CDI
Editor’s Note: The Guangdong-Hong Kong-Macao Greater Bay Area hinges on the concept of metropolitan area and the coordination of different mechanisms. The establishment of the “2+3” free trade area consisting of Nansha, Qianhai, Hengqin, Hong Kong and Macao will promote the development of the Bay Area.
Metropolitan areas provide impetus for China’s urbanization, industrialization and innovation-driven growth since they have emerged as a solution to urban challenges like housing, traffic and employment. The Guangdong-Hong Kong-Macao Greater Bay Area will be a major driving force for China’s development.
There is a great chance to establish a free trade zone alliance inside the Bay Area while Hong Kong and Macao tariff-free zones are already in the region. In addition, Guangdong has three pilot free trade zones, Nansha, Qianhai and Hengqin. It will be an innovative move to join Hong Kong, Macao, and the three free trade zones, to form the “2+3” free trade area. Once the alliance is established, the development of the free trade area will be facilitated so does the Greater Bay Area as a whole.
The Bay Area will continually unleash potential and upgrade economic structure, with an increasing share of the high-end service sector and emerging industries such as digital economy, life sciences, aerospace, renewable and sustainable energy, etc. It will become a global international trade center for goods and services.
Author: Cao Zhongxiong, Executive Director, New Economy Research Department
Overview: Mobike’s acquisition and Didi Chuxing’s dilemma mark that the sharing economy is entering its difficult times. In the future, the mobile transportation platforms need to think about how to make profits; otherwise they are doomed to be merged.
The sharing economy can integrate all kinds of dispersed idle resources, solve the problem of asymmetric information, and accurately find diversified demands, so that the resources can be efficiently reallocated. However, concern about the prospect of the sharing economy has been exposed by the acquisition of Mobike and Didi Chuxing entering a difficult time.
Mobike’s acquisition and Didi Chuxing’s dilemma show that the sharing economy is faced with three difficulties: firstly, it starts with “free user charge” and might be ended by “free user charge”; secondly, it excessively pursues the user growth; thirdly, it only focuses on financing instead of making profits.
The mobile transportation platforms need to operate as an enterprise. Firstly, the sharing economy enterprise must be profitable. Secondly, the sharing economy needs to reduce its operating costs. Thirdly, the sharing economy needs to be regulated by authority when it involves with social benefits and consumer protection. As long as the mobile transportation platforms create sustainable revenue, the integration can be avoided.
Author: Fan Gang, President of CDI
Editor’s Note: Impelled by the anxieties over China’s economic rise, United States has initiated a series of actions towards China, including the trade war and possibly with investment and intellectual property as targets. China shall actively respond to these actions with long-term development interests in mind.
The current trade frictions between China and the United States have not yet escalated to a trade war, although both sides are “preparing” for one. There are several issues that should be looked at properly.
With increasing anxiety over China’s economic rise and change in world economic landscape, United States now intends to contain China’s development by targeting intellectual property and imposing restrictions on high-tech exports in the name of “reducing trade deficits”.
Two issues need to be made clear regarding Sino-US trade imbalances.
First, before being assembled in China, 90% of parts are not produced in China, but are rather imported from other Asian countries as part of the production chain. In other words, much of China’s trade deficit will end up as trade surplus with the US.
Second, at certain points nearly 60% of exports are derived from multinational corporations in China. Some products were produced by American multinational corporations in China and exported to United States, in which case China’s profits were rather low. American consumers have benefited from high-quality and reasonably priced products made in China. The US has also enjoyed a relatively low inflation rate. The US government, however, has failed to properly examine this issue, only focused on the impact of China’s rise on the US instead.
Since China is part of the global production chain, in the long run the trade war will certainly have negative effects on China and the US as well as other countries that are part of the production chain.
China’s biggest interest is sustained development. As a late starter, China should be fully aware of the difficulties during development despite fast economic growth over the past 40 years. To maintain sustainable growth, China needs to keep long-term interests in mind and minimize external disturbances through rational counter measures.
