China advisers urge Beijing to step up reforms to offset trade war impact
- Series of structural reforms needed to ensure China can achieve its full growth potential
A group of current and former government economic advisers have urged Beijing to accelerate reforms in the important areas of technological innovation and private ownership protection to support the momentum of China’s long-term growth.
The appeal by the prominent economists came only a few days before the start of the government’s annual Central Economic Work Conference, at which top officials will set the direction of economic policies for next year.
Justin Yifu Lin, former chief economist of the World Bank, led the chorus with his view that the country still has strong growth potential, given its comparative advantages in new technology, despite the official growth figure falling to a decade low of 6.5 per cent in the third quarter of this year.
“China can maintain a 6.5 per cent growth over the next two years and average annual growth of 5.5 per cent from 2020 to 2030,” he told the third National Development Forum at Peking University.
Lin tried to downplay the impact on the domestic economy of the trade war with Washington, a key reason for current financial market anxiety.
“Assuming the worst-case scenario – that the entire US$500 billion worth of Chinese goods [imported into the US] is taxed – our research model calculates that it would knock just 0.5 percentage points off Chinese growth and 0.3 percentage points off US growth,” he said.
Lin was one of 100 individuals honoured by the central government for their contribution to the country’s reform and opening up initiative over the past 40 years, having provided key theoretical support – labelled New Structural Economics – to the idea of Beijing extending its growth model to other developing countries.
Forums such as Saturday’s programme at Peking University have long been used to voice support for and confidence in government policies, especially recently as Beijing has struggled to stabilise the economy.
The government maintains that the country is still poised to maintain strong growth and escape the middle-income trap, surpassing the United States as the world’s largest economy in the next few decades.
To counter the impact of the trade war, Beijing can still rely on its large domestic market, in particular the demand for upgrading manufacturing, increasing infrastructure, investing in environmental protection and expanding urbanisation.
“If the external environment turns bad and downward economic pressure increases, we can keep [domestic] investment at a certain level to support employment and consumption,” Lin said.
During the 90-day trade truce agreed on December 1 between Chinese President Xi Jinping and US President Donald Trump, Beijing is facing difficult negotiations to satisfy Washington’s demands for dramatic changes to its economic practices.
Pessimistic sentiment about the chances for success rose quickly after the chief financial officer of Huawei Technologies was detained in Canada at the request of the US, threatening to upset the delicate trade talks.
Beijing is widely expected to introduce additional fiscal stimulus measures early next year – including a larger budget deficit ratio to allow for more fiscal spending and a business tax cut – as well as a further easing of monetary policy, given the economic slowdown is expected to accelerate in the first half of next year as the full effect of the US tariffs hits the Chinese economy.
At the Politburo’s meeting on Thursday, the top leadership headed by Xi vowed to build “a powerful home market” as a way to offset external uncertainties next year, stressing that the country “must firmly focus on getting its own goals accomplished”.
Detailed policies to support the economy are expected to be rolled out after this week’s Central Economic Work Conference, which will set the economic policy course for next year.
Lu Feng, a professor of economics at Peking University, said Beijing had always been effective in stabilising the economy over the past 40 years.
However, he said, the leadership needed to speed up reform of key areas – the housing market, the hukou system of household registration, and protection for private firms – to remove obstacles to achieve the country’s long-term growth potential.
Many expect the government to deliver a clear message on the direction of reform during the grand ceremony at the Great Hall of the People on Tuesday morning to celebrate the 40th anniversary of the reform and opening up initiative.
The policy, begun by late paramount leader Deng Xiaoping in 1978, was successful in lifting China to become the world’s second-largest economy, but critics say the pace of reform has slowed or even fallen back in recent years.
Lu said the current economic difficulties presented a good opportunity to make changes. “If we can proceed with a tax cut and widen market entry, China’s economy could jump to a higher level.”
He also said that by taking the initiative on these matters China would have more bargaining power in its negotiations with the US.
Speaking at the same forum, Gao Shangquan, who helped design a series of reform plans back in the 1980s as deputy chief of the State Economic System Reform Commission, said Beijing must firmly insist on the country’s basic economic system – which is enshrined in the constitution to uphold state ownership while encouraging the development of the private economy.
He also stressed the importance of market-oriented reforms, state-owned enterprise reform and the protection of human and property rights.
“Equal competition and ownership neutrality should be brought forward as two principles to guide next step reforms. What the private economy needs is a level playing field for competition,” the 89-year-old said.
Jia Kang, former head of the Ministry of Finance’s research institute, said government policymakers should return their focus to the Reform Document released in 2013, which for the first time mentioned letting market principles play a “decisive” role in the economy and detailed 336 specific reform tasks.
“The government should avoid paying lip service [to these reforms],” he said.
Most importantly, “it should not turn on the right turn signal and then actually turn left”, Jia said, referring to the frequent changes in the government’s stance toward reforms.