Eight key words interpreting China’s Central Economic Work Conference

China’s Central Economic Work Conference, which concluded recently, determined key economic tasks for next year, namely to promote structural reform and sustainable and healthy economic development. The journalist interviewed leading expert in the first time to analyze key points of social economic development and structural reform.

Key word: structural reform

Five policies supporting structural reform: in the next year and afterwards, China should strengthen supply-side structural reform and implement the five complementary policies when moderately expanding total demand. China should explore domestic demand potential with new thoughts, to continuously expand consumption need, give full play to the pivotal role of effective investment on stabling growth and adjusting structure, and promote new type of urbanization.

While “export”, “investment” in the troika of economic growth weakened, “consumption” stands out to become the strongest driving force of economic transformation. The Central Economic Work Conference again underscores the strategic importance of “expanding total demand” and “supply-side structural reform”

“Reform is producing desired effects, and the adjustment of economic structure is going deeper,” Jiang Hui, president of Beijing StarRock Investment, said in the interview, adding that traditional industries driven by investment are shrinking gradually, but emerging industries boosted by consumption are rising in an irresistible trend.

The trend of structural transformation of the economy is evidenced by macroeconomic data. Though GDP growth has slowed down in 2015, the contribution of consumption reached 58.4 percent in the first three quarters. This proportion is expected to increase to 65 percent in 2016.

“China’s economic growth has indeed decelerated, but the growth rate of Chinese consumer market is expected to keep at the world’s leading level,” Wei Jiehong, partner of the Boston Consulting Group estimated that by 2020, individual consumption is expected to reach 6.5 trillion U.S. dollars. Particularly, upper-middle class and affluent class consumers, new generation consumers and online shopping are three forces to transform China’s consumption economy.

Key word: proactive fiscal policy

Deficit ratio rise should be combined with supply-side management: China will reinforce proactive fiscal policy, cut tax and increase deficit ratio in certain phases. Meanwhile, the government will properly increase requisite fiscal expenditure and investment to make up decline of fiscal revenue result from tax cut, and ensure government assuming its expending responsibility.

China has adopted proactive fiscal policy since 2008. Data shows that the country’s deficit ratios were 0.6 percent, 2.8 percent, 2.5 percent, 1.8 percent, 1.5 percent, 2.2 percent, 2.1 percent respectively, from 2008 to 2014. Though 2009 recorded the highest reading, the value has never exceeded 3 percent.

But how much is the deficit ratio in 2015? According to drafted budget of central and local government reviewed in 2015, China’s deficit ratio in the year is around 2.3 percent, up 0.2 percentage points from 2014; the deficit amounted to 1.62 trillion yuan, increased by 270 billion yuan from 2014. Both central and local deficit sizes have increased.

Lin Muxi, Yangtse River Scholar and professor, said that with the implementation of proactive fiscal policy, general budget revenue of the central government decreased. In the past, the growth rate of fiscal revenue kept above 10 percent. In the first half year, the growth rate was only 4.7 percent. But the expenditure increased by 10.6 percent. Furthermore, local governments also face a big gap between revenue and expenditure. Besides, the implementation of monetary policies also caused many problems, which requires support from fiscal policies.

In this November, Vice Finance Minister Zhu Guangyao proposed to review whether the 3 percent limit of deficit ratio and 60 percent limit of debt ratio are truly scientific. Zhu’s remark was interpreted as a sign of adjusting “red line” of deficit ratio, indicating that the government may significantly increase investment.

Key word: de-capacity

China will take active and steady measures to absorb excessive production capacity and phase out absolutely excessive production capacity. The authority should stick to the principle of giving full play to the differentiated roles of the enterprise, government and the market, cutting excessive production capacity in accordance with the law and studying and introducing comprehensive supporting policy system. The authority should take into account of local conditions and characteristics of different industries and carry out measures in an orderly way, balancing social stability and structural reform.

The capital market should coordinate with merging and reorganization, helping to realize the goal of procuring more merging and reorganization and less liquidation and bankruptcy. Staff s of closed enterprises should be resettled properly. The authority should also watch closely incremental and prevent new excessive production capacity from come into being.

Feng Fei, vice minister of the Ministry of Industry and Information Technology, indicated lately that excessive production capacity in some industries got serious recently, especially in iron and steel, cement, plate glass, electrolytic aluminum, as well as shipbuilding industries. Supply in such industries is overwhelmingly beyond the demand.

Take iron and steel industry for instance, data shows that production capacity of the industry was 300 million tons in 2003, and reached 1.0 billion tons in 2012. Startlingly, the capacity is well close to 1,2 billion tons at present. It means that centralized approval and curbing competition, which are prevailing practices in the past, can hardly control current excessive production. Industrial insiders indicated that one thing must be made clear, that is, industries with overcapacity are where pillar enterprises of local government concentrated, closely related to local financial revenue, employment, economic stability, etc.

In this regard, the central government is tough. Premier Li Keqiang indicated at an economic expert’s symposium that China will resolutely take actions to “zombie companies” and enterprises with “absolutely excessive production capacity” in the future, and start with industries with serious overcapacity.

Keyword: destock housing inventory

Measures of various types are taken to reduce the unsold properties. Citizenization of migrant workers should be speeded up to expand the effective demands, enable the supply and demand channel, reduce the unsold homes, and stabilize the real estate market according to requirements of accelerating urbanization ratio of registered population and deepening housing system reform. Schemes for household registration system reform should be implemented to allow the non-registered population, like migrant workers and farmers, to settle in cities where they are working, and make them form the expectation and demand to purchase houses or chronically rent houses in their working cities. The orientation to deepen the housing system reform should be specified to make non-registered population covered in the public rental housing policies. Rental housing market should be developed, and outdated restrictive measures should be cancelled.

Chen Sheng, director of China Real Estate Data Academy, said to the SSN that core of destock housing inventory is to stabilize China’s economy. In terms of Central Economic Working Conference, some of the meeting contents exceed expectation inside and outside the industries. One of the largest breakthroughs is to take moves of various types for migrant workers who newly become the urban citizens. Chen also pointed out that inventory problems existed in the real estate market will be solved, after related policies are actually carried out to make “new citizens” stably settle down in cities.

Migrant workers have huge potential demands for house-purchase. In Feb. 2015, data of the leading team office on migrant workers issue under the State Council showed that current migrant workers nationwide recorded at 274 million, with 168 million working in cities. And more than 100 million migrant workers have not purchased houses or settled in cities yet.

Based on calculation and measurement of China’s Housing Development Report 2015-2016, annual house-purchasing demands of migrant workers may reach 460 million m2, totaling at 2.33 billion m2 in next five years, if we assume that 100 million population will become citizens in urban areas in next five years and 70 percent of families will purchase houses in cities (33.3 m2 per capita). The current inventory of real estate market is 2.8 billion m2, which could be digested.

In line with analysis of various experts, adjustment and control on real estate industry will be synergistically carried out with urban agglomeration deployment and economic belt construction; it is expected that third and fourth tier cities will speed up their steps to reduce unsold homes in next year, and real estate markets of first tier cities will also rebound.

Key word: de-leveraging

Local governments’ debt replacement should be constantly enhanced: in terms of decreasing leverage level, the conference stresses on preventing and defusing financial risks. Credit default will be disposed according to regulations and laws. We should effectively defuse the risks of local governments’ debts, carry out the replacement work of local governments’ debts, and improve management & issuance system of local governments’ bonds. We should reinforce comprehensive regulation, standardize various financing behaviors, duly deal with the risks, and firmly prevent systematic and regional risks. The conference also proposed to intensify the strength for studying and formulating reform scheme on financial regulatory system.

Industrial insiders believe that, in 2016, China will continue to intensify the strength for replacement of local governments’ debts. Up to the end of 2014, total scale of local government debts recorded 24 trillion yuan, while 15.4 billion yuan of them are affordable.

In terms of stock replacement, Ba Shusong, chief economist of China Banking Association, recently wrote in the article that, according to consideration on reducing market impact, it is possible to require a transitional period to finish the replacement work; annual issuance scale of replaceable bonds will be around 4 to 5 trillion yuan, if the transitional period takes three years.

Zeng Gang, director of Institute of Finance and Banking, Chinese Academy of Social Sciences, indicated that financial risks will focus on credit risk of commercial banks, cross risk of financial systems as well as private financing risk in 2016. Although the overall credit risk of banking system is still controllable, its increasingly serious trend cannot be ignored, and commercial banks should deal with these risks as soon as possible, and improve their own capabilities against the risks. Currently, separated supervision system is not beneficial to prevent systematic risk. Along with capital flowing among various markets, cross risk has become more obvious. Regulators will further coordinate the regulations, better adapt the supervision on crossing-market financial activities through regulation system reform, and prevent the financial system risks on the whole.

Key word: lowering cost

Structural tax reduction is still required to lower the costs of enterprises: measures of various types should be taken to carry out moves to lower the costs of real economy enterprises. We should reduce the institutional transaction costs, transform functions of the governments, simplify administrative procedures, delegate powers to lower levels, and further clear up and standardize the intermediary services. We should ease the tax & expenditure burden of enterprises, further standardize the regulations on taxes, eliminate unreasonable charges, create open and fair tax environment, and study how to lower the value-added tax (VAT) ratio of manufacturing industry. Social insurance charges should be lowered, and “five insurances and one housing fund” could be simplified and integrated. We should reduce the financial cost of enterprises, and financial departments should create a policy environment for interest rate normalization to benefit the real economy. Electricity price should be lowered to promote the price market-oriented reform, and improve linkage mechanism on coal and electricity prices. We should also lower the logistics cost to boost distribution system reform.

Jia Kang, former director of Financial Department under the Ministry of Finance, and current president of China Academy of New Supply-side Economics, indicated that easing the burden on enterprises means to constantly promote the structural taxation, such as increasing direct tax proportion and enhancing operability, instead of fully reducing the taxes.

Based on calculation and measurement carried out by Zhang Wenkui, vice-director of Enterprise Research Institute under Development Research Center of the State Council, domestic VAT recorded over 3 trillion yuan last year; taxation will reduce by 300 to 400 billion yuan, if the VAT is lowered by two percentage points, and reducing 10 percent of administration expenditures can sufficiently make up the decline in financial revenue.

In terms of how to implement the determined strategies, Xu Shanda, former vice director of State Administration of Taxation, pointed out that reducing the tax & charge burden on enterprises is to mainly transform the business tax to VAT at present.

Key word: SOE reform

2016 will see implementation of supply-side reform in state-owned enterprises (SOEs). To propel structural reform, comprehensively deepening reform must be relied on. Reform must be intensified in key areas and critical links; a string of reform measures with great driving effect should be introduced; big push must be given to SOEs reform, and the restructuring of state-owned capital investment and operation companies as well as the promotion of reform in monopolized industries should speed up.

One challenging problem faced by China’s economy now is overcapacity. Besides the iron & steel industry, industries including electrolytic aluminium, cement, sheet glass, shipbuilding, non-ferrous metals, construction materials, textile and food are also greatly troubled by overcapacity, in which SOEs are in majority and compose the main part of the reform.

There might be five solutions to cope with de-capacity of SOEs and “zombie companies”. Firstly, quickening the clearance and exit of “zombie companies” through transfer of ownership and bankruptcy; secondly, reallocating resources through reorganization and combination; thirdly, changing products and technologies and applying new ways of operating to guarantee effective supply; fourthly, expanding export and exploring new market so as to quicken the de-capacity by beefing up demand; fifthly, facilitating the export of capacity so as to consume capacity at the supply-side.

Key word: foreign trade

Reassuring measures in the opening up of foreign trade encompass further improving regional distribution of the opening-up, propelling “quality imports and exports”, actively utilizing foreign capital, strengthening international cooperation on capacity and equipment manufacturing, speeding up the negotiation on Free Trade Zone and investment agreement, and actively participating in global economic governance. The environment for foreign investment should be utilized and enhanced. Great importance should be attached to the protection of intellectual property and the legal interest of foreign enterprises. All foreign enterprises should be treated equally without discrimination. Attentions should be paid to the construction of the “Belt and Road”, the financial supporting role of institutions including the Asian Infrastructure Investment Bank and the Silk Road Fund as well as the implementation of major landmark projects.

Bai Ming, deputy director of market economy department at an institute under the Ministry of Commerce, pointed out that China needs to further expand international market and develop export-oriented economy in the future. To achieve that goal, the “quality imports and exports” strategy, which means to improve China’s trade structure, must be followed and that lays foundation for other foreign trades.

Bai Ming also remarked that “besides, the conference points out the urgent problems must be coped with now, such as the participation in global economic governance. We would be put in a passive position if we do not get involved in these matters. One example is the impact brought by Trans-Pacific Partnership Agreement (TPP). The U.S. questioned the Doha round of World Trade Organization (WTO) membership negotiations before and during the just concluded 10th ministerial meeting of the WTO, complicating the picture China faces in international trade. Therefore, active participation in global economic governance becomes quite essential”.

In addition, the “Belt and Road” initiative points the direction of future development. Bai Ming indicated that the first one or two years after the “Belt and Road” initiative was proposed in 2013 mainly focused on seeking consensus and connection of plans. Then there comes the implementation of projects. International capacity cooperation should also tie up with the “Belt and Road” initiative.