Chinas Economic Future, on Policy Decisions, Market Sizes and Reading the Data

Professor Lu Ming

資料來源：Economist Breakfast Meeting Sep 19

Main Points

Below is a summary of the main talking points by Professor Lu Ming at the Economist Breakfast Meeting on Sep 19, 2017, during which he discussed various issues on Chinas economic future with Simon Baptist, Global Chief Economist and Asia Managing Director of the The Economist Intelligence Unit, Simon Rabinovitch, Asia economics editor of the Economist Magazine, and Mary Boyd, Director of The Economist Corporate Network in Shanghai.

Future policies and strong leadership

Most of the members of the next generation leadership are actually very pro-market. And the key to future economic policy making in China is whether they want to push forward the market reform. If they do, a powerful central leader can make the reform process much smoother, if not, however, Im afraid the policy may turn out to be fairly conservative.

The sheer size

Another point often gets neglected when analysing Chinas economic growth, and one which I often emphasis, is the scale of its economy.

China has a large population, and it matters. For fashion and the entertainment industry for example, it means a huge market.And due to the sheer size of the market, even if Chinese companies only put a small fraction of their sales profit into innovation and buying international brands, the impact would be huge, and will also revolutionise their own productivity and raise capacity.In some industries, the high-tech sector in particular, the innovation potential is already progressing fast, and as a result would be another area for future growth.

What the aggregated data doesnt show

China is a huge country, therefore aggregated numbers dont always tell the whole story, and can even be misleading sometimes.

Looking at aggregated numbers - growth potential, investment and debt issues for example - its easy to see that Chinas debt to GDP ratio is rising very fast, and the housing market is also problematic because the ratio of real estate price over income is also very high.

Shifting the focus to provincial and even city level economics however, one will discover that high debt-to-GDP ratio is concentrated mainly in the hinterland. In the coastal region, the ratio is only around 20%, while in poorer western provinces, the number is much higher - in Guizhou its actually over 90%.

What these data reveal is really a story of regional distortion. The government has put so many resources into those western and central regions where returns to investment are very poor.

Therefore, if the next round of economic policy can adjust this and direct more resources into the coastal regions, especially to large cities, it would be great news for the economy and may improve the overall ratio considerably.

Its the same with the SOEs, who are also major recipients of various financial resources. A recent study shows that for most of the enterprises, the leverage ratio has gradually declined over time, and only those very large, centrally-owned ones have seen rising leverages.

If China could correct distortions in its capital market and give more financial resources to the private sector, especially to those lively small businesses, it could see yet another reform-based growth point.

One also needs to bear in mind that Chinas coastal regions, even first-tier cities such as Shanghai and Beijing, are still strictly regulated. There are policies controlling population growth and land supply, which in turn affect the housing market.

Many people consider Chinas housing market a bubble, but in fact it is also a largely regional issue. It is only in the first and second-tier cities that the ratio of housing price over GDP is rising, while in many other places, especially in those third and fourth-tier cities, there is even a large storage of housing waiting to be sold.

One of the reasons behind such regional differences, my own study finds, is that China has experienced a policy turning point. In 2003, the country started to restrict land supply in its coastal area, particularly in places with huge population inflows, the first-tier cities, and it has been going on ever Since.

in other words, we are limiting resources in places where people are moving in, and at the same time increasing supplies in regions where people are moving out.

If the government could deploy wiser policies in the future and fix the structural distortion, for example, by reforming the hukou system, or expanding land supply, allowing more labour and land in coastal regions and big cities, it can change the current situation in the property market and increase growth potential.

Such policies would have other benefits as well. For instance, moving more migrants into first-tier cities could help curb wage growth, which up until now has been relatively fast.

Added land and housing supply could also help slow down wage growth, as currently one of the main reasons driving up payments is high property price and high living costs.

In addition, migrants, most of whom are of working age, could help ease the challenges facing rapidly aging large cities. Such challenges are at their most serious in mega cities like Beijing and Shanghai, but when migrants were included in the statistics, the median age would drop significantly.

And cities in China are taking steps to incorporate extra people, by enhancing infrastructure - financed through a number of means such as city investment bonds, by expanding - for example, Shanghais municipal government recently announced a plan to supply more than one million rental apartments, and thats at least one million more population to be added in the near future, and by establishing ever closer ties with near by towns, of which typical cases include a proposed subway linking Shanghai and Jiaxing, as well as city clusters such as Beijing-Tianjin-Hebei and Pearl River Delta, just to name a few.

In conclusion, there are major issues and concerns which could to some extent justify a somewhat pessimistic prediction, or an economic slowdown, but the root cause behind these problems is often a serious regulation distortion and misallocation of resources.

Such structural problems are perhaps more significant in China than in most standard market economies, but they are also hopes for improvement at the same time.

And the potential of growth would be high if China could reform the system thoroughly, or as the officials in central government like to say, reap the institutional dividends.