Hello, welcome to visit Shanghai Forum
Systemic innovation which helps gathering oftalents is the key to guaranteeing Shanghai’s central status in China andAsia-Pacific region economic development.
Reporter: Xu Ye
Reporter:To begin with, would you please provide a brief analysis of the currentmacro-economy situation in China under the global economic crisis.
Hua Min:When global economy may have already hit the bottom, economic crisis inemerging market economy countries including China may have just begun.
Comparedwith developed countries, though China’s economy still enjoys a relatively highgrowth rate, it faces crisis already. Before the crisis, China’s economicgrowth reached double-digits, yet it is on a downturn since 2008. However,seeing from outside world, apart from countries suffering severe sovereign debtcrisis in Euro zone, economy in most industrialized developed countries is onsteady increase. Till 2013, export completely makes no contribution to China’seconomy increase while consumption’s contribution relatively increases, yetincrease rate of consumption itself is in decline as well, and investment,especially private investment is in decline. Recently, regulation and controlof real estate reduced investment in real estate. The government cannot afford4 trillion RMB investments as before and began promoting infrastructureinvestment such as medical care, railway and electric power. The troika of netexport, consumption and investment are all in decline, which means that China’economy increase has already begun to fall.
Reporter:We see that after global economic crisis, emerging market economies includingChina achieved higher economic growth. Why do you think that it means economiccrisis for such countries has just begun?
Hua Min:First of all, after crisis, industrialized developed countries at first chose extensionof financial policy and loosened currency policy in order to bail out market,yet under economic globalization, such economy stimulus failed to lead toincrease of native economy and job opportunities. The key reason is that giantcompanies of developed countries transfer manufacturing and job opportunitiesto emerging market economy countries enjoying relatively low cost throughglobal outsource, thus leading to situation where job opportunities fail toincrease in developed countries while emerging market economy countriesincluding China maintain high economic increase rate. Judging from globalcapital flow provided by IMF, features of developed countries are long-termcapital inflow and short-term capital outflow, and seeing from basic stage, ithas already hit the bottom. On the contrary, for emerging market economycountries, low-term capital is outflow, and short-term speculative arbitragecapital is inflow, and currently, there are signs showing gradual withdrawal ofshort-term capital from emerging market economy countries, which seems to tellus that economy of emerging market economy countries begins to decline.Therefore, industrialized developed countries are in steady recovery, whiledisaster in emerging market economy countries just begins.
Reporter:What is the main reason for China’s economic decline? What passive influencesdoes such decrease have in practice?
Hua Min: Ithink the main reason is inappropriate policy intervention. Simply speaking,such policies as structural adjustment, domestic austerity and exportsuppression are all inappropriate. China tries to change economic structure bymeans of policy adjustment, yet structure is inflexible and hard to change.Government hopes to change structure by means of policy, and it can only choosefrom the following two policy combinations: the first is domestic austerity,and the other is export suppression. However, after practice of kinds ofindustry austerity policy, industry capital begins to be withdrawn from the realeconomy, and flow to real estate and finance departments that have lowercontrol, which leads to China’s real estate bubble and sudden rise of capitalprice. In order to suppress export, the government adopts increase of exchangerate, which leads to increase in both actual exchange rate and nominal rate ofRMB. Combination of above policies eventually results in three bubblestroubling China today: real estate bubble, financial bubble and RMB bubble as aresult of real economy contraction.
Reporter:To expand domestic demand has long been main measure of our macro-economypolicy. Why do you think is such measure a mistake?
Hua Min:Between 2010 and 2012, increase rate of income in countryside is higher thanthat in city, yet will farmers spend money on consumption goods? No, they willspend money in building houses which become immovable properties that cannotadd to future production. Nowadays, bunch of money is still kept in stockdepartment, which leads to decline in future economic development because oflack of flowing productive capital. Statistical data tell us that currently,the percentage of Chinese people’s disposable personal income and consumptionin GDP are both in decline, and therefore, it is a dead end to depend onexpanding domestic demand. Judging from statistical data provided by UN, taxrate of Chinese laborers is the highest in Asia. Since Chinese people’sdisposable personal income is in decline, such plan as depend on expandingdomestic demand is doomed to fail.
There isanother phenomenon out of expectation of many people. In recent years, increaseof sum of Chinese workers’ income is at rapid speed, yet sum of income inprivate enterprises basically remains the same. Such structural problem showsthat while sum of income increases, private economy department adopts downsize,even close down, which leads to such absurd phenomenon that income rate ofprivate economic department increases while sum of income remains the same. Thekey problem is that most private economy departments are engaged in completelycompetitive market, and therefore, under the precondition of lack of increaseof production rate, restricted by market price competition, once the incomecost increases, they can only adopt downsize or close down. The result is verysevere, because under the condition of stable sum of income in private economicdepartment, increase of national income sum means that income of national-ownedenterprises and public servants is on the rise. The reason for increase ofincome in national-owned enterprises is that most of them are in monopolyposition, and therefore, increase of income of management layer and staff canbe digested by price transfer, and that is also why price of goods and servicesprovided by national-owned enterprises continuously increases.
Manypeople blame unfair distribution of income for insufficient domestic demand inChina, which is incorrect. Apart from China’s current economic developmentstage (China has not entered public large-scale consumption economicdevelopment stage as said by Rostow), insufficient domestic demand in China isalso results from the following several factors: first of all, due to high tax,individuals’ disposable personal income is relatively low; secondly, people areforced to make defensive savings because of imperfect social security system;thirdly, there is no obvious promotion in ordinary laborer’s production rate asa result of lagging behind of social education, especially professionaleducation, and therefore there is little space for income increase. Furtherobservation shows that there is indeed a large gap in China’s income distribution.However, the root of ever larger gap and many people’s relative poverty is notunfair distribution, but lack of job opportunities, which is unfairopportunity. Therefore, if China wants to create domestic demand, to stimulateeconomic increase, it needs first provide fair job opportunity for everyone,not fair income distribution, which is the key to solve China’s problems.
Reporter:Before 2004, increase of total factor productivity and capital accumulationpromote increase in manufacturing industry, and labor factor plays a biggerrole in increase in service industry. However, nowadays the total factorproductivity is in decline, is it external factor or policy factor that leadsto such decline?
Hua Min:Decline of total factor productivity and low earnings rate of investment areresulted from the following several factors: first, national-owned enterprisesreplace private ones, and resource distribution shifts from private enterprisesto national-owned economic departments. Such reverse replacement in productionsystem is the main reason that results in decline of productivity; secondly, westerndevelopment is also an important reason for decline of productivity. Comparedwith developed eastern region, market environment in western region is muchweaker, which reduces use and distribution efficiency of production elements;thirdly, most industry plans carried out by government are inverse market,which deprives entrepreneurs and consumers of their market choices, thusreducing use and distribution efficiency of production elements; fourthly, inrecent years, we have been trying to replace foreign trade with domestic demandto maintain sustainable increase, which leads to loss of comparative advantageand learning effect, thus resulting in decline of total factorproductivity.
Reporter:In 2008, financial expansion policy and investment policy throughnational-owned enterprises taken by government to deal with crisis leads tostrong crowding out effect to private enterprises, which is somehow related tocivilian usury. Then, can we say that our reform in the past few years isinverse market?
Hua Min:Government’s tighter control will definitely limit space of market function. Ifgovernmental departments directly participate in market investment throughestablishing national-owned enterprises, it will further lead to replacement ofmarket by government. If government wants to enter market to participate in economicactivity, it will definitely result in increase in tax, and government willcompete with market bodies for limited credit resources, and therefore, averageinterest rate of society (including standard and non-standard finance market)will increase, and those private enterprises that are in high need of capitalflow will rush into danger by financing in usury market. When governmentchooses to legalize usury instead of leaving the market and reforming highlycontrolled dualistic finance system, finance risk of the whole society willrapidly increase, and therefore, the above problems are not resulted fromreform, but from government’s tightening control and pressure on market inrecent years.
Reporter:Do you have any good suggestion to our government and private enterprises as tocurrent economic decline crisis and development trend of China’s economy in thefuture?
Hua Min:From government’s angle, it must shift from current industry austerity policyto industry expansion policy: it should encourage social capital to flow fromstock real estate and other property departments back to flowing real economydepartments in order to achieve austerity bubble, and it should increaseeffective supply and job opportunities in order to guarantee steady economicdevelopment. Judging from enterprise’s angle, it must now involve in usuryfinance activity, should try to reduce monetary lever, and do solid work. Onlywhen real economy is solidified can we achieve steady economic increase.
Reporter:While giving suggestion to Shanghai development policy, you mentioned thatShanghai should regain risk-taking urban spirit, and should take innovation wayin future economic development. What are included in Shanghai’s innovation？Which are most important among them?
Hua Min:As urban economy, Shanghai’s landing and infrastructure resources are anywaylimited, and cannot achieve long-term sustainable increase through materialinvestment. Sustainable increase of Shanghai’s economy must depend on increaseof total factor productivity and drive of knowledge element, the former dependson market mechanism and the latter requires government’s more investment ineducation and research and development. Therefore, the way of Shanghai’s futureeconomic development first requires firm practice in marketization, andgovernment needs to change from leader of economic development to supporter andserver. We can call it systemic innovation. Therefore, Shanghai needs to havesuch idea to lead economy to go out of government-led economic developmentmode, to promote culture innovation, and to actively promote entrepreneurspirit and risk-taking spirit. At the same time, government needs to loosenpolicy controls. Among all these reforms and adjustments, the key is to seewhether Shanghai can establish a scale platform to gather talents from the wholecountry, even the whole world. Systemic innovation which helps scale gatheringof talents is key to guarantee Shanghai’s central status in China andAsia-Pacific region economic development.
Reporter:As is mentioned by you, Shanghai’s future development requires a sustainableincrease mode that is market-oriented, respectful to knowledge, talents andpeople. Then, what do you think should government do in order to achieve such mode?
Hua Min:First of all, the government should loosen control and provide space formarket. Currently, access threshold of finance market is very high, andgovernment monopolizes in domestic market, which require reform to loosencontrol. For the external, the government should lower duties and marketaccess; for the internal, the government needs to permit private enterprises toenter property industry, including high-speed rail, medical care, banking，back to original intention of reform in 1970s.Secondly, government should lower cost of setting up a business, and encouragesmore people to enter market and set up their own business. Thirdly, governmentshould effectively protect knowledge property to guarantee that people havingknowledge can get what they deserve by invention and innovation. Fourthly,government should control housing price and lower tax in order to reduce costfor talented immigrants on housing and to increase earnings rate in innovationreturn. Currently, loose of housing restriction policy is just a dice gamebetween central government and local government. The central government has notsent a regulation and control signal, yet if such control is cancelled, thebubble will become huge, and therefore, the government should live through.Fifthly, the government should develop education, to promote quality of stockpopulation and to increase supply of flow knowledge. The most important thingis to launch technique education as Germany does. The key to promote techniqueeducation is to establish on-board certificate system, just like we need to getdriving license if we want to drive a car, or else no one will pay fortechnique education. Currently, number of university students is relativelyredundant, yet the society lacks intermediate technique talents, and thereforeto train intermediate and above technique professional education is in highneed. The most reasonable mode is that the country is totally responsible forcompulsory education; technique education is half-public goods, and governmentestablishes license system through legalization and both government and marketinvest in technique education; government sets up competition mechanism in higheducation.
Reporter:The topic of this year’s Shanghai Forum is “strategy in future ten years.” Inthe end, would you please imagine China in future ten years?
Hua Min:My expectation is to return to Xiaoping Line: to face the world and the future,to stick to reform and open policy and development is the absolute need.
Introductin of Hua Min:
Head ofGlobal Economy Research Institue, College of economics, Fudan University,professor, PhD mentor, vice president of China Economics Society, expert ofShanghai People’s Decision-making Advisory Committee, long engaged in researchin international economy, global economy and Chinese economy
