Editor’s note: The following lecture by Liu Shijin, a Chinese scholar who presented it recently at a high-level Chinese government think tank, represents one strain of establishment thought on China’s future economic prospects. Liu cautiously predicts a soft economic landing, but warns of unstable factors and suggests that another round of fast growth is nearly impossible to achieve. His remarks, lightly edited for brevity and clarity, are presented below.
Within the next year or two, the Chinese economy should reach the bottom of its decline. But we should pay special attention to some of the unstable and uncertain factors, such as a relatively large real estate bubble that could have a very big impact on the economic bottoming and transition phase.
Regarding the sustainable development of a global governance structure, I will make three points. First, China’s structural reform and stable development are vital to the stability and development of the global economy. In the past, we often discussed the effect of the international economic situation on the Chinese economy. However, in recent years we have become increasingly aware that China’s economy itself is a vital part of the global economy.
China’s current GDP accounted for more than 15 percent of the total global economy. China’s contribution to global economic growth over the past two or three years was more than 26 percent. China’s reform and development and its impact on the global economic pattern are different from what they were in the past.
From the release of the Q3 data, we can see that after six years of adjustment the Chinese economy is now very close to the bottom, and we should not be too pessimistic about the Chinese economy. On the demand side, our high growth is mainly driven by high investment, so the bottom of the demand side signifies the bottom of investment. Not long ago, real estate had a relatively fast growth, even bubbles in some areas. However, the peak of China’s real estate investment has already passed, and real estate investment will gradually turn to low or even negative growth in the coming months. It has basically touched the bottom of the demand side.
On the supply side, production capacity reduction has made some progress, especially in terms of target adjustment, which is mainly reflected in the change of two indicators. In September 2016, the producer price index (PPI) for industrial products turned positive after dropping for more than 50 months. At the same time, industrial enterprise earnings turned to positive after more than 12 months of negative growth. In addition, most industry profitability has been good recently. These are significant signs of the supply side bottoming.
Presently, we should pay particular attention to some of the unstable and uncertain factors. If real estate does develop a relatively large bubble, it would create financial risk and financial pressure. In the case of a bubble bursting it would have a negative impact income distribution and other adverse economic effects.
Of course, if we can successfully reach the bottom in a year or two, it would be in an L-shape: coming straight down first, then turning horizontally and eventually coming out gradually on a medium growth platform. Some people may wish that it would return to 7 percent or 8 percent, or even higher. But I think the high growth we experienced in the past 30 years will not happen again.
A significant growth increase is impossible. We should give up this fantasy and instead welcome China’s solid medium-speed growth period. The L-shape landing means it will no longer decline. It will stabilize and gradually go on track with a medium-speed growth. The emergence of this track is critical to the development of China’s long-term economic development.
With a medium-speed growth stage, there will be no reason for a significant depreciation of the RMB. The main factor affecting the RMB exchange rate is the U.S. dollar. The Q3 performance of the U.S. economy has been good. Overall, however, the U.S. economy is not a whole lot better and the Chinese economy is not a whole lot worse.
Therefore in the medium run, the RMB exchange rate is a better or more reliable basis for stability, especially in the medium-speed growth period when the Chinese economy stabilizes. In the long run, if China’s reform can make substantial progress, and if our production efficiency can be improved, the RMB will have a certain amount space for appreciation.
In the next one or two years, we want China’s economy to successfully touch bottom. It will be a good foundation for the development of global economic stability and the reform of a global governance structure.
Liu Shijin is a former Vice Minister and research fellow of the Development Research Center at China’s State Council. This is an abridged translation of a recent speech by Liu. The Chinese transcript was posted to his personal blog on Oct. 31, 2016.