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Chinese Economy at the Turning Point - From Capital Accumulation to Technological Innovation

Author: Source: Date:2017-05-05
On May 5, Xiaonian Xu, professor of Economics and Finance in CEIBS, delivered a speech in the Public Lecture Series of SZIDI on Chinese Economy at the Turning Point. Xiaonian Xu conducted an in-depth discussion on economic restructuring and business model transformation of China. He believed that the economic growth in China needs to be transformed from capital accumulation to innovation.

An overview of Xu’s views -
▲ Xu said that China has fallen into the middle-income trap, with per capita income staying at about $10,000. Such situation points to the malfuction of macroeconomic policy and that the expansionary fiscal and monetary policies of the government are only to stimulate investment and demand. As a reflection of macro policy, however, the consequence of “transforming from real economy to fictitious economy” is to transfer the money that has been put into real economy to real estate market. Faced with such situation, Xu Xiaonian mentioned: “the housing price in Shenzhen will continue to rise, so people who haven’t bought a house yet can now make up their mind to buy. People who do have a house are too early to be happy as the price goes higher, it may fall in the future more sharply.”

▲ The housing price is related to tens of thousands of households. I personally hold that there are two main reasons for booming housing price last year. One is the overissue of currency and the other is the negative growth of land supply nationwide for two consecutive years (2014 and 2015). As the negative growth of land supply imposes pressure on supply side and the overissue of currency increases the demand, under the role of supply and demand, therefore, the result is booming housing price in large and medium cities nationwide. For easing the rise of housing price, we can proceed from two aspects. One is to tighten the currency, and the other is to increase the supply of land. As far as I’m concerned, these two aspects are more effective than the administrative suppression. In market economy, do we still require administrative methods to limit prices, loans and purchase?

▲ Our discussion on supply side shall center on enterprise efficiency, that is, how to promote the technological innovation of enterprises. The supply side needs a healthy and fair competitive environment rather than industrial policy. Therefore, Xu Xiaonian proposed four major initiatives for the reform of supply side:
1. Protect private property rights. The protection of property rights helps entrepreneurs build stable expectations for future profits and enables them to make long-term investment under such stable expectations. Besides, it is a precondition for long-term investment in R&D. And the most effective way to protect property rights is judicial reform;
2. Narrow the scope of state-owned economy. Since state-owned enterprises have neither the power of innovation nor pressure to innovate, they cannot be the main body of innovation. The main body of innovation must be private enterprises. In order to build innovative economy in China, we shall narrow the scope of the state-owned economy. With greater state-owned economy, there is less hope for innovation of this country.
3. Loosen and relieve regulation. Regulation is a great “enemy” of innovation. Innovation does not need government support, but needs a free environment and free flow of resources, which are prerequisites for innovation.
4. Conduct comprehensive tax reduction. Let the market play a decisive role in the allocation of resources and release more resources from the administrative allocation (namely, from the hands of the government), and let enterprises allocate those resources in market. This is the highest significance of tax reduction, rather than just reducing the burden of some enterprises.

▲ “Transformation does not mean career change, and career change means death.” Xu said that some entrepreneurs misunderstand “transformation” as “career change”. Transformation really can break a way out but it often requires you to think about enterprises that you are most familiar with, to change the present situation and get a way out. Meanwhile, he believes that innovation can be done in traditional industry, even there is no high-tech. What innovation needs is concentration.

▲ The future macro-economy of China is very certain, and the “L”- shaped long tail will last for three to five years. How long to go depends on government’s next action. If the government’s actions are effective, the L-shaped small tail will end soon. If the government accomplishes nothing in the reform, we will then have to forge ahead in the L-shaped tail.

The enterprises need to think about what to do at this stage, and how to shift from manufacture in the past to R&D and from market share to innovation, products and to focus on products and technology. As long as the enterprises make up their minds to transform, there is hope for China’s macro-economy in the future. There is no uncertainty for future macro-economy. As long as Chinese enterprises can innovate and continue to maintain their vitality, there will be hope for China’s future macro-economy.