Huang Yiping speaks at the thirteenth Caixin Summit (Caixin Media)
Speaking on 18 November at the thirteenth Caixin Summit, held in Beijing from 16-19 November 2022, leading Chinese economist and Deputy Dean of Peking University’s National School of Development Huang Yiping highlighted that in order to recover and rebound, moving past the pandemic era, China’s economy needs to transform its growth model. In his telling, growth will need to rely more on innovation, rather than just factor input (要素投入); more on the domestic market, rather than exports; and more on “new driving forces”, rather than real estate.
Growth these days can’t count on exports or consumption
Setting the context for his comments, Huang noted that in an environment of high inflation and risk of recession in Europe and the US, “exports seem to be having trouble”, while consumption at home is weak as a result of Covid restrictions and resulting uncertainty. In his analysis, government investment in infrastructure remained the only of these three past growth drivers – exports, consumption, investment – to support the recent economic recovery. Relying on public investment, however, won’t work in future, according to Huang.
Beyond the current moment, Huang argued that conditions for future economic growth have fundamentally changed compared to the past 40 years: the country has moved from a low-income, low-cost development model toward higher income levels—and thus higher costs. Second, the trend toward globalization on which China relied so greatly for its past economic growth has reversed. Third, the country’s demographic dividend rapidly becoming a demographic challenge. Given this context, Huang proposed that the Chinese leadership’s introduction of “Dual Circulation” to better leverage the domestic market “makes sense”.
On the supply side, Huang argued that the “domestic cycle” must boost efficiency to strengthen innovation and facilitate industrial upgrading. Commenting specifically on the conditions conducive to innovation, Huang proposed Guangzhou’s Pearl River Delta and Yangtze River Delta as models to be learned from, noting three factors crucial to their success: efficient markets, hard-working entrepreneurs, and limited government intervention. For China to innovate successfully, Huang implied, private enterprises – responsible for 70% of innovation in China – must have a predictable business environment and space within which to experiment.
Domestic consumption crucial for China’s economic modernization
Next to innovative capacity and production efficiency, Huang emphasized the critical role that domestic consumption would play in driving the next stage of Chinese growth and development.
Given that external demand could no longer be relied on to absorb Chinese production, Huang stressed that without increased domestic consumption, additional investment would lead only to excess production capacity. This dead weight of excess capacity would not only curb growth in the strict sense, but also inhibit innovation.
So, in no uncertain terms, Huang argued that China’s growth and industrial modernization hinges on the build-up of adequate levels of domestic demand. The reason for depressed consumption according to Huang? China’s low household income levels and restrictions associated with the Covid pandemic. He noted that China’s total consumption accounts for only about 55% as a share of GDP, or 20 percentage points lower than most developed and even many developing countries. Resulting from unequal distribution of income and the incompleteness of the Chinese social security system, the low level of income at the base of society limits spending and thus consumption, according to Huang.
What could bring consumption to the levels required for China’s recovery and future growth?
Stressing first and foremost that Covid was a factor restricting domestic demand, Huang argued that getting past the pandemic by 2023 would be a major support for consumption. Beyond this, monetary and fiscal policy support could further boost consumption levels, and thereby help to drive growth. Moving away from the past focus on export-oriented industries and infrastructure investment, policy could shift toward the household sector, consumption, social security, and toward people’s livelihood. After all, a rise in domestic consumption, says Huang, will be key for the long-term sustainable growth of the Chinese economy.