Expert background: Prof. BAI Chong-En (白重恩)
Prof. BAI is Mansfield Freeman Chair Professor and Dean of the School of Economics and Management at Tsinghua University, Beijing, China. He earned his Ph.D. degrees in Mathematics and Economics from UCSD and Harvard University, respectively. Professor BAI’s research areas include Institutional Economics, Economic Growth and Development, Public Economics, Finance, Corporate Governance and Chinese Economy.
Professor BAI is a member of the National Committee of the Chinese People’s Political Consultative Conference, the “14th Five-Year Plan” National Development Planning Expert Committee, the Chinese Economists 50 Forum, the China Finance 40 Forum, and Chinainfo 100. From 2015 to 2018, he was a member of the monetary policy committee of the People’s Bank of China (PBoC). He is a member of the Scientific Council of the Barcelona Graduate School of Economics and was a member of the executive committee of the International Economic Association.
CMG had the opportunity to talk to Prof. Bai on 29 March 2023 in the context of the “Staying in Dialogue with China” webinar series – a series created in partnership with the Stein am Rhein Symposium (stars), Caixin Global as well as further partners in the Europe-China context. You can find an overview of the planned webinars here. The following is an authorized excerpt from the conversation.
CMG: The just concluded “Two Sessions” were quite explicit about the challenges around growth, debt, unemployment and external challenges. What is your high-level assessment of where China’s economy is right now and how do you see the economy performing this year and beyond?
We have just come out of the pandemic – a very important change. Businesses – especially services – are coming back to normal, and this normalization will be very important this year.
But China faces a challenging international environment. In many advanced economies, monetary authorities these days take a tighter approach to monetary policy to keep inflation under control. We have also seen the failure of some banks, and the uncertainty in these economies will affect external demand for Chinese exports.
In the longer run, however, the Chinese economy has great potential to achieve relatively high growth rates for the next five to ten years.
First, China has a large domestic market, something quite important for business. Think about the digital economy. Large platform businesses for instance can use this large home market to develop their digital platform and rapidly bring it to scale.
Second, and another advantage: the Chinese population also provides a very rich human capital basis, with over 10 million students graduating from college every year. So even though the overall population may be shrinking, this is an important new source of human capital.
Third, China has set a good start in two important areas for future growth: green and digital. In solar and wind, for instance, some Chinese players are already internationally competitive. But also in the digital realm, Chinese firms have been very innovative, especially on the consumer side. This innovation momentum needs to also expand to other areas.
What measures will the Chinese government proactively take to stimulate the economy?
It has both monetary and fiscal policy tools at its disposal, but fiscal policy will be more important. The Chinese government announced a higher level of fiscal deficit for 2023 than last year. The headline numbers may not look like a stark increase, from a 2.8% to a 3% deficit. But if you look at a broader definition of fiscal deficit, it is a significant increase.
Also, the economy is expected to grow faster than last year, so a fiscal deficit of 3% in terms of GDP means that in absolute terms it is actually a quite substantial increase. Monetary policy supports fiscal policy, so that the two don’t play opposite roles.
The ”Two Sessions” this year flagged concerns around financial risks. How do you observe the situation regarding the financial risks?
One potential area of risk is local public finance. During the pandemic, fiscal revenue grew slower than normal, but expenditure grew at a normal rate. So, after three years, local public finances are in a dire situation.
This is one potential source, because local governments have borrowed a lot, and if they get into financial trouble, this may be transmitted to the financial sector. But if we manage to realize our growth potential, in the long run, we can grow the economy "out" of this situation.
Another potential risk is real estate. We have a situation where the population is shrinking, the rate of urbanization is slowing, and a large percentage of urban population already owns property. Future growth in residential real estate therefore cannot be as rapid as before – another challenge.
We need to engineer a smooth transition towards a “new normal” in the real estate sector. And that transition has to be carefully managed, so that in the transition period we don’t take a big hit to the broader financial sector.
In December last year, the Central Committee and the State Council issued a key long-term policy with time-horizon 2035, the “Strategic Plan for Expanding Domestic Demand (2022-2035)”. What does this policy try to solve?
China in the past used to rely heavily on the external market. In 2007, net exports contributed about 9% to GDP. Then, the Global Financial Crisis hit, and China tried to transition towards more reliance on domestic demand. So today, net exports are much less relevant for overall GDP, around 1% to 2%. This is the longer-term trend.
More recently, during the pandemic, external demand was quite robust even when several countries were hit hard by the pandemic. So, we saw a couple of years of rapidly growing external demand. But as the world economy is coming back to its post-Covid normal, we may see a reversal of the situation to how it was before the pandemic.
Therefore, we need to sustain growth with internal demand and can’t keep relying on exports forever. Demand from household consumption is especially important. Today, however, households in China still consume considerably less in terms of their share of GDP than in other economies.
On the investment side, I expect growth from new areas. China needs a lot of investment in the areas of the green and digital transformation. This will also drive domestic demand.
Coming out of the “Two Sessions”, how would you characterize the role of the market from the perspective of policymakers, and do you see more willingness to trade off economic vs. social policy goals?
It has always been the official policy that the economy should be guided mainly by the market. The official saying is that the market should play a decisive role in allocating resources. At the same time, the government should also play a role.
It is common in all successful economies that both the market and government play important roles. China is entering a new phase of economic development. The government talks about moving from rapid growth to quality development. Hence, equity is becoming an important issue.
People in a civilized society care about the underprivileged people. It is also in the Chinese cultural tradition to care for them, and thus not really new. But the situation has changed, so now the attention to "common prosperity" becomes more important.
I don’t see it as a huge change in terms of ideology. The circumstances have changed, and we are adapting to these new circumstances.
Do you think there is a shift in attitude towards the idea of “unorderly capital expansion” (资本无需扩张) in the State Council's government work report?
I do sense there is some change. But I would interpret it more as the result of learning.
As the economy is reaching a certain stage of development, you start paying more attention to social issues, and think about how to make capital better serve the other policy objectives. I think policymakers are still trying to find their way, it is quite complicated. It is a learning process.
In the longer-run, they will make adjustments to the detail regulations, but the general direction remains that China wants to achieve Chinese-style modernization with common prosperity, high-quality development, peaceful co-existence with others in the world and living sustainably with close attention to the environment.
Hence, I don’t see it as a change, but rather an adaptation based on the new knowledge gained so that regulations can keep improving with the new circumstances.