Huang Yiping: China Must Shift Toward Direct Resident Support to Boost Economy
Dean of PKU's National School of Development urges central government to make concrete financial commitments to improve resident welfare
For today’s episode, I bring an opinion piece by Professor Huang Yiping. He is the Dean of the National School of Development at Peking University and also a member of the People's Bank of China's Monetary Policy Committee.
It’s worth noticing that the article was first published on《领导文萃》(Leadership and Decision Making or “Lingdao Wencui”), a bimonthly journal established by Fujian Provincial Party School in 1992. It’s an influential publication among mid and senior-level Chinese officials.
The original journal lacks a digital edition, so I've sourced the text from the school's official website, where it was later republished.
Some highlights:
The old model of economic growth needs a complete overhaul. The tried-and-true practices are no longer sustainable. The new growth model must lean heavily on innovation, domestic market development, digital transformation, and policy reform. China has to move away from the extensive growth model based on low-cost advantages and change toward innovation-driven growth.
To boost innovation capacity, maintaining an open economy is absolutely critical - this cannot be overstated in today's climate of heightening geopolitical tensions. The private sector's dynamism is another crucial factor. Policy support should zero in on breaking through technological barriers. In terms of other issues, the market and entrepreneurs will naturally sort out the rest.
Instead of getting bogged down in debates about whether consumption or investment should take priority, the focus should be on striking the right balance between the two. Currently, China's policy toolkit seems better equipped to boost investment and supply while falling short on stimulating consumption. A bold policy shift toward promoting consumption is worth considering. This means the government needs to put real money on the table - whether through enhanced social security benefits, improved welfare for urban residents, or direct stimulus payments. This kind of concrete action is what's needed to reverse the economic slowdown and generate sustainable momentum.
Below is the translation I made:
Soucrce: https://nsd.pku.edu.cn/sylm/gd/538685.htm
Reflections on Major Current Economic Issues
对当前几个重大经济问题的思考
Understanding Key Changes in China's New Economic Phase
According to joint research by Chinese and American think tanks, China's new stage of economic development faces three significant transformations. First, China's traditional low-cost advantage is eroding as production costs rise, making it increasingly difficult for industries relying on this strategy to remain competitive. Second, the global market environment has shifted dramatically. While China's economic development over the past four decades largely benefited from globalization, with exports and foreign direct investment serving as key growth drivers, both these channels now face mounting challenges. Third, demographic changes, particularly an aging population, present formidable challenges. Beyond these primary shifts, other significant transformations are underway, notably in digital technology and green development, all signaling China's entry into a new economic phase.
This evolution raises a crucial question addressed in "China 2049," a collaborative research project between Peking University's Institute of National Development and the Brookings Institution: What changes are needed to maintain sustainable growth? The book's core conclusion emphasizes that China's future demands a fundamental transformation of its growth model, as the familiar practices that drove growth for the past 40+ years have become increasingly unsustainable. This transformation necessitates a greater emphasis on innovation, domestic market development, digital technology, and policy reform. At its heart, the shift requires moving from an extensive growth model based on low-cost advantages to an innovation-driven approach that can sustain China's economic development in the decades ahead.
How to Enhance Innovation Capability
The first critical factor is national openness. China is currently experiencing unprecedented changes in the global landscape, with international markets and environments vastly different from the past. In today's complex international environment, characterized by measures like America's "small yard, high fence" policy, maintaining openness is crucial for innovation - isolation will only hinder high-level innovation capabilities. For instance, while previous export volumes rarely raised concerns, now even the initial exports of "new three items" trigger sensitivity from certain countries.
Against this backdrop, fostering innovation requires a deep understanding of the importance of maintaining openness. Western nations, particularly the U.S., still hold much of the world's advanced knowledge and technology. Cutting ties merely in response to their restrictive measures could create larger problems and impede China's scientific and technological progress. While China can certainly mobilize domestic resources for major research challenges, realistically speaking, no country in today's world can solve all scientific problems solely through its own efforts, nor can any nation claim to possess all cutting-edge technologies. This makes openness a crucial variable, especially in today's context of intensifying geopolitical tensions.
The second factor is the vitality of the private sector. Everyone recognizes the innovative capacity of private enterprises. Currently, a key challenge lies in boosting and maintaining entrepreneur confidence, particularly among private business owners. Over the past decade, China's innovation capabilities have shown remarkable progress, notably in catching up with the technological frontier. The critical question now is whether this momentum can be maintained - a challenge that presents significant hurdles and complexities.
Understanding the New Overcapacity Challenge
Overcapacity has long been a persistent issue in China's economy, but today's overcapacity problems differ significantly from the past. Previously, excess production could be readily absorbed through exports to international markets with minimal pushback. Many entrepreneurs operated under the simple principle that as long as products could be sold and markets existed, overcapacity wasn't a real concern.
Why is today's overcapacity situation more complex? There are two main reasons:
First, heightened geopolitical tensions have changed the landscape. Western politicians are now quick to scrutinize China's production capacity, even when there's only potential impact, resulting in a less accommodating international market environment than before.
Moreover, China has transformed from a small to a large economy, which fundamentally changes the dynamics. The key distinction between small and large economies lies in how their trade volumes affect global market equilibrium. In the past, China's imports and exports had minimal impact on international markets due to its smaller economic scale. Now, as a major economic power, substantial exports from China can significantly disrupt the global market balance - a concern that rightfully worries many countries.
Second, there are policy-related challenges, particularly in the new energy sector. While government support for innovation through industrial policies is positive, the focus should be on overcoming technological bottlenecks rather than simply expanding production capacity. Once technical barriers are overcome, markets and entrepreneurs can handle other challenges independently. However, the current situation shows that many local governments are eagerly supporting new energy products, with some subpar facilities finding willing government supporters somewhere in China's vast territory.
The key point is that both central and local government support should prioritize overcoming technological bottlenecks rather than simply replicating existing production capacity. While industrial policy is important, its emphasis should be on technological innovation rather than mere duplication of similar industries.
Balancing Consumption and Investment
Overcapacity will persist as long as macroeconomic imbalances remain unresolved. This pattern has evolved from labor-intensive manufacturing (clothing, toys) to home appliances and later to industries like steel, aluminum oxide, and cement. The common thread among these sectors with overcapacity issues is high investment coupled with insufficient consumption - a pattern that needs to change.
For years, China's growth was investment-driven, leading some scholars to advocate for a shift toward consumption-driven growth. This has sparked debate among economists, with some supporting the transition to consumption-driven growth while others maintain that investment remains the true growth engine.
However, the debate over whether growth should be investment-driven or consumption-driven may be missing the point. What's crucial is achieving a balanced ratio between investment and consumption. Exclusive focus on either is problematic: America's past challenges stemmed from overconsumption and underinvestment, while excessive investment without corresponding consumption leads to unrecoverable investments and overcapacity. Previously, China could offset these imbalances through international markets, but this is increasingly difficult now that China has become a major economic power.
The importance of consumption cannot be overstated. Economic development ultimately aims to improve people's living standards, and increased consumption is necessary to absorb production output. However, sustainable consumption requires real purchasing power - people can't consume without adequate income. Therefore, finding the right balance between investment and consumption is an immediate priority.
Current Chinese policy appears more adept at supporting investment and supply than consumption, though recent initiatives like trade-in programs for consumer goods have shown positive results. Sustainable economic growth requires robust consumption growth. Without it, and without visible improvements in living standards, the economy lacks vital momentum, risking a negative spiral among consumers, producers, and investors.
A bold policy shift toward consumption support is worth considering. However, consumption stimulus must go beyond empty promises. As part of macroeconomic policy, the government should make concrete financial commitments through enhanced social security, improved welfare benefits for urban residents, or direct cash transfers to citizens.
Only through such tangible measures can the macroeconomic trajectory truly reverse its decline and regain momentum.