Editor's note: Leaders and officials sketched out economic policies and priorities for 2017 at the Central Economic Work Conference, which concluded with a statement on December 16, 2016. According to the statement, revitalizing the real economy is one of the major missions in 2017. Renowned scholars on macroeconomic policies analyzed how to achieve this objective at a forum organized by the China Center for International Economic Exchanges on December 21. Edited excerpts of their opinions follow:
A workshop of Hebei Changli Auto Parts Co. Ltd. in Shijiazhuang, capital of north China's Hebei Province, on November 25, 2016 (XINHUA)
Liu Kegu, former Vice Governor of China Development Bank
The 2016 Central Economic Work Conference mapped out four major objectives for 2017, namely, cutting excessive industrial capacity, de-stocking, de-leveraging, lowering corporate costs, and improving weak links; pushing forward agricultural supply-side structural reform; bolstering the real economy; and pushing forward sound development of China's property sector. In fact, the four tasks all relate to finance. The problem is, money is now fleeing from the real economy.
Rates of return on investment in the real economy are low, so funds naturally go elsewhere. Credit and loans are available to large and medium-sized enterprises yet are difficult for small and micro businesses to obtain.
To prevent funds from flowing excessively outside the real economy, China has to get its stock markets back onto a track of funding the real economy. The Central Government should draw up guidelines for property regulation and delegate regulatory responsibilities to local governments. Policymakers should normalize bank credit, lower borrowing costs, regulate commercial banks' trading on financial markets, and encourage banks to offer swift and direct support to small and micro businesses.
The government should also cut corporate tax and introduce property tax. The GDP target should be a floating forecast based on economic figures in every quarter, instead of a prediction at the beginning of the year. A rigid target harms China's efforts at macroeconomic regulation.
Zhou Tianyong, Deputy Director of the International Institute for Strategic Studies at the Central Party School
Money is leaving the real economy as the manufacturing industry's profit and its contribution to GDP are becoming lower, especially in the private sector. According to my estimation, the private sector constituted 10 percent of the GDP in 2010, while in 2014, it was 4 percent. The tax burden on businesses is comparatively higher in China.
Why does money keep flooding into the non-real economy? The reason is, financial intermediaries, such as microfinance and private lending, have boomed since 2011, thus financing costs for enterprises have risen rapidly. In addition, skyrocketing housing price has created a large group of people whose fortune has not arisen from business or industry, but from buying and selling of property assets.
The government should cut value-added tax by at least 5 percentage points and greatly reduce other fees paid by businesses. Tax authorities should further raise the tax threshold for small and micro businesses. In addition, the National People's Congress should draft a law to cancel unnecessary administrative charges. Lowering corporate costs also necessitates reforms in finance, land and energy. The most urgent task is to lower assess threshold to invite more private banks to the financial market.
With regard to the property sector, the government should introduce property tax to replace land transfer fees. Differentiated tax policies should be adopted based on the functions of real estates, which means tax rates on real estate for living and for investment ought to be different.
Li Ruogu, former Chairman and President of Export-Import Bank of China
China's real economy is faced with three major difficulties. To start with, China's money supply has been increasing at over 12 percent annually since 2011, but companies in the private sector are out of funds. In addition, there has been a sharp fall in investment efficiency in the real economy, considering the fixed-asset investment of 55.16 trillion yuan ($7.98 trillion) generated only 4 trillion yuan ($578 billion) worth of GDP in 2015. Finally, capital is flowing back and forth from one institution to another within the financial sector. Even if it finally reaches the real economy, the cost would be too high for businesses to bear. The collapse of the real economy has also led to enterprises relocating their manufacturing abroad, bringing pressure on the yuan's exchange rate.
The first solution lies in tax cuts. The Central Government should reduce the tax burden for entrepreneurs to boost the real economy by cutting taxes for favored industries, such as innovative startups and high-end manufacturing, and levying higher taxes on capital gains and real estate transactions to maintain fiscal balance. Government subsidy for bank loan interest should also be offered to favored industries in the real economy.
Small and micro businesses are the main employers and active players in economic development. China's financial industry, however, is centralized in several state-owned banks. To meet the financing demand of such businesses, China's financial system and its supervision need to change accordingly. The government should also encourage innovative financial instruments to support small and micro businesses.
The National Development and Reform Commission has made remarkable progress in delegating authority to examine and approve investments to lower levels and setting up an online approval system for investment checking in all sectors. More needs to be done. It should raise the threshold for examination and approval. This important reform would greatly benefit the real economy.
Zhang Yongjun, Deputy Chief Economist with the China Center for International Economic Exchanges
The Chinese economy has been suffering from low efficiency of financial operations. Though enterprises have large capital demands, China does not have developed capital markets to meet the demands and lacks a solid credit system, which together result in a low direct financing rate. Many long-term investment needs are met through more expensive indirect financing like short-term loans.
Essentially, to solve the low efficiency in finance, the government should accelerate the transformation of the economic growth pattern and raise the quality and efficiency of growth.
Despite the difficulties, from a long-term perspective, I have confidence in the economy. If the government can implement appropriate measures to reduce corporate costs, China can achieve a reasonable growth speed and good growth momentum.
Copyedited by Chris Surtees
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