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[music] Hello [music] and welcome to Dialogue.
The Communist Party of China has released a major blueprint outlining the country's development path through 2030. Known as the 15th five-year plan, it not only sets the course for China's own growth, but also offers the world a window into its next phase of modernization.
So, what will this next stage of growth look like? And how will China deal with rising protectionism, boost domestic demand, manage local government debt, and just as importantly, how can it speed up technological innovation to strengthen its self-reliance?
To delve into these questions, I'm joined by Professor David Dong Quay Lee, director of the Academic Center for Chinese Economic Practice and Thinking at Chinua University. Welcome to Dialogue of Professor Lee.
Well, now we have this outline of the 15th five-year plan. Compare it to the 14th five-year plan in terms of the goals, in terms of priorities. Uh, how do you see it?
>> The major difference between the 15th five-year plan and the 14th five-year plan in my view is the sense of urgency. The 15th five-year plan has a has a bigger sense, a more significant sense of urgency. Uh, in the official language, uh, the 15th five-year plan will be the critical, a very critical, uh, period, uh, in order for China to reach its goal, to reach, uh, modernization by 2035. More specifically, in the 15th five-year plan, there are dual goals, two goals, okay? Number one is to make sure China's technology and China's industries are keep on upgrading so that China's, uh, industries, China's, uh, real economy and technological, uh, uh, status will be self-reliant at the high level. Okay, self-reliant being self-reliant at a high level. The second goal is to make sure the Chinese economies will be able to grow at a reasonably fast pace, okay, by, uh, boosting domestic demand. So, to me, these are the two most important salient features of the 15th five-year plan.
>> Uh, very, very clear. Thank you for that. But in order to achieve that goal, I mean, some people would say, if you compare the next five years to the five years we are in right now, uh, some say, I think you also mentioned about this, you know, profound changes in China's environment, development environment, in particular, I would say external environment, for example, the rise of protectionism, tariffs, for example, tech restrictions, that obviously will serve as a hindrance in terms of Chinese economic growth.
>> Absolutely. These are challenges, but meanwhile, these are also, um, momentums for China to rely upon, upon in order to speed up its, uh, process of modernization. Okay. More specifically, the tighter and the tighter restrictions of technological export to China from the West actually gives a higher sense or more important sense of urgency for China to be, um, able to develop its own technologies. So, there are, these are also, um, motivations for Chinese, uh, industries, for Chinese engineers, and Chinese scientists to, um, be, um, to be, to work harder or to be more self-reliant. And I, I really think China is in a position to reach this goal since China has the largest, by far, the number of new college graduates each year. We're talking about 4.5 million engineering graduates, and also we're talking about Chinese engineers are well-trained, and also having much lower level of, um, uh, wage rates than their Western counterparts. The other area of urgency is that, um, very unfortunately, many countries in this world, mostly in the West, are restricting China's export to this, to their economies, so that China has to come back to rely upon boosting its own domestic demand in order to, uh, compensate for the loss of potentially a huge foreign market, which again is something which Chinese economy should have, uh, all along. So, now we have a sense of urgency. So, both in terms of technological, uh, restrictions to China and, uh, smaller, uh, uh, chances for Chinese companies to export, uh, give China an urgency to work harder on domestic issues.
Mhm. Uh, well, on domestic demand, uh, Professor, uh, you know, you say this is, you know, one of the top priorities for China's economy, and you have advocated for using consumption subsidies rather than direct income transfer to stimulate spending in the short run. Tell us more in that respect.
>> Uh, yes, absolutely. Because the Chinese households are quite different, to be very frank, from their Western counterparts. Chinese households are very much willing to put money aside for their future expenditure, whether it's being taking care of their elderly parents, or taking care of their young kids, or for their own retirement, and also, of course, for, uh, unexpected and potentially large medical bills. So, of course, in the long run, China needs to beef up its social welfare system, however, it takes time. In the meantime, uh, what China can do and should do, and which should be very, uh, very quick in boosting domestic consumption, is by subsidizing consumption. More specifically, the central government can and should, and has already done so in a small scale, to provide, for example, 20% or 15% of the, uh, consumption, uh, uh, bill, okay, at the cashier's, uh, uh, uh, desk. Okay, the central company would pay 20% or 15% of whatever, uh, a consumer is ready to pay. This means that the, the price of goods is reduced by 20% or 15% for a period of time, for, for example, for the coming three years. This way, consumers will be more willing to spend money on consumption goods rather than on savings. And also, very interestingly, in the Chinese economy, our governments, central and local, most rely upon sales tax, or broadly speaking, value-added tax. When the consumption level goes up, okay, the, uh, the turnover amount, the amount of turnover of the economy goes up, sales tax revenue goes up, VAT goes up. In the end, the central government does not have to spend much money. Okay, by my calculation, virtually, okay, almost virtually zero amount of increases in the actual subsidy. In other words, you subsidize consumers, and then consumers spend more, and then through collecting tax on the higher volume of sales, okay, the government gets money back. So, this is a win-win situation. This is a win-win solution for the time being.
Well, interesting suggestion here. But Professor Lee, you know, how do you look at the, the resource, you know, the, uh, the reason behind this low level of spending, maybe, or the weak consumption in the China market?
>> Well, there are two major reasons for the, uh, slow pace of consumption. Number one is lack of basic social welfare provisions. Okay. In China, we have many households who are not actually, uh, getting enough pension from the government, or actually who are not expecting to get the good pension for their, for their retirement from the government. The pension program has to be beefed up. Also, medical, uh, medical expenses, uh, are getting, getting higher and higher. So, we need more subsidies on the medical, uh, uh, uh, front. Also, we need, uh, more, uh, provision for education, because Chinese households typically are very much keen on their kids' education. They pay a lot of money out of their pocket for kids to go to additional classes, for kids to go to summer schools, for the kids to go even overseas, in order to have a better future. So, in this regard, the government can beef up the education system by providing, uh, more, uh, and at more education, uh, uh, uh, supplies at a lower price, and also, uh, retirement, uh, uh, taking care of, uh, old parents, elderly parents, by providing low-income or low, uh, subsidized programs for, uh, the, for the retirees, actually can also be important because in China, you look at the picture. Okay, in China, surrounding each large city, there are lots of stretches of land which are very inexpensive, and the government, local governments can easily convert the inexpensive land into, um, some kind of resource for retirees to live in, and swapping out the expensive land in cities, in inner cities. This, so, this, these are the welfare issues. Until these welfare issues are resolved, households are very reluctant to spend money. The other reason for the lack of enthusiasm in, in consumption is the expected slower pace of increases in disposable income. So, for that, the, to Chinese economy has to, uh, has to grow faster. Okay. Currently, frankly speaking, the Chinese economy is running too slow. Okay, we're below its natural rate of growth. When the economy is growing below its potential, uh, households don't feel comfortable. They feel that tomorrow their disposable income may come down. Okay, so these are the two fundamental reasons. One is lack of social welfare provision. The other is a slower pace of anticipated, uh, GDP growth and disposable income. Both problems should be resolved. I do hope that, and also expect, the 15th five-year plan will provide us with good policy packages to deal with these two issues.
>> Mhm. Very interesting. You mentioned about the Chinese economic growth, uh, rate, you know, in general, people say we, you know, for each year we are in recent years, you know, we are not seeing specific targets like, you know, 5.3% or 5.2%. Usually, we say this flexibility around 5%. Do you think, like, how high should be this, um, you know, the proper rate that will unleash the Chinese economic growth potential?
>> Well, in my, in my view, okay, and also, I believe this is a consensus view among Chinese economists, that the Chinese economy needs to have a target of economic growth. This is like, uh, the conductor of the orchestra. Okay, the conductor has to move his pattern, pattern, right, to to give a tempo of the whole orchestra. Okay, without the moving of the, uh, the pace, the whole orchestra will, will not be synchronized. Okay. However, however, I do not expect that in the 15th five-year plan, there will be an explicit, uh, GDP growth target. Why? Because again, using the metaphor of orchestra, uh, the Chinese local governments are trying to beat the national target. So, if the central government were to give a 5% GDP growth target, then many, many provinces are trying to move faster than 5%. In the end, the eco economy will have its own problem. It's like the orchestra. Each segment of the instruments are trying to move a little bit faster than the conductor's, uh, uh, uh, indication. In the end, the the music wouldn't be beautiful. Okay. So, that being said, I do believe that there will be subtle and implicit targets of economic growth.
>> And most likely that implicit, uh, target of economic or GDP growth will be 5%. Okay. So, because the f coming five years will be critical, critical for China to reach its target, to real, to realize modernization by 2035. 5% will be a very, uh, comfortable number.
>> Mhm. Uh, but Professor Lee, you know, speak of the economic growth, of course, there's a big factor that is the property market. Are we out of the woods yet?
>> We, we are not, we are not out of the the water yet. Okay. The, the, the property market is still under the water. Why? Because again, it goes back to the expectation. Many households are still expecting that they will have slower pace of growth in their disposable income. And when they have these expectations, they will not be willing to spend money on investment, on housing investment. So, we have to, we have to be patient, uh, to wait for the expectation of increases of disposable income to come back. Now, meanwhile, meanwhile, I have been arguing around that local governments in China should do something to speed up the transactions in the housing market. For example, in Beijing and Shanghai. Why? I have been advocating that the local governments to abolish, abolish all restrictions on the purchase of housing, especially for regions which are not super hot. Okay. So, in other words, with very few exceptions like in Beijing, the exceptions being near Chinua University, my, my neighborhood. Okay, except for these small areas, all regions, uh, in Beijing should have free, free transactions. Okay. Currently, in order to have, to buy a piece of land, any piece of property in Beijing, you have to be a local resident, or you have to pay personal income tax, so to speak, for three to five years before you can buy a piece of property in Beijing. That, that policy should be abolished, except for certain regions which are prone to have revival of rapid increase in housing.
>> Uh, and if you look at the other areas, um, we also see signs, you know, for, for some time already, deflationary, you know, pressure, uh, the economy has been undergoing such a pressure for some time. And what is the solution, you know, going forward? And also, what's behind the deflationary, uh, trend? And how should the, the Chinese government do to say, make sure there's, I mean, reasonable, let's say, uh, inflationary pressure, or inflation?
>> Yeah. Uh, there's no doubt the Chinese economies going through a process of deflation, which means that price levels, whether it's, uh, uh, consumer price or producer price, are overall declining. And, um, the very undesirable consequence of this defra, deflationary cycle is that enterprises are getting lower and lower level of profit, and therefore they're not willing to invest. Well, what, how to resolve this issue? Let's come back to the fundamental reason or cause of the deflation cycle, and then to find out the fundamental reason, we have to ask ourselves, who are the largest ex, spenders of the economy, and why they are slowing down in their, in their spending? Okay. When biggest imp, spenders are slowing down in their spending, of course, the purchasing power for goods and services is coming down, and therefore we have deflation. Then, okay, to give you the answer, okay, who are the biggest spenders? They are the local governments. Local governments spend around 41% of GDP, for good or for bad, okay, it's, it's a fact. Okay, why? Because local governments are not only providing, providing public service, mostly they are making infrastructure investments, and also building new cities. But now, because of the mounting local government debt, local government's expenditure, uh, is now reducing from 41% of GDP to something around 35, 36% of GDP. Okay, by the way, Chinese consumers are only spending 38% of the, of the GDP. Okay, local government's decline in their SP, expenditure, okay, is the single most important reason for the decline of purchasing power of the Chinese economy, and therefore, in turn, responsible for the deflationary cycle. Okay, and then, if you agree with my analysis, the, the answer to fight deflation is super, super, super simple, that is to swap out local debt, let local governments to revive their energy in expenditure. Okay, this time around, not by doing infrastructure, but by spending more on social welfare for their local residents. Okay. Therefore, my proposal again goes down to something I discussed moments ago, that is, central government's increases, uh, is central government debt, which is now only 28% of GDP, or among the lowest in the whole, whole world, percentage-wise. And meanwhile, Chinese central government has the largest, by far, amount of the amount of assets under their belt. Okay, much, much higher, much, much higher than all other governments in the world. Okay. So, this is a simple solution. This is a solution for reviving the Chinese economy.
>> Yeah. You know, it deals with the, the government debt, and also it could successfully, uh, you know, dealt with, uh, this is also deflationary pressure. Um, what about this, you know, people often talked about, you know, like in involution, people call the nerm, you know, disorderly competition or price wars. Does that also contribute to this, um, deflationary pressure?
>> Absolutely. The, the, the so-called, um, uh, uh, so-called excessive competition, or whatever, in involution, okay, uh, is actually a consequence of the lack of, um, uh, demand of the Chinese economy. When there is the lack of demand in, uh, automobile, in home appliances, in, you name it, in various services, the companies, of course, in order to survive, would have to reduce their prices. So, the fundamental reason for this excessive competition, or, um, or, uh, unproductive, uh, uh, competition among enterprises, and also within industries, is, uh, can only be resolved by the Chinese economy to have higher aggregate demand. I'm talking about demand from local governments and from households. Okay. So, there's a, there's a need for a push, a push from outside, a push from outside enterprises, a push from outside industries, for from the government to have higher aggregate demand, and therefore to solve the problem of excessive competition.
>> Mhm. Well, move on to this, uh, what you call sweet trouble in manufacturing. [snorts] uh, you pointed out, you know, several sweet troubles in Chinese, uh, this sector, manufacturing, such as domestic demanding, demand lagging behind industrial capacity. Uh, tell us more also on that respect, and what is the sweet part and why it is trouble?
>> I, I call this a sweet trouble, that is, many, in, in the Chinese economy, we have lots of industry, almost all industries have, have ample, ample amount of production capacity. Okay. So, we have said goodbye long time ago to the era of shortage economy. So, consumers are well-treated. Okay, consumers are pampered. Meanwhile, enterprises are becoming miserable because they are in trouble making a profit. So, in order to resolve this sweet trouble, I call it sweet trouble rather than bitter trouble, because bitter trouble reminds us of the days of shortage economy. Okay, economy of shortage. Okay, to solve this, uh, sweet trouble, okay, we need again to boost domestic demand. Also, also, this, the government is federal, central government can provide certain subsidies for certain enterprises to, to retreat, to retreat from the industry, that is, to, to get out of, to exit from the industry, because we have too many enterprises, too much production capacity in almost all industries. So, having less enterprises, having less production capacity, the balance will be reinstalled.
>> Mhm. Well, the other direction, of course, is, um, overseas companies coming to China to do more investment. That means China needed to open wider, let's say, um, in terms of opening up its, uh, uh, different sectors, for example, service sector, manufacturing sector. And also, at the end of the year, we know that the Hana Island, um, you know, customers operation will be closed, to have a separate customers operation. This is, you know, to build Hannah into a free port island there. Uh, how do you look at the prospect of opening up, in terms of the Chinese policy, you know, without the, the rest of the world?
>> Absolutely. The Chinese economy today is highly, highly competitive in most of its industries and in services. Okay. So, that China is completely ready to open its doors to, uh, to foreign companies, the foreign technologies. Okay. So, we are wide open. We are, we're more than ever ready to open up. Okay, so this is absolutely the direction of change. Let me give you a tangible example, a simple example. In my view, the Chinese economy is ready, is ready to announce zero type of rates for automobile, for cars. Okay, why not? Why not we have zero type of rates for the GM, for Cadillacs, Cadillacs, for, uh, uh, uh, Toyota, for, uh, uh, Ford manufactured, uh, overseas? Why not? We are ready for that. Okay. Also, Chinese services, uh, are also ready in most cases for zero type of rates. That's why China is the only economy in the world to have consistently the import-export. In other words, to promote import, it's very rare. You have export, export, export, that's, that's very common. But import-export. This is very, very rare. Also, that's why the Hainan province will become the independent and a separate customs region, much like Hong Kong, much like Macau. Okay. So, the Hainan will become very open economy of China, and gradually between Hainan province and the rest of the Chinese economy, the border control will be, of course, right now very tight, very strict, gradually, gradually lifted. Okay. So, that Hainan will become, um, become a catalyst of opening up and reform for the whole, uh, Chinese economy.
Mhm. Well, last question, Professor Lee. Uh, right now, we know that the Chinese side and the American side, they have reached a consensus and on different issues. Basically, we are seeing both sides walking back from a trade confrontation or tariff competition. I mean, it's good. You know, at least there's a one-year truth, probably, you know, that's what we can expect. Uh, furthermore, long-term prospect, you know, trade and economic relationship between the two sides.
>> I am, um, very optimistic about the China-US and China-Europe, European, China, China's Japan economic and the trade and financial collaborations. Okay, because between China and these economies, there's still tremendous room for collaboration, and there are many, many consumers and business executives, and also, um, investors who stand to benefit from, uh, continued collaboration. So, I'm confident. However, I am also aware of of a lot of problems which will come back, which for sure, almost for sure, will come back in the coming months or in the coming weeks, uh, uh, about, uh, China-US trade, China's, uh, China-European trade. Okay, there will be bumps. There will be, uh, uh, troubles down the road. So, let's stand, let's stand ready to resolve these issues. Okay. As, um, invest, as investors in the stock market, uh, uh, um, um, I, I think, uh, no, we, we should be very, very careful, very, very careful about this up and downs and volatility down the road. We, we should not pretend that all issues are resolved, even for issues which have been fully agreed upon. Okay. Uh, in the Korean meeting between the two, uh, great leaders of the great nations, still there will be troubles. The US Congress, the US Capitol Hill, the US, uh, politicians, and some US business people may make noise. They may make trouble. Okay? So, let's be ready. Let's be ready solving the problems. And the meanwhile, the stock markets will be volatile, will have up and downs. Okay? So, this is not smooth. So, I am optimistic in the long run, but I'm very cautious in for the coming one year, and the coming, especially coming months and coming weeks.
Well, on that tone, we are coming to the end of today's [music] discussion. Many thanks to Professor Lee. You can also watch us on the CGT [music] app on YouTube. I'm Shindor. Thanks for being with us. See you next time.
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