facing an l-shaped economy

1、<p>　　Facing an L-Shaped Economy</p><p>　　Editor’s Note： China has entered the 13th Five-Year Plan period （2016-20）， which is pivotal for building a moderately prosperous society， and this year it’s als

2、o confronting the arduous task of carrying out supply-side structural reform. In the first quarter， China managed sound economic growth， structural upgrading and the improvement of people’s livelihoods despite numerous c

3、omplex domestic and overseas factors. At the same time， it still faces a series of deep-seated contradictions and proble</p><p>　　Overall economic situation </p><p>　　Q： In the first quarter， Ch

4、ina’s GDP grew 6.7 percent year on year， which remains within the reasonable range and is higher than market expectations. Other economic indicators showed a recovery. These， in the eyes of some people， indicate “a good

5、start”or a moderate rebound of the economy， which bodes well for future growth. Some optimists even believe China’s economy has bottomed out and will see a “U-turn.” Is it safe to say that China’s economy is turning arou

6、nd？ What’s your prediction on the</p><p>　　A： By and large， China’s economy has realized stable growth since the beginning of this year. The overall situation is in line with expectations， with some sectors

7、faring better than anticipated. However， inherent problems in economic development still persist， and new challenges have emerged. Given that， it’s hard to simply describe the situation as “a good start”or a moderate reb

8、ound. To make an accurate analysis， one should take into consideration China’s development phase as well as the inte</p><p>　　In the first quarter， some sectors realized stable growth as hoped， and there was

9、 even a recovery in some areas. With GDP growth standing at 6.7 percent， employment was stable， incomes increased， economic and financial risks were brought under control. Furthermore， the price of some industrial produc

10、ts bounced back， the performance of industrial enterprises began to rally， and fixed assets investment picked up. The number of newly started projects also increased， and supply and sales were robust</p><p>

11、　　Progress was also made in sectors that we had hoped to boost. The service industry accounted for a larger share of the national economy， new models and types of businesses sprouted up， and some high value-added and hi-

12、tech products experienced rapid growth. In addition， household consumption kept upgrading， and domestic tourism boomed during the May Day holiday （April 30-May 2）. 　　Moreover， the Yangtze River Delta and Pearl River Del

13、ta―two developed regions in east and south China， respectively</p><p>　　However， there is no denying that some inherent problems have not been completely resolved and that new ones have surfaced. Stable econ

14、omic growth still relies heavily on investment. In some regions， the balance between financial revenues and expenditures faces great pressure as economic risks have increased. </p><p>　　What’s worse， as inve

15、stment from private enterprises declines precipitously， risks from real estate bubbles， excess production capacity， bad loans， local government debt， and volatile stock， foreign exchange and bond markets， as well as ille

16、gal funding， have all increased. In regions featuring a lower degree of marketization， lowend industries and single industrial structure， downward economic pressures are accumulating， employment problems are becoming pro

17、minent and social conflict risks are gr</p><p>　　All things considered， China’s economy is likely to experience an “L-shaped” trajectory， rather than a “U-turn” or a “V-shaped” rebound. </p><p>

18、　　What’s worth mentioning is that the L-shaped trend will not come to an end within one or two years. In the next few years， sluggish demand accompanying overcapacity is not likely to experience a significant improvement

19、， and the economy is unlikely to register consecutive rapid growth following a rebound as seen in previous years. </p><p>　　We are nonetheless confident in the future of China’s economy. Given its huge poten

20、tial and strong elasticity， China’s economic growth will not suffer a sharp slowdown. Therefore， one should not be overly optimistic or distressed about the rise or fall of some economic indicators. </p><p>

21、　　While China’s overall economy shows signs of recovery， economic development remains polarized with growth in east coastal areas picking up and other regions struggling. What does this imply？ 　　This is inevitable for t

22、he economic development of a market economy―resources always flow toward high-yield fields， which eventually results in excess production capacity. Excess profits will consequently diminish due to over-competition. Then，

23、 some resources will shift to new fields， leading to innovatio</p><p>　　Under the “new normal，” China urgently needs to optimize resource allocation， foster new growth engines， and form new industrial struct

24、ures. Some regions， sectors and enterprises will stand out. Those that don’t fare so well will learn a lesson and will have to adapt， which is a good phenomenon. </p><p>　　Since China’s reform and opening up

25、 in 1978， its economy has become polarized. In this process， a batch of vibrant regions， competent enterprises and famous brands have sprung up. After the global financial crisis in 2008， the world economy has also becom

26、e increasingly divided. Entering the “new normal，” China’s economy has begun to experience further polarization. Last year， the Central Government noted that businesses which chose to adapt themselves to the “new normal”

27、 and value innovation， qu</p><p>　　This year， the trend continues and has become more conspicuous. In the foreseeable future， more energetic regions， internationally competitive industries and enterprises wi

28、ll emerge， while some regions， industries and enterprises will find it more difficult to survive. </p><p>　　It’s better to confront such challenges and find out solutions rather than putting up with the prob

29、lems. Now， the people and government officials in these regions， industries and enterprises are trying to get rid of any delusions， become self-reliant， and embrace reform and innovation in an effort to catch up. </p&

30、gt;<p>　　Macroeconomic control </p><p>　　Reviewing the economic situation in the first quarter， we found that the rebound of fixed assets investment played a leading role in stabilizing economic growt

31、h. Therefore， some people argue that a short-term stimulus is still viable and effective and should be employed again. What do you think about that？ </p><p>　　It’s a question arousing great attention both at

32、 home and abroad. Whether or not China is able to properly handle such a policy will have both short-term and far-reaching impacts for the country’s future. 　　To promote healthy macroeconomic development， measures shoul

33、d be taken from the perspective of both the supply and demand. The focus changes with different development stages. At present and for a long time to come， China will take steps to push forward supply-side structural ref

34、orm while ex</p><p>　　While advocating the new development concepts of innovation， coordination， green， opening up and sharing， adhering to the general principle of seeking improved stability， and carrying o

35、ut a stable macroeconomic policy， accurate industrial measures， flexible microeconomic policies， practical reforms and inclusive social security， three points should be highlighted in formulating the macroeconomic policy

36、： </p><p>　　The first is expanding the aggregate demand and sticking to a proactive fiscal and prudent monetary policy. Another is firmly pushing forward supply-side structural reform by focusing on rectifyi

37、ng the mismatch in supply-demand structure and allocation of production factors. The five tasks of de-capacity， de-stocking， cutting costs， de-leveraging and shoring up weak growth areas should also be carried out. In ad

38、dition， efforts should be made to promote the positive anticipation of and confidence</p><p>　　Looking back at the first quarter， we found that some problems were being settled， and at the same time， some ne

39、w problems emerged. What should be the focus of macroeconomic control？ </p><p>　　Different countries face different difficulties，which also vary with different stages of development. The question is how to c

40、orrectly analyze the difficulties and find out solutions. Since China’s reform and opening up， the nation has been courageous and has persevered in confronting and overcoming difficulties and has made significant progres

41、s on this front. </p><p>　　Admittedly， a number of problems are emerging from China’s economic development. For one thing， the pressure of an economic slowdown is looming. For another， the real economy faces

42、 high leverage. If we rush to alleviate the downward pressure， the leverage ratio will rise even further. Therefore， efforts should be made to analyze the problems in order to discover the crucial factors needed to surmo

43、unt the dilemma. 　　In China， the contracting labor force and upgrading industrial structure will he</p><p>　　However， high leverage will definitely lead to high risk. If it’s not well controlled， high lever

44、age may spark a systematic financial crisis and negative economic growth. Many might lose their savings. </p><p>　　Therefore， policies targeted at the stock， foreign exchange and housing markets should be co

45、mmitted to resuming their functions and respecting their rules of development， rather than being used as an instrument to maintain economic growth. </p><p>　　Stock market policies should resume their financi

46、ng functions， protect the rights and interests of investors， and give full play to the regulation function of the market mechanism. They should also improve the fundamental systems concerning issuance， delisting and trad

47、ing， strengthen market supervision， elevate information disclosure quality， and crack down on insider transactions and stock price manipulation. </p><p>　　Foreign exchange market policies should give priorit

48、y to the improvement of the monetary policy’s autonomy and give way to the self-correcting mechanism of the international balance of payments. They should also facilitate the formation of an exchange rate operating mecha

49、nism that is flexible in both directions and is based on market demand and supply. For the real estate market， excessive inventory should be reduced in the process of pursuing people-oriented urbanization. </p>&l

50、t;p>　　In carrying out these policies， attention should be paid to two key aspects. </p><p>　　First， the government should avoid behavior oriented to achieve short-term goals. It will take a long time for

51、the world economy to ride out of the global financial crisis. It’s also a prolonged process for China to complete structural adjustment. Given that， we should strengthen confidence， resolution and patience， and address b

52、oth the symptoms and root causes with a focus on the latter. </p><p>　　Second， these policies should be carried out properly. Even if the direction is correct， once overexerted， such policies always fail to

53、achieve their expected results and may even lead to added risks. </p><p>　　Supply-side reform </p><p>　　China’s supply-side structural reform has caught the attention of both the international c

54、ommunity and Chinese society. Has a set of specific implementation measures been formulated？ Looking at first-quarter economic performance， what are the focuses and difficulties involved in further pushing forward the re

55、form？ 　　The Central Government has made it clear that carrying out the supply-side structural reform will be its main task in terms of economic work for some time to come. In the long run， </p><p>　　Since l

56、ast year， the Central Government has made all-around plans for the supply-side reform， ranging from theoretical reflection， toplevel design， policies， measures and main tasks. During a meeting of the 12th Central Leading

57、 Group for Financial and Economic Affairs held in January， special attention was paid to the supply-side structural reform. The group clarified aspects of the current situation， the direction， goal and plans of the refor

58、m， as well as who should carry it out and how. </p><p>　　The Central Government and related departments have formulated specific work plans， and efforts will be made to put them into operation. At the same t

59、ime， provinces including Guangdong， Jiangsu， Zhejiang and Shanxi， and Chongqing Municipality have published their own reform schemes. Some enterprises have voluntarily suppressed their impulse to expand blindly， focused

60、on their main business， and moved on from the stage of reducing output and pursing higher quality to boosting both output and qual</p><p>　　The five major tasks of supply-side structural reform are interrela

61、ted， supplementary and arduous. Since the beginning of this year， an array of policies has been promulgated to reduce costs and boost the areas showing weak growth. In the days to come， further efforts need to be made in

62、 reducing excess production capacity and tackling “zombie companies.”In other words， dealing with employment and debt problems will be inevitable. </p><p>　　Since the beginning of this year， the government’s

63、 policies aimed at cutting overcapacity and destocking have achieved some effect in some places. However， administrative intervention has played an important role in the process. There are suspicions that cutting overcap

64、acity is seen as a one-size-fits-all approach， and it is reminiscent of measures taken in a planned economy. Do you think administrative actions are necessary to push forward supplyside reform？ How should the government

65、and the ma</p><p>　　For those sectors wherein the market system functions well， the government shouldn’t intervene in their attempts to reduce overcapacity. The consumer products sector， for instance， is alr

66、eady highly market-oriented and has sufficient market competition―this curbs overcapacity naturally. </p><p>　　All levels of the Chinese Government should take the initiative to accomplish the five tasks： &l

67、t;/p><p>　　Cutting overcapacity： Local governments should be clear about their specific tasks and targets as well as enforce stricter requirements for environmental protection， energy consumption， quality， stan

68、dards and safety when granting market access. They should also strengthen the enforcement of laws and regulations in these regards in addition to dealing with “zombie companies” by cutting off subsidies and loans to them

69、. </p><p>　　Deleveraging： The government should avoid using stimulus policies. Furthermore， loan and trust companies should abandon the practice of ensuring the return of investors’principles. The government

70、 should also crack down on illegal fundraising， in accordance with the law， in order to regulate the market. </p><p>　　Destocking： The government should step up the reform of the household registration syste

71、m and establish and improve fiscal， taxation and land policies to encourage rural migrant workers to buy homes in urban areas. </p><p>　　Reducing costs： The government should reduce taxation， cancel unreason

72、able charges and streamline procedures of administrative examination and approval. </p><p>　　Improving weak links： The government should carry out targeted poverty alleviation， promote sci-tech innovation an

73、d environmental protection， and improve the transparency of funds used for infrastructure construction. </p><p>　　There are concerns that cutting overcapacity and deleveraging are contradictory to stabilizin

74、g growth and will increase downward pressure. What’s your view on this？ </p><p>　　The key is how to perceive the relationship between short-term and mid- and long-term effects. </p><p>　　In the

75、long run， stabilizing growth is in line with the country’s economic restructuring， which drives and guarantees sustainable economic growth. For instance， cutting overcapacity and deleveraging will help to optimize the ec

76、onomic structure and promote healthy and sustainable economic growth. 　　However， in the short term， stabilizing growth while restructuring may seem counterintuitive. For instance， cutting overcapacity may affect some re

77、gions’ GDP and fiscal revenues， while deleveraging ca</p><p>　　It should be noted that economic growth fueled by excess capacity is unsustainable and the pain that such growth could incur would be far greate

78、r than the pain that would arise from the process of cutting overcapacity. For instance， some companies with excess capacity are suffering losses， owing both money to the bank and wages to workers. These companies should

79、 be closed in order to release scarce resources such as land and loans. Next， their employees should be covered by social safety net， an</p><p>　　While cutting excess capacity， the supply of effective produc

80、ts should be increased， and new growth engines should be nurtured. Many places， including those in central and west China， have developed a series of new growth engines in the ongoing round of structural reform. However，

81、 places which shoulder huge burdens in terms of overcapacity may not be able to see instant results from the short-term restructuring. They should nevertheless take a leap of faith and go through with the reforms. </p

82、><p>　　Expectation management </p><p>　　In recent years， expectations about economic prospects have been unstable， with both pessimistic and optimistic forecasts being aired. How can we properly gu

83、ide social expectations on these prospects？ </p><p>　　These expectations haven’t appeared out of thin air. They’ve come from real experiences and can influence reality. Macro-control under a market economy i

84、s essentially expectation management. The world economy has become more complex and volatile after the global financial crisis， leading to increased uncertainty in expectations. Under such circumstances， the government n

85、eeds to strengthen its guidance of the public’s expectations. </p><p>　　The key to stabilizing expectations is to stabilize the government’s policies. </p><p>　　Macroeconomic policies should be

86、stable. The more resolutely and substantially we implement the supply-side reform， the more positive the market expectations will be. To the contrary， if we continue to spur growth through the old method of stimulus meas

87、ures， suspicions are bound to emerge. 　　We should also strengthen forward guidance of our policies and increase their transparency by clearly elaborating on their purposes and meanings so as to reduce the chance of misr

88、eading and to correct misun</p><p>　　Moreover， it’s important to improve the credibility of the media. On the one hand， positive reports are necessary to improve confidence. On the other hand， reports which

89、blow up achievements while ignoring the problems will damage the public’s confidence and lower expectations. Furthermore， we should allow scholars and professionals to express their opinions on the economy freely， which

90、will also help to stabilize perceptions. </p><p>　　Under the current economic climate， the roles played by people， especially three kinds of people―entrepreneurs， innovators and officials， are particularly i

91、mportant. How can they be motivated to push forward the supply-side reform？ </p><p>　　People are the most active factors in production. In order to get used to the “new normal，” the vitality and creativity o

92、f these three kinds of people should be made better use of. However， in reality， a lot of work remains to be done in order to spur the vitality of these people， because some of them cannot understand or get used to the “

93、new normal.” </p><p>　　Entrepreneurs play a central role in optimizing the allocation of resources and improving the supply and demand structure. Their creativity should be made use of in order to push the s

94、upply-side reform forward. A new type of relationship between the government and entrepreneurs should be established in order to grant the latter equal rights and opportunities and a greater sense of security. </p>

95、<p>　　Risk prevention </p><p>　　Since last year， a decline in bank profits and the rise in non-performing assets have drawn intense scrutiny. The capital market also experienced fluctuations in the fi

96、rst quarter. How can China avoid systematic and regional financial risks when facing downward pressure？ </p><p>　　Finance is the core of the modern economy. Problems in the financial industry will hinder the

97、 realization of a moderately prosperous society. Although financial risks are controllable on the whole in China―especially since the banking sector has a strong capacity to withstand risks―the fluctuations in the stock