Reviving a New Engine

　　China should let its consumers and entrepreneurs play a larger role in driving economic growth

　　Every April， thousands of government leaders， business magnates and world-famous scholars gather at Boao， a small town that was once a fishing and agricultural village， to attend the Boao Forum for Asia Annual Conference (BFA)， discussing pressing global and regional issues in white tent-style halls with a tropical pacific flavor.

　　With the theme of Asia’s New Future： Identifying New Growth Drivers， the 2014 conference included 60 panel discussions， with an emphasis on reform， innovation and sustainable development.

　　The speedy growth of Asian countries and emerging countries over the past few years has largely been attributed to globalization and industrial relocation. Yet， most Asian economies， especially China， seem to have been losing steam in their economic growth.

　　Uncertainties and destabilizing factors in the world are increasing， and the spillovers of the international financial crisis are still affecting Asia， said Chinese Premier Li Keqiang at the opening ceremony of the BFA annual conference held on April 10.

　　Meanwhile， some Asian countries have been crippled by economic slowdown， rising inflation， capital withdrawal and currency depreciation. Pessimistic views about the prospects of emerging economies have resurfaced， Li said. To sustain its development momentum under the new conditions， Asia needs to find a fresh source of development drivers.

　　China will make efforts in deepening reform， adjusting economic structure and improving people’s livelihood to seek new growth engines， said the premier.

　　Source of growth

　　As population dividend and cost advantage gradually fade away， and external demand from the West remains fragile， China’s investment-and-export-led growth model has hit the rocks.

　　In 2013， China’s gross domestic product (GDP) was a mere 7.7 percent， the lowest level since 1999， bidding a farewell to the explosive economic expansion to which the country has become accustomed. “It’s predictable，” said Martin Jacques， an economic commentator from the University of Cambridge， arguing that China invested much more in its economy than the United States in proportion to its GDP.

　　After years of rapid economic expansion， China is now focused more on ensuring steady economic development， adjusting the structure of the Chinese economy and advancing reform， rather than blindly pursuing high-speed GDP growth.

　　“We will pay more attention to sound development in the medium and long run，” said Premier Li， claiming that China would not resort to short-term stimulus policies just because of temporary economic fluctuations.

　　“Entrepreneurs rather than government can create real demand， and then sustain healthy economic expansion，” said Zhang Weiying， professor of economics at Peking University.

　　In the past few years， China has been focusing on the role of government in keeping the economy running via large-scale investment. To shield its economy from the torrents of the global financial crisis， a 4-trillion-yuan ($644.4 billion) stimulus package was launched to finance programs covering almost all sectors.

　　But the package only yielded short-run effects， and has even incubated an array of potential problems down the road， like macroeconomic imbalance， government debt and shadow banking.

　　“If we hadn’t slowed down steps this year， the economy would most definitely have suffered a calamitous collapse within one or two years from now，” said Zhang， who insisted that immediate stimulus plans would only undermine the long-term economic stability and contribute little to real benefits， for the massive stimulus plan failed to make a dent in the unemployment rate.

　　Thus， it’s time to make a change. China’s policymakers are realizing more and more that the investment-led model doesn’t fit China’s current situation anymore， and what the country can now count on is domestic demand.

　　According to an analysis by the World Bank， China’s household consumption only accounts for 35 percent of its GDP， 25 percentage points lower than the global average. If China can elevate this ratio to 50 percent by 2020， a total of $1.4 trillion needs to be spent， which is equivalent to the combined GDP of Mexico and Spain. In other words， there is huge potential to boost domestic consumption.

　　Mitch Barns， CEO of Nielsen， a leading global information and measurement company， believed the loosening of the one-child policy and the aging population would help create tremendous market demand. As Barns pointed out， 2 million-3 million babies would be born every year due to the policy change， and another 5 trillion yuan ($805.5 billion) would be consumed on education and baby products.

　　The country is heading toward an aging society. “China would be the world’s most aged society by the year 2030， with a higher proportion of people aged over 65 than in other countries，” said Barns.

　　Urbanization will also advance domestic consumption. Premier Li said that narrowing the gap between urban and rural areas and among different regions would also unleash huge potential for growth.

　　Now， rural people spend more on food and housing while urban households spend more money on transportation， communication and recreation. As more and more of the rural population migrates to cities and towns， there is considerable room to reduce this gap.

　　“Each year， millions of rural consumers become first-time brand buyers，” said Barns， who noted that huge business opportunities would be discovered among the group of new consumers.

　　The question now is how to turn these new urban residents into real consumers. Despite the fact that China has gone all out to push for urbanization in recent years， the ratio of consumption against the GDP hasn’t been remarkably raised.

　　Many rural people who have migrated to urban areas are not included into the social security network， and some of them even don’t own a house to live in or have a job to support their family.

　　As Barns noted， only when people feel secure about their future well-being， can they show a strong willingness to spend their money.

　　To enhance people’s sense of security， China’s urbanization should shift its focus from blindly expanding the size of the city to lifting people’s living standards， such as allowing these who migrate to cities and towns equal access to social security， medical treatment and education with urban residents， said Zhang Xike， Greater China President of private equity investment group Apax Partners.

　　“Each year， over 10 million people settle down in urban areas， and most of them are in their 20s and 30s. This will inject great vigor into the consumer market，” he said.

　　Spark entrepreneurship

　　Some participants pointed out that reforms should be carried forward in the public sector， and state-backed companies need to be more professional and innovative. They also argued that the private sector should be allocated with more resources and be allowed to compete into more areas.

　　“The government should make clear companies’ ownership， protect entrepreneurs’ property rights and enhance judicial transparency and equity， as well as reduce its stake in state-owned enterprises. In this way， business owners will feel free to expand and innovate，” said Zhang Weiying.

　　Compared with large state-owned enterprises， small and medium-sized enterprises (SMEs) are under greater pressure to innovate， and some of them even spend more on this front than their counterparts in the West.

　　“The development of SMEs， which make up the bulk of the private sector， is largely affected by the banking and credit system，” said Edmund Phelps， American economist and winner of the 2006 Nobel Memorial Prize in Economic Sciences.

　　“Most of them feel frustrated by competing for loans from state-backed commercial banks， and have to seek private loans with annual interest rates as high as 20 percent to 30 percent， which pose great challenges to small and micro-businesses，” said Huang Rong， Vice Chairman of the All-China Federation of Industry and Commerce.

　　“The government should encourage entrepreneurship in the private sector， which will also stimulate domestic consumption， because profit earned by these companies mainly goes into the pocket of consumers， while that of state-owned ones always goes straight into the hands of the government，” said Phelps， who advocated that supply management would help realize sustainable growth.

　　In February， the China Banking Regulatory Commission unveiled the first batch of licenses for private banks， which will broaden SMEs’ access to loans and provide low-income families with more long-awaited financial services.

　　“The move will enable those being refused by state-owned banks to grow with more financial support，” said Chen Zhiwu， professor of finance at Yale School of Management， who highly praised the success story of China Minsheng Banking Corp.

　　Aside from financial support， Chen argued tax reduction could also facilitate economic restructuring and foster points of growth.

　　In fact， the Central Government has kicked off pilot programs to replace the business tax with a value-added tax in some sectors and regions， reducing a tax burden of 120 billion yuan ($19.33 billion).

　　Since August 1， 2013， the Central Government has further exempted 6 million small and micro-businesses from business tax and value-added tax. At the same time， progress was also made in improving financial support for them.

　　According to statistics from the People’s Bank of China， loans for small and micro-enterprises extended by major financial institutions， small rural financial institutions and foreign-funded banks posted an outstanding amount of 13.21 trillion yuan ($2.13 trillion) at the end of December 2013， up 14.2 percent year on year.

　　Zeng Peiyan， Vice Chairman of the BFA， believed there are still a plenty of opportunities for China to exploit. “This year will be a year of reforms in the economic sector as well as the fiscal and tax system. When all these measures and policies are completely put in place， China’s economy will make further progress.”

　　(Reporting from Boao， Hainan Province)

　　Key Points of Premier Li Keqiang’s Speech at the Boao Forum for Asia Annual Conference 2014

　　- Building a community of shared interests， common destiny and shared responsibilities in Asia

　　Asian countries need to work together to further liberalize trade and facilitate investment， as well as upgrade regional and sub-regional cooperation. While the World Trade Organization should take a leading role in the development of global trade， the Regional Comprehensive Economic Partnership and the Trans-Pacific Partnership should become important supplements to the multilateral trade mechanism.

　　Asian countries should facilitate infrastructure construction including railway， highway， aviation and water transport. They should cooperate in the upstream， midstream and downstream of the industrial train， make progress in sci-tech and talent training， and promote growth of the “new economy” sectors， including green energy， environmental protection and the Internet. China is ready to intensify consultations with relevant parties on the preparations for the Asian Infrastructure Investment Bank.

　　Asian countries should build consensus， make active efforts and jointly fulfill their due responsibilities to achieve peace and stability in Asia. They should promote security dialogue and consultation， strengthen cooperation on non-traditional security issues， including disaster management， maritime search and rescue， counter-terrorism and combating transnational crimes， and actively explore the establishment of a regional security cooperation framework in Asia.

　　- Seeking new growth engines for driving the Chinese economy

　　—Deepening reform

　　China will further streamline government administration and delegate more power to lower-level governments， introduce a system of listing government powers， consider the adoption of a management model based on a negative list approach， accumulate useful experience through the development of the China (Shanghai) Pilot Free Trade Zone and spread it to other areas.

　　China will carry out a new round of opening up at a high level and an important part of this endeavor is to further open up the service sector， including the capital market. It will actively create conditions to establish a Shanghai-Hong Kong stock exchange connectivity mechanism.

　　—Adjusting economic structure

　　China will narrow the gap between urban and rural areas and between developed and underdeveloped areas and improve industrial structure. China will implement a new type of people-centered urbanization and invest more in shantytown renovation. The service industry will be promoted and the trial to replace turnover tax with value-added tax will be expanded to more service sectors. China will support the development of green， new-energy， energy-saving industries and phase out outdated capacities.

　　—Improving people’s livelihood

　　To increase residents’ income， China will provide more fiscal and financial support and services for college graduates and the unemployed to find jobs or start businesses. It has expanded tax breaks to more small and micro companies so that they can provide more jobs. The government will continue improving its social security system in order to make people more willing to spend.

　　By Deng Yaqing

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