Dean BAI Attended “Global Economy and Policy Choice” Forum and Gave a Speech
May 10, 2020
How will the sudden outbreak of the coronavirus epidemic change the global landscape? What is the new pattern of global industry? How will China's economy develop in the future? Mansfield Freeman Chair Professor BAI Chong-En, Dean of School of Economy and Management, Tsinghua University ,said that in order to return the economy to normal, it is necessary to improve the production and consumption environment, to protect enterprises with bright prospects but difficulties in the short term and to protect the financial system as well as people's livelihood, at the "Global Economy and Policy Choice" thematic forum sponsored by Phoenix Finance, Shanghai Advanced Institute of Finance and National School of Development (NSD) at Peking University.
BAI noted that when considering the implementation of measures, special attention should be paid to avoid the long-term adverse effects caused by short-term stimulation. There have been such lessons learned in the past, when relatively strong measures had been taken to protect growth but brought some negative effects in the long run.
On how to protect enterprises with potential in long-term development, BAI said that it is crucial to restore the normal production and consumption environment. To create demand for these enterprises, we need to suit the remedy to the case, and the degree of protection in different industries is supposed to be different. For example, in international tourism, even if consumers receive consumption coupons or their disposable income is increased, it is difficult to bring demand to the industries. Many enterprises want to alleviate the cash flow pressure including labor costs, capital costs, rent and tax, etc. However, those enterprises under too much pressure still need more help, such as certain financial subsidies.
BAI proposed some opinions on the adjustment of the industrial structure. He believed that the household consumption needs structural adjustment. The proportion of Chinese household consumption in GDP is less than 40%, lower than that of many other countries in the world, not to mention those large economies in G20, where the proportion of household consumption in GDP is almost all above 50%, and some as high as 70%. In order to maintain sustainable economic development in the future, it is necessary to increase the proportion of household consumption in GDP.
In addition, BAI said that the industrial structure needs to be adjusted in terms of urbanization-related public expenditure, household consumption, trade and digital economy. He held that the digital economy can bring benefits to everyone and it is necessary to speed up the construction of new infrastructure and master the pace while remaining cautious about traditional infrastructure. Although traditional infrastructure can create demand and solve some employment problems in the short term, it is necessary to consider its long-term impact and whether it can help enterprises with better prospects, in order to avoid overcapacity.
Below is the text version of the speech.
The theme of this link is the new pattern of post-epidemic industries. Now China can say that after the epidemic, the epidemic situation has been effectively controlled, but from a global perspective, the epidemic situation is still in progress and there is still great uncertainty in other countries. However, it is still possible to make some inferences about China's economy in the future.
Try to avoid long-term negative effects caused by short-term stimulation
As for what needs to be done, the first task is to make production and consumption links return to normal. If the consumption environment cannot return to normal, the economy can hardly do so.
First of all, a particularly important task is to protect enterprises that have bright prospects but are facing difficulties due to severe short-term shocks. If some or most of these enterprises get bankrupted, the economy will not only suffer a lot, but also be difficult to recover in the future.
Secondly, we should protect the financial system. The financial system has a very important function of supplying for the real economy. If the financial system is badly harmed, its ability to supply for the economic system in the future will also be negatively affected.
In addition, we should protect people's livelihood. Many enterprises are facing difficulties at this stage; thus, their employees are also struggling, and is necessary to ensure their normal life.
Also, we need to speed up economic restructuring. In fact, even if the epidemic has not out broken, some structural adjustment is needed. The truth is this epidemic requires faster economic structural adjustment and adjustment based on the long-term structural changes brought by it.
When considering about these things, special attention should be paid to avoid long-term negative effects caused by short-term stimulation. There have been such lessons in the past. Sometimes, in order to maintain growth, some relatively strong measures have been taken, which indeed played efficient role at that time, but may be harmful in the long run.
Different industries face different pressures, so different industries need different levels of protection. For example, in tourism industry, even if coupons or increase of income is possible, it is difficult to bring demand to the industries because the consumption environment does not exist.
Many enterprises want to alleviate the cash flow pressure including labor costs, capital costs, rent and tax, etc. However, those enterprises under too much pressure still need more help, such as certain financial subsidies.
Future economy needs to increase the proportion of household consumption in GDP for sustainable development
In addition, what adjustments should be made to the industrial structure? First of all, the proportion of Chinese household consumption in GDP is less than 40%, lower than that of many other countries such as those large economies in G20, where the proportion of household consumption in GDP is almost all above 50%, and some as high as 70%. In order to maintain sustainable economic development in the future, it is necessary to increase the proportion of household consumption in GDP.
How to increase the proportion of household consumption in GDP? In the short term, the consumption environment is inadequate and per capita disposable income are not high enough, increasing residents' income may have some impact on consumption.
In terms of consumption, the service consumption is relatively low, including medical care, old-age care, etc. Old-age care includes some financial services, such as old-age insurance, which cannot rely solely on the government and residents need to prepare for themselves. There is still much room for development in education, sports, entertainment, etc. With development of economy, improvement of people's living standards and the aging of the population, there will be more and more room for development in these service consumption areas. Besides, some other issues is affected by the purchase restriction, some of which may need to be adjusted in the future.
In addition, what relates to the industrial structure are public expenditures and household consumption related to urbanization. In places where level of urbanization is still not high enough, it is necessary to continuously improve the level of urbanization, especially its quality. As this process goes, the industrial structure will also be affected, especially in the investment and consumption related to the housing of farmers in cities. This has a lot to do with the land policy and should be adjusted in the future to help residents better enjoy the benefits of urbanization.
Another aspect of industrial restructuring is related to trade. In the past ten years, China's labor-intensive exports have gradually decreased their share in the global market, because of the increasing cost of labor accompanying the continuous economic development. However, for other countries such as Japan and South Korea, their labor-intensive exports share decreases while their capital and technology-intensive exports share increase. However, the latter one in China is declining and this needs to be changed.
As for the structural adjustment of capital and technology-intensive exports, China has the ability to change for its continuous development of technology and the ability to provide production, capital and technology-intensive products. However, there is also resistance, namely, the increasing trade resistance and trade friction. Trade friction is different for different trading partners. For example, many trade frictions are caused by concerns about national security. Is there any way to eliminate such concerns of trading partners? Other countries may have less trade friction, so we should find ways to do more trade with them, which requires continuous optimization of our trade structure.
The global supply chain has faced great risks before the outbreak. Some imported products are vital to the supply chain, but they are unsafe, which enquires better arrangements for the Chinese supply chain. The epidemic has attracted concerns about the issue not only in China, but also in other countries. Therefore, on the one hand, China must ensure the safety of its own supply chain, and on the other hand, it cannot completely separate itself from the global supply chain system. If everything is self-sufficient, efficiency will also be affected. Therefore, we should make two preparations. On the one hand, we should think at the bottom line to ensure safety. On the other hand, we should make full use of the opportunities brought about by globalization. China has benefited from globalization over the past few years and should continue to benefit in the future, but supply chain security should be considered at the same time.
In the adjustment of industrial structure, another crucial aspect is the digital economy, which is actually a long-term trend, promising even without the epidemic. China has advantages in the field mainly for its large market. The epidemic has brought new engines to the development of digital economy, while online economic activities, such as online office, education, medical care, conferences, retailing, digital government, etc., may have a sustained impact. For example, some habits developed with the help of online meetings may continue to exist in the future.
The evaluation, pricing and accounting of digital assets should be supported by a complete system
There are several factors contributing to a better digital economy. First, the data itself, as an element, which has not been well distributed in the market yet, needs better handling in the future. Its distribution is quite difficult, because data, as an asset but unlike other physical ones, needs a complete set of systems to support its evaluation, pricing and accounting.
The governance of the digital economy will also bring challenges. When considering the future development of the industry, we must consider what changes have taken place in the governance of digital economy and what development this change bring to the industry. The digital economy affects not only enterprises, but also the whole market environment. For example, the digital economy makes the transaction cost lower. In the future, we can expect a more advanced credit and financial system.
In the development of digital economy, Internet consumption has developed well in the past, but there is still much room for Internet industry to catch up. Why is the development of Internet consumption better than that of Internet industry? A very important reason is that some of its services are related with a comprehensive platform. For such a large market like China, the conditions for the development of such a platform are relatively good. Although the industrial Internet also has some common services, such as online meetings, more industrial internet technologies are specific, which makes the market advantages not fully realized. Therefore, there is still much work to be done for the industrial Internet.
Internet consumption in China has developed very well and there will still be some new developments in the future. What needs special attention is the possible impact of 5G. 5G has changed the functions of mobile terminals. For example, many calculations are now performed on terminals. With the 5G’s future development, many calculations can be performed on the cloud, which will greatly expand the functions of mobile terminals.
The role of talent innovation should be especially considered in industrial Internet. The development of industrial Internet needs more talents, and talents innovation applied to the real economy more quickly, which requires effort. In addition, it is necessary to establish a new ecology of industrial Internet oriented to industrial chain aggregation. The construction of industrial Internet is largely related with the new ecology.
Traditional infrastructure may aggravate overcapacity while providing jobs in the short term
At present, the infrastructure of the digital economy must also be considered for developing the digital economy. New infrastructure has a lot to do with it, so to a certain extent it is necessary to speed up the construction of new infrastructure while keep a balanced pace, which is very important to maintain efficient investment.
With infrastructure, mobile terminals are still needed to enjoy this digital economy. To some people in remote areas, mobile terminals are still luxury goods. Therefore, how to make mobile terminals popular and make the digital economy bring benefits to everyone may require some government work.
The construction of new infrastructure now needs to speed up and keep its pace, but special caution is needed for traditional infrastructure. Though traditional infrastructure can create demand and solve employment problems in the short term, people need to consider whether the demand created can really help enterprises and what long-term impact it may result in. If not handled well, traditional infrastructure may lead to overcapacity.