Forecast of China's Economy for 2021 | Hu Yifan, Huang Yiping, Yao Yang

[Music] good evening to those of you on the east coast of the united states good afternoon to those on the west coast and good morning to those of you in china it's wonderful to welcome so many of our friends to tonight's program normally we do this program in person uh in the big the second week of january when ifan yao yang and e ping all come to the united states for meetings and then we do a program either at citibank or the new york stock exchange which is a forecast on on china's economy this year obviously for the reasons of covet 19 still raging in the united states and travel extremely difficult between the united states and china we are doing it online the good news is we have even a bigger audience than we have when we're in person um but it's it's wonderful that so many of you can join us and i just want to thank uh the folks who sponsor this every year chub city uh new sponsor invesco vanek and xcol because without them we wouldn't be able to do this uh for now the 12th time this will be the 12th time we're doing it and the reason i love this because it always informs my view of what's going to happen in china's economy in the coming year and we're always joined by the leading economists in all of china and this year because we have to limit it to um just an hour and a half uh we're joined by huifan uh yao yang and huang ping ifan as you all know is the regional chief investment officer and chief china economist of ubs wealth management yao yang is what i often call my partner in crime because he runs this with me is a chong kong scholar and boya chair professor at china's center for economic research and the national school of development he's the dean of the national school of development at peking university uh huang yi is the jinguang chair professor of economics deputy dean at the national school of develop development and director of the institute of digital finance at peaking university and e-ping as i do in every case i will ask you about digital finance at some point in the questions and answers so we'll start with e-ping we'll go to yaoyang and i know we'll start with ifon we'll go to yaoyang and then we'll go to e ping but um thank you for joining us so early in the morning and we look forward to hearing your comments okay thanks steve uh thanks for inviting me to present the chinese economy forecast for the coming for this year and also for the coming uh for the coming five years so as we know the 2021 will mark as the start of the china's 14th five-year plan the announced proposal and 2035 long-term goals have set the tone of the policy priorities over the medium and long term with a comprehensive initiatives covering the chinese economy technology communist culture the environment and openness amid an increasing complicated geopolitical environment so the policy makers in china have pledged that the china will reach high income status by 2025 and that its gdp or national income per capita will double by 2035. so that implies a gdp kegel target of 4.7 percent during 2021 to 2035. in other words china will enter an error of the medium speed growth with the folks shifting the quality growth after decades of the high growth if the china maintains its growth rate you are forecast by by 2030 the china's gdp will be similar to the u.s gdp we are still if we assume that you as a gdp growth like i will be around like between two to three percent so for the china's for the long term goal so we think that uh will be the the drivers will be highlighted by the dual circulation strategy tax self-sufficiency urbanization 2.0 and the green economy to help the economy bust even as it is being rebalanced so for this year we think the china's economy will continue to recover this year in our view with gdp growth rising to around nine percent from the total of two point three percent in 2020 led by investment and consumption with a potential upside surprise from the ex exports so and also the gdp growth may then normalize to the 5.0 to 5.5 percent during 2020 to 2021. so the china could remain the main global growth engine and the world's largest market with a population of the 1.4 billion and a middle income uh mark the the huge ma potential market so this year uh we we caught this year it's uh the china's market is a market of strengths so as we know uh the gdp growth will rebound to around like nine percent so in our view specifically for the consumption will uh show low team growth so especially for the retail sales uh enterprise uh uh uh expected to post low team growth like uh in 2021 after shrinking to the 3.9 percent and also for the investment side we still expect for the infrastructure it will be led by the infrastructure and also for the property investment so we expect this year and the fixed income investment will be still uh continue to grow like for the low team for for the high single digit growth and also for the credit side there's a concern uh for the pbo say to probably to tighten the liquidity so we in our view it's over concerned uh we think that of course there's a no uh no very no easy no like as easy as last year but this year for the policy side we think will still remain uh relatively redundant liquidity so in our view the leaders pledged for graduate policy normalization uh in our view this year and for the credit growth will continue to be around uh like a low team growth so that will be around like a 12 so it's not bad growth and we think that that will continue to support the consumption and also investment uh especially for the urbanization 2.0 and also for the tax self-sufficiency will actually bring some extra strength to the chinese economy when we talk about the risk i think that for the sino-us tension probably will continue to be one of the risk of course like a later yayang and the ep will highlight more uh but here i just want to say for the china one side to deal with this kind of the pressure i think as i do itself better so i think the uh currently reforms and openness are two major strategies for china to try to keep some external and internal balance and also uh implement its dual circulation strategy like in the current situation so if we see that we have to mention the recently for the last year at the end of the last year the china signed rcep with the asean countries and also plus some australian new zealand and also other countries and also late december china signed the sino-us signal europe invest bilateral investment treatment i think all this kind of the policies actually bring some china extra strength uh in uh in a complicated global environment and also bring china strength probably to have a big bargaining power with the us so i just stopped here and probably we can like later like have to talk about more about this great but we've laid a great foundation i would like to ask a ton of questions but i'll let yaoyang and and uh speak first so let me turn it over to yaoyang yeah i'll meet myself okay it's uh a great uh to come to uh this uh uh workshop uh let me call it uh you say usually uh we have this face-to-face forum in new york city but this time we have to do this online and i would like to thank uh steve owens and the national committee for organizing this and we hope to continue our collaboration in the future i ivan has just laid a good foundation uh for this workshop so let me go details uh to the 14 to 5 year plan um now china's the two sessions that that is national people's congress and the national people supportive consultation conference will have their annual meetings in beijing early march and the mtc session is going to allow the formula allowance the 14-5 year plan i usually when we talk about the five-year plans we only treated them as kind of intuitive plans uh that is uh you know they uh they were just uh guidance uh they were not the meant to regulate implemented but this time it's a different because the president xi jinping himself participated quite regularly in the writing of the plan and he had several workshops consulting scholars and entrepreneurs so this plan i would say is going to be more rigorously implemented than previous plans okay it's a very comprehensive plan as he once said laid out a actually gross target for the next 15 years but here i only want to talk about the three major things that i believe will reshape the chinese economy in the next five to 15 years right so those three directions are as evil the first one is urbanization 2.0 or second wave of urbanization and second is dealing with climate change and the server is a technological independence and a robust supply chain let me go a little bit deeper into those three directions first urbanization 2.0 you know china's urbanization uh has been going on for 40 years the pace was not slow each year we add about one percent of the rural population to the cities right but in the next 15 years we are going to probably accelerate that pace more than 200 million people are still going to move into the city okay so that's uh it's kind of a continue a continuous moment from the past right but then the new thing is that now the government wants to give up this even distribution of population right so in the past people were encouraged to move to nearby cities but this time the urbanization is going to be mainly around nine so-called central cities like the beijing shanghai guangdong centre yeah then we're going to see probably seven uh urban centers uh into urbanized areas in china right and there we're going to see more people moving from second or third fourth tier cities to first tier city or cities around the first tier cities so population is going to be concentrated right that's going to dramatically change and the distribution of the china's economic activities right those activities are going to be concentrated you know few urbanized centers all right so currently in china we are discussing about the decline of the north and the rise of the south right so that's actually uh just a uh one sign around the science for the concentration of economic activities and together with that uh the huco system is going to be reformed the government just allowed a new policy to open up the hugo's system except those major cities so that's a first lesson the second is to deal with climate change china has announced china is going to peak as a mission by 2030 and to reach net zero by 2060. those two uh taxes are just daunting taxes it's not that easy uh for example currently in china coal still accounts for about 80 percent of china's energy mix right and the china's emission is still uh increasing and if the events of prediction is attracted then in the next five or seven years china music economy is going to be in a booming period again and if the economy is booming then michigan is going to increase right so even to reach this emission peak by 2030 is going to be a daunting task for the government the government is gearing up its policies to reach those two goals like to implement the carbon tax or carbon trading green finance all systems right and we also see the electric vehicle sector booming in china dealing with the climate change is going to lay a foundation for the improvement of u.s and china relationship right we all understand the trade and biden puts a lot of emphasis on climate change i think that's going to be good for u.s china relations and then the third area is technological independence and the robust supply chains um this is a mostly caused by uss sanctions on high-tech exposure to china right so china proposed as a dual circulation strategy and the essence of dual circulation is a domestic circulation and within that i believe the essence is technological independence and to build a robust supply chain right um so the government is quite determined on this okay uh to give you an example in the semiconductor industry china the current self-sufficiency of supply of chips in china is about 30 but in five years time china aims at uh fulfilling 70 percent of self-supply chips right so that's a major objective but china probably will invest heavily in the semiconductor industry and to reach that goal right china is also checking other areas to find out technologies that are potentially uh could be a and american sanction right so with that the china wants to reach a robust supply chain so that can run by themselves if outside if they are subjected to outside the sections right so overall i would say those are three major areas that will receive the chinese economy and of course that that's going to have major implications for u.s china relations let me stop here thank you that's terrific um barry norton immediately asked this same question that i would have i want to test which is more a clarification about the huco reform uh you know barry like the three panelists today as part of our track two dialogue and he said you know with the urbanization 2.0 isn't there a contradiction between saying people are going to move to nine kind of central cities but at the same time you're saying there's not going to be a liberalization in you know beijing shanghai and other cities how is that going to work how is huko going to actually be reformed uh yeah that's a good question yeah those major cities will maintain their current focal policy but we are talking about uh urbanized regions right neckline yangtze river delta we have not just the shanghai we have hang go you know other cities then in those other cities they are going to have a unified google system for example if i live in shujo for three years they all have those pointer systems i earned some points so if i move to uh say hando or nanjing those cities are going to recognize my scores so i can continue my scores so that's going to make uh my hook call more easily okay should i start yeah um well i guess the question i like to address in my opening remarks it really is if the financial sector can deliver whatever um even and yayang predicted for the next five years or maybe next 30 years at the moment if you you follow the discussion in china um you probably will feel that that is a difficult task for the financial system there are lots of complaints about the financial sector at the moment but there are two issues that always stand out in our policy discussion the first complaint is that the financial sector no longer strongly supports real economic activities and the second complaint is that financial risks are growing everywhere so we needed to prevent systemic financial crisis let me go into these two issues one by one the first question is well why is the financial sector not good enough to support economic growth when china started the economic reform we only had one financial institution in china the people's bank of china which was both a central bank and also a commercial bank um but from then on we made a major progress in establishing a very large financial sector this sector however has a number of key characteristics number one it's very large as all of you would agree number two it's dominated by banking sector and the number three somehow the government maintained um interventions in parts of um the the financial system like interventions in um determine the setting of the interest rate the landing rate allocation of funds um and so on so this is a quite unique in a way it's a very large it's a bank dominated but at the same time there's still a high degree of government intervention however if you look at what happened in the chinese economy last 40 years even though as an economist we always criticize this financial system not as the best reform um invest the form but you would agree that economic growth was a fantastic um and the result we can't really complain up too much about an annual average gdp growth above nine percent for 40 years so obviously it worked but now it's not anymore um and the question is why my own interpretation is that china now has entered into a new phase of development in the past we had a low cost advantage and the growth was kind of input driven and extensive growth that's why the kind of state intervened the bank dominated the financial system worked one way or the other the difference now is that we are a up a middle income country and we probably will approach high income level relatively soon which means when the low cost advantage is gone you need to rely on more on innovation and one specific issue is how do we support the smes the private enterprises because these smes now contribute more than 60 percent of gdp and 80 70 percent of corporate innovation and 80 percent of urban employment the question now is that kind of financial system no longer works for a number of reasons because government intervention would certainly reduce allocative bank dominated the financial system is not particularly suited to support innovation and this is why i think this financial system needs to be revamped this is the first thing um bottom line is the growth model is changing and the financial sector should also change otherwise it will not be able to support economic growth the second complaint about the financial risks now i have to say to start with that china is probably the only major emerging market economy in the world that hasn't experienced a systemic financial risk during for the past 40 years however the reason why we now see a lot of financial risks emerging in the capital markets in the banking sector in the shadow banking sector and in the fintech area and so on um almost anywhere you can imagine about the financial risks they're coming up the question again is why i think the key answer is that the reason why we didn't have a financial crisis during the 40 last 40 years was not because of a very good financial regulation but because of the two factors number one continuously rapid economical growth when the economy was expanding so rapidly even if you made some problems during the development you can always absorb it with very rapid or continuous growth number two government guarantee whenever there was a problem the government would always step up forward and take the response showed the responsibility and if you look at what happened in 1997 during the asian financial crisis it was very clear the non-performing loan ratio of the banking sector was above 30 percent but there was no bank run the banks continued to restructure and to grow and today they already among the largest in the world the secret is that number one the government took a responsibility to recapitalize injecting capital and the restructure the banking sector um and so on so there was no panic and the number two because the economy continued to grow so rapidly the non-performing long non-performing assets we set aside at the end of the 1990s is already very very tiny today compared to gdp so these two factors support the financial stability but i'm sure you would agree growth is already slowing and the government will not be able to forever guarantee any problems coming up from the financial sector so this is why we need a complete revamp of the financial sector in order to support economic growth over the next 5 to 30 years the policy makers already outlined a broader picture or a broad framework of financial reform and i will summarize them into three key areas number one changing the structure of the financial intermediation particularly developing multi-layer capital markets and the race the proportion of direct definers in total financial intermediation basically means direct finance and the capital markets should become a lot more important in supporting innovation because they're probably bet more capable than the traditional banks in a facilitating innovation here there's also a question about the financial innovation i'm not getting into it but the think tax sector is really moving forward very rapidly in a number of areas like a mobile payment the big attack landing online investment and probably also the central bank digital currency china in one way or the other is the leading international development that's happening and that needs to be happen uh they need to happen um even more quickly the second change is we really now need to enforce market the discipline let the market the mechanism to play decisive roles in allocating resources and one key area is about exchange rate and more importantly landing rates the government has been making lots of efforts in supporting or encouraging the commercial banks lending more to the smes and the private enterprises and so on i think we made a significant the progress is during the last five years the banks are lending a lot more but they can only land a lot more on sustainable basis on two conditions number one you should be able to do the risk management effectively this is why the technological progress in the fintech sector is very useful because the traditional banks are not capable of dealing with credit risk assessment of smes for instance because they don't have a lot of financial data they don't have a lot of creative assets but the big tech companies can do that relying on big data that's one side of the story the other side of the story is you should let market base the risk pricing the government in fact is continuously pushing down the landing rate artificially asking the banks to lower the lending rate every year that is good will but it's not sustainable because smes by definition is more riskier than other enterprises so i think how to really implement the market base the risk of pricing is a critical challenge now going forward finally um the reform of the financial regulation that is also important we could no longer rely on the government to take all the responsibility for the problems to show up in the financial sector so we needed to do a lot of things in the financial sector number one we probably needed to focus more on the function the transaction in the financial sector instead of focusing on the institution by doing that by focusing on the institution the problem was there are lots of areas uncovered like when you have a shadow banking when you have a think tank no regulators want to take a responsibility because they didn't really issue a license for them that's something we needed to change number two we also needed to enforce market discipline um the the problem in the past was a regulator has two responsibilities one is a regulation and the two is development so most the regulators because they're responsible for development they have normally have a low tolerance of default and bankruptcy um when that happens you know market discipline would not work if the market discipline is not effective then financial efficiency could not be really be raised there's also a question about innovation of financial regulation because the financial sector is moving forward quite rapidly but we number one don't have enough resources in regulatory and organizations and the number two we probably don't have enough capabilities about it and finally i also think some accountability in the regulatory system is also useful the problem in the past is whenever there is a problem in the peer-to-peer landing in the small banks and so on we all criticize these operators of these institutions my question is when these problems happen in one institution we can always criticize the managers and owners of these institutions but when the problem is very broad-based like hundreds and thousands of institutions have the same problem i think we needed to ask what was wrong with that regulatory system i'll stop here three terrific presentations i mean and i've got tons and tons of questions so let me let me just follow right on to uh what e ping said and just ask okay with these reforms these financial regulatory reforms what are the role for foreign institutions and foreigners in this you know efon mentioned continued reform and opening um and you have brought it down to the financial sector what is going to be the role of foreigners in this and how much more is china going to open to foreign investors and foreign operators right um well foreign foreign players is always a critical force in financial reform and financial development in china we in fact started the financial opening very early but but before i get into the details let me divide the financial opening into two different categories one is opening of the financial services sector which really means introduction of foreign financial institutions to china to operate i'm here the answer is opening up the capital account so mainly cross-border capital flows what is happening in china i think the chinese government has been much more relaxed than aggressive in opening the financial services sector certainly look at last three five years um you probably know the government increments the more than 50 measures during the past three four years allowing financial foreign financial institutions to operate in china that was very encouraging in fact i'm always very proud when we talk about opening of the chinese economy one area is leading was in the financial sector today you can see um hole on the foreign financial institutions in china in many areas i think they're going to happen more these are financial institutions are very important for the chinese financial market and they they're not just to bring some capital but more importantly they bring new technology new products new business models and so on and of course they're also bringing um a competition so that's one area we already saw significant progress and i expect that to continue the second area capital account liberalization and the opening of the capital markets in fact i think that that will be the main brics roads during the 14th five-year plan the government is already trying to put together some plans for opening the capital account and as alongside the restarting internationalization of of inb i think we should all pay attention to that particular area in the next five years i'm pretty confident i think we're going to see significant breakthroughs in that area so it will be a lot easier for foreign investors to come to china to invest in the chinese market to hold and be denominated the financial assets within five years and that i assume is part of the confidence that the leadership has today in the chinese economy that you liberalize at a time when your reserves are strong when fdi is flowing in when the capital account is growing which brings me back to e5 back to yifan to ask the by the way i couldn't hear at one portion did you give a date at which point you said the chinese economy you give an assumption two percent u.s growth china's 4.9 percent growth when the two would cross did you say what year that would be when china's economy would become bigger okay so uh if we assume the u.s growth will be two percent the china's growth will be around four point seven percent kegel growth and then on the 2013 and uh like how for the uh the u.s and the china gdp will be similar uh if the if we assume u.s at three percent then it will be 2035. and if it's two percent it's what it's a two percent of the if we assume the us gdp two percent of the growth so i think to buy uh china is around like five percent of the growth so by 2030 so the china's gdp and the u.s gdp will be similar and does that take into account this enormous difference that have occurred in the last 12 months of almost you know china rebounding from covid quickly in america not uh yes but uh yeah but 2021 will be um autumn so this year the china's gdp growth will be around like a nine percent so we just assume like a small stream to five percent and then that that will be the case so it's uh already take the fact take already take the factor the i noticed you know the confidence you know the confidence measure that came out recently weakened quite a bit in in china i noticed that we're seeing having the chinese government controlled covid so well after the initial outbreak but now we're seeing outbreaks and we're seeing lockdowns um do you think it's going to start affecting and i i assume over lunar new year i've heard from many people they're staying home so that the the surge in in travel that generally occurs around the new year is going to be much more limited this year uh have you taken that into account and what does that mean for going forward and is there some risk that you know we're seeing sadly we're seeing mutations of the virus we're seeing higher transmissions um is that a risk to your forecast uh we're already taking into consideration of the forecast so yes i think that during the chinese new year there's still like a large migration of the workers like a return hometown and i think for the chinese government already applies a lot of like measures try to control the potential opportunities to spread the virus of course it's not like a fully controllable so but we already see there's a many measures that's already applied for example uh almost everyone like a retaining hometown have to take the new cell new cell sig new select like her asset test and also uh have to like have if there are any things like uh there's a mini lockdowns if any suspect suspected cases happen and also i think that now um for the uh vaccination i guess like it's also like uh i i think will be the final solution for the us as well it's also largely applied in china especially like for the vulnerable positions so i think to combine the ways of like how well-managed measures uh plus the vaccination i think we still think the vaccination the virus can be largely controlled so the count the consumer confidence is gradually picking up but of course we are not seeing like how for the virus will disappear this year and but it could it might could exist for a long time with the human beings but we think they're still like how manageable especially in china so then your base case for 2021 is nine percent nine percent growth yes yes that's around nine percent so it's uh like uh i think this year uh for the consumption will catch up because last year for the consumption is still at three percent uh it's mainly uh led by the investment and exports so this year we think the exports will continue to be strong especially supported by the infrastructure and also property investment and for the consumption side led by the auto and also some discretionary and also like a staple consumption uh and also we saw the transportation and maybe for the terrorism and also for some service sector entertainment service sector so we'll catch up we'll catch up gradually so that's actually give some additional strength for the chinese economy yao yang and e-ping is that basically where you are for 2021 around nine percent well i i i don't make a forecast anymore but i see the range of forecasts in the market and imf just to give a number 8.1 so i would certainly trust the effects of forecast and it could even be higher but we have steve we have to discount the base effect last year because we had a very low base yeah yeah a lot of that is based upon the way china calculates it yeah yayang is that about where you you are i i actually have no idea i i don't do forecast but uh you know since evan has done a lot of research i tend to believe her and what does this mean what is the you know with these flows um and the very optimistic view of china's economy versus the rest of the world what does it mean and an e ping made reference to internationalization of the rmb and potentially um making it more the the valuation more market-based where do you think the rmb ends up when we do our forecast in 2022 so a year from now this question for e final for me anybody who wants to answer well i'll have a go and if i'm probably even he she is a chief investment officer um so she probably knows better um my my general sense is that if the chinese economy does better than the rest of the world still there is a a possibility that the currency should um appreciate continue to appreciate but the question here is when the determination of the exchange rate is affected by a number of factors and in fact the relativity is very important so for instance even if china is growing more rapidly than the rest of the world but if the u.s and some other developed countries recovered faster in relative terms than the than china maybe their currency could even be stronger there are a number of other factors i think we should take into account number one what is going to happen to the fat federal reserve bank's um quantitative easing if they start to tighten that would affect the interest rate the liquidity and exchange rate of rnb in china number two um capital account liberalization in china which i predicted would be the main breakthrough next uh next five years would also have some impact implications for the exchange rate because our past capital account the liberalization was easier on inflows but but more difficult on the outflow so really capital account liberalization in the next five years meaning easier for the residents to invest overseas that would also affect the exchange rate so my general prediction is that the currency could stay strong if the economy does better than the rest of the world but there are many other factors we should keep in mind my main argument is that we should always avoid adaptive expectation about the exchange rate you fine oh yes i just uh i agree with the ep so i just wanted to add here so this year we fought as a us usd could be relatively weak comparing with uh rest of the currency uh the reason i think is that the main reasons are still the dual deficit i think the uh because of the strong stimulus package last year for the u.s for the fiscal deficit as close to the 6 16 to 18 and this year with 1.8 trillion of the stimulus and we expect that like for the deficit it will continue to be around like around like 15 of the gdp so that's huge gap and also plus for the us for the um for the external deficit so the dual deficit will keep the dollar relatively i'm not seeing like a very weak but at least like i will not be as strong as as previous years so that's actually give some opportunities for the cny so for the rnb we think this year will actually it's like be relatively stable so that's actually it's uh for the um it's already uh that will be actually very attractive for the international investors so especially for china's like a bond market because this year for the china for the government bonds will be included in the world government bond index so currently for the china 10-year treasury bonds is about like a 3.2 to 3.4 return uh comparing with uh for the u.s around one percent or for the european countries is like around zero percent plus a stable relatively stable for the stable cny so that's very attractive for the like international investors uh so for the equity market because of the rebound of the chinese economy we also expected for the corporate revenues this year for the chinese market in general will rebound around like 20 by the end of this year so that's actually bring some uh like additional strengths i have for the investor investors for the secondary market so as ep mentioned like for the financial services like openness i think at least we are on the right direction i think it's like for the i think it's a good sign i think besides the financial uh for the financial sector openness i also wanted to highlight like uh for the china further openness like in many other fields uh so that will also bring some uh attractiveness like for the investors for the direct invest in china so i think the major uh mainly it's including like for the manufacturing sectors uh more sectors like a more um more sectors will be open uh especially like highlights in the sino-european bilateral investment treatment and also the for the rcep that's including transportation telecommunication and auto sectors and also we will have open for some service sectors especially for the health sectors for the private hospitals could be open to the foreign investors and also for the rnd sector for the rnd field especially for the biological resources could be could be limited access to the foreigners as well and also for the cloud services and telecommunication i mentioned that's also part of the services could open to the foreigners and also for the international uh um for the international for the uh maritime transportation and it will be also for the foreign investors so that will be very attractive and also for the air transport related service will be like open and also especially for china now uh put emphasis on the for the green economy uh so we think that there's a lot of cooperation in the environment especially like for the esg highlighted by the government as uh i think the it's also in the future will be actually required to be included in disclosure especially for the listed companies so i think with all this kind of the openness plus all this kind of the uh the recovery and also um for the relatively stable cy so the china actually we call the 2021 as a year of stress could be very attractive to the international investors that spread to u.s treasuries has narrowed over the last few weeks but it still is still is quite significant and should bring in more money but are we going to have a real estate tax in china that's been talked about for for years and what's that going to do to kind of the over investment in real estate any of you want to pass with a guess on that yaya yeah i think uh the real estate attacks will be implemented in five years the gang has stated us clearly but i don't know the impacts on that sector it could have some effect on speculation but if the government gives us some time for people to respond then people were first to sell off their house before that right so in general it's going to be good for the whole sector and also for the economy uh yeah i want to add here i think it's a good tax because like uh actually it's like uh uh like you could text rich people and also that's the purpose of tax and also i think that could like uh uh probably curb uh speculation uh but also that could affect the the wealth but in china in my view there's a lot of like uh that the policy will be more like a local policy localized policy so catering like to the local uh structure local like uh for the ownership structure so currently we know it's already like for the shanghai and chongqing has a property tax and but for the but they also have the exemption for the like i may be for for the first uh house like for the families and also uh and also for the horse value like the valuations also have some flexibility so i think the uh it's in my view it's very likely in the future so we will have like a maybe for the whole for the first house is exempted from the uh the housing tax and also uh probably we will tax for the new housing first for the old for the existing ones maybe it will tax when it's in transactions and also for the tax rates that really depends on locally i think that's ranging from one to three percent so it's really depend uh like uh yes uh it's also right so it will be relative flexible technically the china now it's uh ready to lab the tax so i agree with you young it's uh probably in five years after the property tax then it's probably it will come within heritage tax as well studying america um you're ahead of the institute of digital finance can you tell us about where the central bank digital currency is and whether in part this is um a way for the central bank to set monetary to have better data to set monetary policy uh well the the the central bank already finished the design of its digital currency what we call now um ecny from last year they already well the year before they already experiment in a number of cities like four cities but also um the the the the winter olympic uh theme so the experiment i think the question now is when the central bank will feel uncomfortable with the technology the operation of the mechanism itself and then it could be rolled out um i used to say um the ecny can be rolled out relatively quickly but i've been saying it for some time and still not yet so i don't know exactly when and if i have to make a prediction and i hope um the ecny will be in our digital world during 2021 i hope but it may not happen um your question about whether this is it might be a a step to facilitate better monitoring of the financial system for better monetary policy making um i think that is probably quite a few steps away from us ecny really is a form of electronic payment according to the pboc officials this really is only substitute for currency in circulation and to some extent this is very similar to the mobile payment service we're already using like wechat appear and alipay the difference is this is directly issued by the central bank while rdp and wichita p is on b in electronics form but are created by these institutions themselves so i think that direct the impact there could be some substitution with the existing mobile payment um because this is also a mobile payment and in to some extent it might actually be better than the existing electronic form because this is a legal tender it's a safer and it's also probably more cost effective because the pboc is not going to charge and somebody like for using digital currency to make the payment so these are all good but there are two things i like to just highlight number one this does not necessarily mean it will completely push out the mobile payment service because the idea is that we probably are going to have nine authorized institutions developing their own digital warrants these nine institutions including alibaba and including 10 cents so the worried could still be there and in fact in the future in rdp wallet and in which had to pay wallet you can also use directly use um just the ecny um instead of what they're using at the moment so these wallets will continue to exist they're not going to be pushed out but at the same time there will be competition because there will be nine digital worries and at the same time using the same ecny this is the first listing definitely there will be competition the second thing as a result of that i think more importantly is that after nine warriors were i introduced the information the digital footprints um these mobile service and payment service operators collected before may become segregated meaning if i use alipay to pay your icbc up wallet then rdp would only know this part of this the the transaction and icbc would only know the other part of the transaction the the two of them neither of them would have a complete picture of the entire transaction the only organization will have the full data is the central bank that i think is it could be a significant change and in fact it could affect the future landscape of what certainly would be important for data policy but may also affect the landscape of digital finance this is in my view much more important than competition for mobile payment and and and and the implications for monetary policy i think will be sometime like a bit distant away from us fascinating um my last question then i'm going to go to audience questions there was enormous debate today on on a listserv that i'm on about china's fertility rate and the enormous drop that appears to be occurring in china's fertility rate in some places these are reports not from the central government but from the local governments in some places up to 30 percent which is truly extraordinary um and obviously that's not covet data it's data that related to the births in in 2020 which was obviously they were conceived mostly in in 2019 um number one is is that likely the case and two what are the implications of that for economic growth yeah let me take that question uh i think uh those uh data uh quite are naming uh but looking into the future probably there is no way for china to reverse the trade with declining fertility rate um china is going to look like our asian neighbors right so sing about japan korea therefore killing the rate up to 1.4 even below right so china eventually is going to reach that stage no matter what kind of government policies are going to be conducted right but what are the implications of economic growth in the future in our china 2049 book project we did some analysis uh we just found out actually we don't need to worry about labor supply because of automation actually automation is going to more than compensate the laws of the labor force due to population aging right uh anyway probably we don't need to worry about consumption like japan is worrying about just because china still has a lot of people living in the countryside who are going to move into the city that's going to automatically increase consumption so to become old before getting rich is actually good for china in this case the biggest challenge is the social security right in 10 years or 20 years time when our generation and eating and my generation gets old that's going to be a huge challenge right but uh china still has some room to deal with that the china's public assets right it's about uh it's a uh two 200 trillion net assets in the hands of the gun so supposedly the government can just sell off some of the assets then use the money to subsidize the social security system so that so we can get by that's a huge wave of agent then after 2050 uh you know population is going to stabilize so that's going to be much better than the next uh 20 30 years interest give us a view on where you think um well this is from vincent joe at the rhodium group of where you think china's current account and trade um positions surplus i think is fair to say for 2021 are going to be in this coming year uh in 2021 of course we still expect like for the like uh for the surprise like for the chinese for the chinese current account uh like especially like how we also expect there there might be like a surprise in the export side as well uh so with a direct investment of of course like um uh i think because of the large capital control outflows so i think overall for the capital account is also uh like i will continue to keep the the surplus as well uh but at the same time we also see the trend for the uh for the um falling the balance of the current account uh i think that currently uh before we use it to run like a four to five percent of the current account surprise then like how gradually um uh four to the three percent now it's not like i'm maintaining around like up between one to two percent so we think that would be the trend so overall speaking i think the china will still have the very uh have the strength like for the for the exports as well as for the attractiveness for direct investment so we think that's for still keeping the current account relatively balanced uh especially like even wrong surprise for the company any chance that the restrictions on capital outflows are going to be lifted uh actually the recently for the for the capital account like there's some because of the strength of the cny so i think in the late december there's some relaxation of the capital outflows especially for the person uh for the in for the household account so i think that uh i think there's some new reg new measures and to allow for the household to uh maybe transfer out the some of the like the for the capital uh i think the fc uh the the capital gains are outside from china so i guess that's really depends on for the cny stress is that part of financial reform that you think about relaxation well in fact um as i said my expectation is that uh internationalization of the currency and the uh liberalization of the capital account will be the key focus um in a financial opening over the next uh five years um the question about the timing i think this is kind of a tricky question in the past we always focus on while trying to find a better time to liberalize when the macroeconomic situations are sound but now i think looking back the the experience of most the developing countries suggest that that might not be on the ideal strategy when the macroeconomic condition is is great you liberalize the capital account there will be lots of capital influence and you feel happy because more liquidity higher property prices stronger currency and so on and you all claim that the international investors are voting with their money in confidence in our system but the problem is as you know when capital moves in rapidly there always will be a point when these flows return and when the money is moving you could easily lead to asset bubbles uh over a value the currency and so on so so you often end up in a financial crisis i think the current is thinking now is maybe timing is less critical than the master that you liberalize what is important for us to liberalize going forward is we need to be careful about the sequencing of liberalization the real sector first the financial sector follows the um the the the domestic economy first in the external economy follows and exchange rate first then capital account follows uh one very important the new thinking is that whatever way we liberalize we always need to have macro prudential regulations in place which means when even when we're liberalizing we're always thinking about um the the bad times um and make sure that risks don't accumulate excessively that is the strategy i think um we should we should always keep in mind yeah um let me go to audience questions um first one from well we've already done one from sheldon peng one of our uh one of our directors uh for yao yang you know you talked about kind of green finance and and climate change and the efforts there he says china started a nationwide carbon credit trading exchange given china's ambition to make real progress in curbing emissions many people are very disappointed at the initial implementation of the scheme in that penalty for non-compliance to pollution quota is so minimal 20 to 30 000 rmb and that foreign invested companies in china are not allowed to participate a number of observers feel this is an example of the central government being fooled by people below do you have any comments on that well i'm not expert on this but i tend to agree with your opinion by my colleague professor xi jin tao he's a environmental expert his idea is that carbon trading because it really requires a lot of regulatory tasks so he actually favors the carbon tax right and the capital belongs to local governments so local governments then have a lot of incentive to cut the pact and then uh so that that's going to be much better uh occur you mentioned yeah um arthur krober asks all of you um the five to ten year views you have expressed are in general very optimistic what are the major risks that could risk that could cause china to fall significantly short of its growth objective over the next decade so what are the what are the downside risks what can go wrong uh then let me go first i think the biggest risk is the deterioration declaration of u.s china relations that's by far the largest risk right so if the u.s continues the trump administration's policy and then china's economy is going to have much more trouble right well there there could be other risks um number one for instance if we don't manage the financial risk as well and unfortunately if we end up being a systemic financial crisis then we're not going to make that that target the other thing which is very important is the ability to innovate because non-growth is innovation driven i'm not really talking about the very high-end innovation we're competing with the u.s chip industry and so on what china needs to support the growth over the next five to 15 years is a really improvement on the existing level of technology like if you're making an electronic product you're making automobile we need always to advance in that direction um we're certainly doing well um so far but there is a big question if we can continue particularly in light of what yaya just highlighted if the external environment becomes really very hostile i think there is a potential risk there okay so i think the yeah yeah i agree with the ep and yeah yeah i think another risk i can think of is a still for the leverage the macro leverage i think as they it used to be a very big concern the 2018 and then i think it's uh probably like uh it's like oh because overwhelmed the sino-us tension i think has put aside and also of course the china stimulus package is not as strong as like the u.s last year but still it's a quite uh significant package so i think that actually will continue to push up the macro leverage especially like i think with urbanization 2.0 so that means like for the local government has to spend more on the infrastructure so i think the it's probably not only the phenomena for china it's a global phenomenon but i think for it's are still like our concern for the longer term uh because all not only for the local governments but also for the households we also say for the laboratory actually increased quite a lot so for the leverage not only have the uh the uh the growth issue but also have it's a structure issue in china as well is it fair to say that the the greatest risk is that their vested interests in china that don't represent the majority but that really don't want and don't benefit from reform and that those interests can have real effect on decisions relating to reform and isn't the greatest risk that the vested interests who don't benefit prevail reform doesn't occur the way it should and the economy begins to slow more and more i give a like a quick answer maybe i think the ep and your young can add in my view yes i think it's indeed further reforms become has become harder and i think that's the current stage because it's a half a combined interest group however i think that the situation in my view has actually changed a little bit since the 2018 because of the pressure of the u.s side so i think the for detention of course like our on one side i think there is also have the negative pressure on china's economy but on the other side i think it's also push china's like openness and the reforms so from the from this sense i think the the largest opposite uh party for china is the u.s probably the same situation for the u.s as well and let me add that to evan's comments uh i agree with her you know over the last two years uh china has done a lot of reforms through the foreign channel right for example uh there's a bit with european union is going to bring major reforms to china and also because of the u.s pressure we had there's a new uh foreign director in western law that changed the situation quite a lot actually i don't worry that much about reform i don't think to me seriously i don't really don't think a reform is a big challenge for china the biggest challenge of china is that domestically is that the policies are quite often guided by emotion instead of a rational discussion and a calculation that's a risk interesting um bob donor has a question for um for you which just disappeared off my uh there it is um it says um bob donor also a member of our track 2 dialogue removing a government guarantee and moving to market-based credit supply is inherently difficult particularly if there is a large existing stock of credit will the chinese government try to engineer a managed pace of credit distress and bankruptcy or will it shift back and forth between market-based risk and government guarantee i guess the bob already implicitly uh provided an answer to um that question because he knows china so well um i think the strategy of the government now is they realize blanket guarantee doesn't work anymore you cannot sustain therefore a few years ago the government already decided that they should let some risks to um to to to to to grow up in a local in in in limited areas um but the question i think the problems is that once you let some risks to come out there is a potential that it might spread to some other areas then the policy makers would become quite worried that we saw a number of cases during the past years so for instance a couple of years ago you all know there was a one bank in mongolia balsam bank had a problem and it was restructured by by the regulators there are some other problems um and look around and i think the government became nervous um so they didn't want everybody to like um to show show up their problems so my guess my answer to bob i guess is that now we have the right strategy of manage the release of the risks um hopefully um there will be no systemic risk the challenge is always that um the the trade-off between the two is always very difficult so we don't know if we we will see one of these two extreme risks either you're always trying to release some risks but you worry about the big problems then you go back to the older regime i think that's what we're seeing at the moment the other risk is if you become bold enough when you make more uh progresses then there is also a risk to see widespread problems in the financial financial system at the moment i don't know what will be the exact outcome i certainly hope the middle ground um what the government is hoping that is gradually releasing some risks at the same time strengthening the regulation and hopefully some of the existing stocks of problems can be resolved even if we don't let them like blow up um like what happened with the state-owned commercial banks in the late 1990s that's the ideal route but there's no guarantee that this will happen and this is why my number one potential risk for chinese growth trajectory over the next five to 15 years is is a financial risk a number of people asked about um semiconductors uh let me ask uh liz economies one of our directors also and she asked china had a target of 40 self-sufficiency for semiconductors by 2020 and as was stated 70 by 2025 but it has already missed the 2020 target by a wide margin and many of china's investments in this area have collapsed over the past year what gives you confidence that china will achieve its 2025 target and let me try to answer this question uh you know china missed the 2020 target probably it's because the u.s didn't give china enough pressure that's probably not true true because because of the u.s pressure china is gearing up the investment into the semiconductor industry uh yes last year many local investments class but that's not going to stop china investing in that industry currently the ground calls for private equity funds to join hand with local western files and i i think much of the u.s is going to go to height terrorism in which chips industry will be a major topic of the investment and also if we think about those low precision chips china actually has quite a strong manufacturing capacity so china can probably start from this area then gradually move up the ladder to produce high precision juice anybody else want to comment on that one um david youths a former employee of the national committee uh said in too fast asked in 2019 china committed to large purchases of agricultural and other products that were to some degree paused by covid19 crisis will china return to those purchasing commitments this year and are there other economic measures that china could take that would demonstrate good faith to the new biden administration and encourage reciprocal improvements in u.s china relations okay so uh for the first one deal for uh although it's uh handicapped by the kovi id 19 uh i think the china still tried to um like i made it's a commitment so actually by uh the date is by uh october by the no by the november 2020 the china actually for from the agriculture goods are already fulfilled by like around like 80 percent so the speed actually caught up very rapidly uh since like uh for the second half of the last year so uh you know our view although waste uh increasing pressure from the um the trump administration the china still make its uh still try to commit its uh like uh make made its commitment so your view uh for the trade one deal probably will continue if there's no other um no other disturbance but it also depends on really depends on the new relationship between the bad between the bad administration and china so i think the china now is a way tennessee to say what will happen like how for the new administration or young any suggestions on that for that one well i think um if phase one is still a legal document then um the chinese government will continue to implement although there was a question even in the u.s when the um the agreement was assigned if the number the target of purchase was practical enough for the two sides to fulfill um so this is one issue i think we need to to to look at and as the event suggests that we are at the moment hearing from media reports a lot of different information messages about what the biden administration is going to do about it i think so the two sides will probably need to come together and to make a position um on this but bottom line is i'm sure the chinese government will need to make more efforts trying to um to to to liberalize its economic system issues like a better protection of intellectual property rights opening of the domestic market and hopefully also reducing reduced subsidies to state-owned enterprises these are the areas the government already committed and if china can do some of it i think it would uh would show good will on in cooperating with the uh by the administration um just to finish um i think one thing we all should pay attention to is that the chinese government made a clear message about its interest in joining cptpp if that is the case i think the potential reform program would be way beyond what we have in mind because the cptpp is a very high level opening a regime standard um and the chinese government said it's seriously interested in joining it so i i think we could see potential progress in structural reforms but again what is going to happen to large extent also depends on the atmosphere of the bilateral relations yeah i think that that cptpp statement is absolutely true it would mean massive reforms in china and you i would expect that in an agreement it would you would need a long pathway for china to ultimately comply um that's one issue you would need to negotiate the other is uh each of the countries have veto power over any new uh entry um so the question would be would japan or other allies of the united states be willing to even negotiate the admission of china while u.s china relations are you know deeply troubled um and i would argue i think david's question is great they're you know china obviously the benefits of the the comprehensive agreement on investment with the eu will also flow to the united states so that you know kind of it's it has most favored nation provisions i think so that will be a benefit and hopefully the united states and u.s businesses will will create will invest in china and create by doing that create additional jobs in the united states but china should won't begin the process of cutting tariffs that were imposed during the trump era they're no good for the chinese consumer they're no good for american exporters and i'm confident you know president biden in his campaign and since then has talked about the loss of jobs as a result of the u.s imposition of these tariffs so it failed it not only failed to generate jobs in the united states that the analysis is that it lost was i think the number that the campaign used was around 250 000 so both sides can enter into negotiations to reduce tariffs which help both the people of china and the people of the united states um any final you know i've got another 25 questions but we don't have time to ask them unless if there's one that jumps out someone is asking what would capital account liberalization look like well um that i mean imf has um a category of um 40 different areas of cross-border capital flows um account liberalization would mean if my prediction is right by the end of the 14th five-year plan period which means by 2025 we should achieve what imf defined as basic convertibility uh most of the items the categories should be open for two-way capital flows but obviously the authorities would probably want to retain some short some restrictions on short-term capital movement for the purpose of financial stability anti-money laundering and a number of reasons so that is i think what the chinese government is aiming at the idea is that for all economic and political reasons china has developed into such a stage that open capital account is a must for china to continue to rise but at the same time we also need to be careful about the potential risks so there will be some restrictions but a small number of restrictions remain plus some macro prudential regulations other than that the capital account should be largely open within five years fascinating we've come to our closing time and i know all of you have to get to your day jobs and we will get to our night camps here on the east coast but i can't yaoyang ifan i can't thank you enough for for being with us this evening i can't thank you enough for being such great participants in our track 2 dialogues and always being available when the national committee asks for your help but i have learned a ton tonight and i am absolutely certain our audience has learned a ton and really informed us about what's going to be going on in the chinese economy in the coming year but thank you all so much it has really been terrific and audience thank you so much for for uh joining us this evening thank you steve with this wonderful hosting bye

Channel: National Committee on U.S.-China Relations

Views: 88,688

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Id: 6Q3iNjmLj2k

Length: 90min 48sec (5448 seconds)

Published: Fri Feb 05 2021