Illustration: Peter C. Espina/GT
2016 was a very critical year of great rejuvenation for China as the economy stably progressed, marking a good start of the 13th Five-Year Plan (2016-20). Going forward, in 2017, China will continue to deepen supply-side structural reforms to move toward a comprehensive well-off society.
As the 2017 government work report noted, last year China's economy went from a slowdown to steady progress. The country's GDP reached 74.4 trillion yuan ($10.8 trillion), growing 6.7 percent and contributing more than 30 percent to global economic growth. Consumer prices rose 2 percent and energy consumption per unit of GDP decreased by 5 percent, showing that the quality and efficiency of China's economic development has significantly improved year on year. However, in 2017, China's economy still will see downward pressure, facing more complex domestic and international economic situations. In the process of promoting supply-side structural reforms, we must reduce system costs, transform the "real estate" economy and improve the environment of the real economy.
China's systematic cost-based curve is gradually rising. According to statistics from the World Bank, China's macro tax burden in 1998 accounted for less than 10 percent of GDP, however, this number rose to 19.4 percent in 2011, 29.1 percent in 2015, and may even be as high as 35.9 percent if the income from social security funds and land transfer income is taken into account. It is not difficult to see that China's macro tax burden has grown rapidly. In addition, land, real estate and labor costs have gradually increased. At the Central Economic Work Conference in 2016, President Xi Jinping put forward a policy of cutting overcapacity, destocking, deleveraging, reducing corporate costs and shoring up weak spots as major tasks in the supply-side structural reforms and proposed effective solutions for reducing system costs through the introduction of tax cuts, lowering the social security insurance payment ratio, lowering electricity prices and enacting other initiatives.
In addition, the successful transformation of the real estate sector has affected the stability of China's economic reform. Since June 2015 when the domestic stock market crashed, large amounts of funds have been transferred to the real estate market. In early 2016, China's real estate market boomed as housing speculators flooded the market. Soaring real estate prices not only pushed up the cost of business operations and people's livelihoods, but also seriously undermined China's economic structure, distorted the allocation of economic resources and increased unfair social wealth distribution. Further, the rising prices may put China's financial system at risk.
The Central Economic Work Conference and the government work report has repeatedly stressed that we must adhere to the idea that "a house is for living, not for speculating" to curb the Chinese real estate market bubble. On September 30, 2016, new property market regulations came out, which have already brought the real estate market back to a normal and healthy track.
Finally, the continuous improvement of the real economy's environment will be the catalyst for China's economic reform. Compared with developed countries, China's real economy is still fragile, due to a lacking product technology, excess capacity, a slacking market and slow product upgrading. In addition, the stock market, housing and other virtual capital markets are accelerating in attracting social funds from the real economy. Looking at the global environment, economic recovery in Europe and the US is lower than expected, Japan and South Korea are lagging in economic structural reform and the US Federal Reserve's recent interest rate raise lead to capital outflows from China, bank credit asset shortages, yuan exchange rate fluctuation and other adverse chain effects. Domestically, the macro tax burden, labor and other cost increases exacerbated financing difficulties, along with high corporate debt and insolvency problems, creating financial risks.
In view of the decline of China's real economy, the 2017 government work report released at the two sessions lays out three ways in which fiscal and monetary policy should play a comprehensive role. First, efforts are required to revitalize the stock market, optimize increments, promote the marketization of interest rates and the reform of the yuan exchange rate, push for economic restructuring and upgrading through "cutting down overcapacity, destocking and deleveraging, reducing corporate costs and shoring up weak spots." The report also stresses the need to guide financial institutions to optimize the credit structure and improve the efficiency of financial resources allocation. Second, the country needs to improve the macro prudential policy framework, effectively prevent and resolve systemic financial risks and effectively maintain the stability of the financial system. Third, reforms should work to continue to increase investment in infrastructure and further reduce taxes and fees to lower enterprises' costs, and thus improve the general living environment of the real economy.
Looking forward to 2017, China's economy will continue to face greater downward pressure. If we unswervingly push for the development of mass entrepreneurship and innovation, and effectively promote and carry out the policies needed to comprehensively promote supply-side structural reform, the opportunities will be greater than the challenges.
Yang Wang is a senior finance research fellow at the Hande Fintech Research Institute and Song Yuanyuan is a research fellow at the International Monetary Institute of Renmin University of China. firstname.lastname@example.org