Yukon Huang Photo: Courtesy of the Carnegie-Tsinghua Center

Editor’s Note:
Whether the global economy can achieve recovery has become a hot topic of discussion in recent times. Along with this discussion, the growth prospects of the Chinese economy have become a global focus of attention. What potential does the Chinese economy hold for growth? Can it overcome short-term challenges and achieve long-term sustainable development? With these questions in mind, Global Times reporters Xie Wenting and Bai Yunyi (GT) recently interviewed Yukon Huang (Huang), a senior fellow with the Asia Program, formerly the World Bank’s China country director. 

GT: Recently there have been many discussions regarding China’s economy and its prospects. How do you view the prospects of China’s economic growth?
Huang: I think it’s not a short term issue. It’s not about this year. It’s about the next four to five years, because you’re talking about sustainable growth. You’re not talking about a short term economic cycle.
So the question is, can China grow at a reasonable rate for, let’s say, the next five years and beyond? I think the answer to this is it is possible. China still has significant growth potential. And if it actually addresses the right issues, it could grow a 5 or 6 percent on a sustainable basis. 

GT: You mentioned that the Chinese economy still has significant growth potential. What is the potential that you refer to?  How can this potential be realized? What are your suggestions for China’s economic transformation and development?
Huang: Sustainable development not only means environmental sustainability, but also financial sustainability. In recent years, housing construction has been one of the main drivers of China’s economic growth, but given China’s population growth, it is difficult for real estate to play this role in the future. Exports will also play a smaller role now that economic growth is slowing in both the United States and Europe, and so is their demand for Chinese manufactured goods. 

China does have several ways of increasing growth significantly on a sustainable basis without requiring more funding from the government. The critical question is not monetary expansion, or more expansionary policies, or lower interest rates, or more credit flows. It’s what can be done to increase growth without requiring more money. That’s the key question.

There are two issues that we need to be focused on. One has to do with consumption. The key question is, how do you increase consumption on a prudent basis, not just for 3 months, 6 months, or a year, and how do you increase consumption without requiring more money from the government? Now, in other countries, the answer is there isn’t any possibility to do this. But in China, you could actually increase consumption on a consistent, sustainable basis without requiring government support. It has to do with the household registration system, hukou.

So how can hukou reform provide a huge boost to consumption? The answer is, if you look at the major cities like Shanghai and Shenzhen, about 30 to 40 percent of the population and workforce do not have a local hukou. These households consume about 30 percent or less of their income compared to residents with local hukou registration as they spent less in housing, cars, and education. If more big Chinese cities are able to relax their hukou policies to a certain extent, the consumption of these households will increase significantly. They would consume 30 percent more. This would increase GDP growth by 1.5 to 2 percent annually. Think about that:1  to 2 percent every year for the foreseeable future, without any cost to the government. You don’t have to provide tax breaks. You don’t have to provide any subsidies. It would basically be driven by household consumption.

GT: In China, household registration (hukou) is not only an economic issue but also involves social concerns. Do you think further relaxing the restrictions on obtaining household registration in major cities is feasible?
Huang: The government has signaled this even in the reform programs that were just launched, which talked about rapidly reforming the hukou policy. Hukou reform did not matter 10 years ago because people moved to the cities. When they moved to the cities, they made a lot more, they consume more, even though they didn’t have local hukou registration. When they had a higher income, people would spend more. So consumption increased rapidly in the past, even when you didn’t have hukou reform.

But now that urbanization has largely occurred, and it’s not increasing, rural migrants to big cities cannot be counted upon as much. You have to count on increasing the consumption of people who are already living in the cities. So that’s a completely different issue. Therefore, what needs to be done is the expansion of consumption among the population already living in cities.

GT: What other measures do you think can be taken to further unleash China’s growth potential?
Huang: First is the adjustment of government investment allocation. When I moved to China in 1997, approximately two-thirds of government investment was directed toward the coastal provinces, while one-third was allocated to the interior. However, around the year 2000, China initiated the development of the western regions, leading to increased investment in the interior, particularly in the far west. Presently, the situation has reversed, with two-thirds of state investment flowing into the interior, while only one-third is directed toward the coastal provinces.

This was rightly done because the government was trying to deal with the inequality of poverty, because most of the poor people were in the interior. So you want to provide them with more services. But today the situation is quite different. If we look at it from an economic perspective, investment in the interior is 40 percent less in returns than investment along the coastal and central provinces. If China were to achieve a balanced allocation, with 50 percent of resources directed toward the interior and 50 percent toward the coastal central areas, it could potentially result in a 1 percent annual increase in growth. Moreover, this approach would not impose any additional burden on the government as the expenditure would remain the same.

Besides, there needs to be an adjustment in funding support for state-owned enterprises (SOEs) and private enterprises. Currently, the return on assets for China’s SOEs is only about half that of private enterprises. Of course, a considerable portion of China’s SOEs fall within strategic sectors, and for these fields, continued financial support is necessary to foster their development. However, for a portion of areas that do not possess strategic value, a portion of the funds originally allocated to SOEs can be redirected to support more efficient private enterprises.

GT: Do you think that emerging economies, including China, can still become the engines of global economic development in the future?
Huang: If we examine the period from 2007 to 2020, developing economies and emerging market economies performed exceptionally well. A significant contributing factor to the higher growth rate of emerging market economies was the rapid expansion of China. China’s growth is closely intertwined with the growth and demand of emerging market economies, and one of the key drivers is the commodity market. When China experiences rapid growth, it stimulates the prices of commodities, minerals, and oil, which primarily benefits developing countries. China’s imports and exports have consistently increased over the last 15 years, even during the pandemic, unlike what occurred in the West. Consequently, China’s share of global exports reached record highs in 2022, despite the challenges faced by Western countries due to the pandemic, recession, and slowed growth. So when China’s trade is very strong, it drives up the trade prospects of emerging market economies. 

One thing that needs mentioning is, whether Europe can sell more consumption goods to China. That’s not the same issue for the EU depends much more on agricultural exports, service, and financial services. And that’s a different kind of issue. So, the emerging markets’ future is very much linked to China. Then the question is, well, Europe and United States recover fairly rapidly. Europe has a big problem because of its problems with Russia. So, one big issue in the future for Europe will be its economic future, which is actually dependent and is very much linked to China. Europe’s investment and Europe’s trade with China are much larger and much more closely linked than US trade investment with China.

It’s worth mentioning the role played by China-EU economic relations in this context. Europe is a producer of high-end consumer goods, whereas the US produces relatively fewer consumer goods. Such investment and trade relations between Europe and China are becoming even closer. If China’s economy thrives, Europe tends to exhibit a favorable economic performance as well. Thus, the outlook of the global economy and the strengthening of economic ties between China and Europe are closely interrelated. While some concerns arise due to political factors, my perspective is that ultimately, Europe will not take such a stance. Furthermore, given its diminishing economic connections with Russia, Europe needs to increase links with China.