Chia’s economy achieved the growth target of over 5% in 2023 under intense pressure. How will China’s economy do as we approach 2024, given the obstacles and constraints it faces, such as insufficient demand, overcapacity in some industries, low public expectations and many persisting risks and hidden dangers? How could the “troika” of investment, consumption, and exports around high-quality development be organized around clear priorities and crucial issues?

Liu Xinghua predicted in an exclusive interview that the next seven years will be critical for China’s economic development. From a medium- to long-term perspective, China’s economic structure has enormous potential for transformation and upgrading, its labor quality and human capital have ample room for improvement, its super-large market of more than 1.4 billion people and robust production capacity still have distinct advantages, and its urbanization still has great room for development in terms of both quantity and quality. These are all due to the country’s involvement in the new round of scientific and technological revolution and industrial transformation. All these factors provide favorable conditions for investment, consumption and foreign trade growth as well as high-quality economic development.

China’s economy entering “seven critical years”: Creating new growth drivers for industrial structure transformation and upgrading

Southern Finance: China’s economy achieved the growth target of over 5% last year 2023 under intense pressure. How do you view China’s economic situation this year and its development trends in the coming years?

Liu Xinghua: The “14^th Five-Year Plan” is currently facing hurdles in its implementation due to China’s economic expansion. From now until the “15^th Five-Year Plan” ends in 2030, or seven years, will be a crucial time for China’s economic growth. If the essential and reasonable economic growth is not maintained, high-quality development will be more challenging to attain and risks may intensify.

More than halfway through the implementation of the “14^th Five-Year Plan”, 2024 has emerged as a critical year for accomplishing the goals and tasks of the “14^th Five-Year Plan.” Held prior to the Spring Festival this year, the “two sessions” of 31 provinces, municipalities directly under the central government, and autonomous regions established targets for GDP growth this year ranging from 5% to 6%. Some provinces had higher or lower ones, such as 8% by Hainan, 4.5% by Tianjin, and 5% by relatively economically developed regions in the east such as Beijing, Shanghai, Guangdong, Jiangsu and Shandong. The 31 provinces, municipalities and autonomous regions project a weighted average GDP growth of 5.4%.

Based on the figure from last year, it will be challenging to reach or exceed 5.4% countrywide this year. I predict that this year’s national GDP target of roughly 5% will remain in place. It can only establish a strong basis for achieving the goals of the “14^th Five-Year Plan” at a growth rate of 5% or higher. This is of great significance to and plays a major role in stabilizing expectations on all fronts, preventing and mitigating financial risks and increasing employment.

From a medium- to long-term perspective, China’s economic structure has enormous potential for transformation and upgrading, its labor quality and human capital have ample room for improvement, its super-large market of more than 1.4 billion people and robust production capacity have distinct advantages, and its urbanization has great room for development in terms of both quantity and quality. These are all made possible by the country’s new round of scientific and technological revolution and industrial transformation. All these factors provide favorable conditions for investment, consumption and foreign trade growth as well as high-quality economic development.

In my view, China’s economy has the potential to grow by an average of roughly 5% annually over the next seven years, assuming that exports are stabilized to the greatest extent possible. This can be accomplished by taking measures such as stimulating potential domestic consumption and expanding productive investment to start a positive feedback loop between consumption and investment, comprehensively deepening reform, fully spurring the intrinsic impetus and innovative vigor of various business entities, advancing higher-standard opening-up and creating a new development pattern where domestic and foreign markets can boost each other, providing flexibility for achieving the long-term goals until 2035.

Consumption: Attaching importance to an optimal combination of short-term and medium- to long-term policies

Southern Finance: How do you view last year’s consumption rebound? What about this year’s potential for consumption to propel economic growth?

Liu Xinghua: It appears doubtful that consumption will increase to the same extent this year as the growth in 2023 was predicated on the low base in 2022. Nonetheless, overall recovery in consumption is anticipated in 2024, acting as a “ballast stone” for economic expansion. To stimulate consumption potential, a wide range of policy combinations are needed.

Southern Finance: What are the key factors for stimulating consumption potential?

Liu Xinghua: A wide range of policy combinations are needed to promote consumption because a series of factors, such as increased consumer expectations, improved spending power and upgraded consumption structure, make final consumption a prolonged and consistent driver of GDP growth. It cannot be achieved merely through short-term stimulation but requires an optimal combination of short-term and medium- to long-term policies.

Investment: Making infrastructure and equipment renewal important growth engines

Southern Finance: What do you think of the numerous provinces that have moderately lowered their growth targets for fixed-asset investments this year?

Liu Xinghua: In 2023, China’s gross capital formation accounted for 28.9% of global economic growth and propelled economic expansion by 1.5 percentage points. The national fixed-asset investment (excluding rural households) reached RMB 50.3036 trillion, up 3.0% year on year (on a comparable basis). The majority of the fixed-asset investment growth targets were between 7% and 10%, as stated in the government work reports of provinces, municipalities and autonomous regions at the beginning of last year. This indicates that a large number of provinces failed to meet their pre-established growth targets for fixed-asset investments.

It was, of course, influenced by the price factor. A longer time horizon reveals a distinct downward trend in the growth of national fixed-asset investments over the past decade, which presents China’s economic growth with a challenge as well as an opportunity for structural reform and a change in the country’s driving force.

However, we should also be very aware of the fact that if the growth of fixed-asset investment declines too quickly (severely slowing down economic growth), the country’s medium- and long-term economic targets will not be met. The growth rate of national fixed-asset investment was as high as 22.4% on average between 2002 and 2011, and then fell to 13.1% from 2012 to 2016; the growth of fixed-asset investment has continued to decline since 2017 from 6.4% to 5.4% in 2019 before the pandemic; in particular, during the three years of the pandemic, the growth rates were 2.7%, 4.9% and 4.9%, respectively.

Southern Finance: Which sectors may fully utilize the motivating force behind wise investment? What tasks need to be prioritized and attended to?

Liu Xinghua: From the perspective of the three pillars of fixed-asset investment, the real estate market is unlikely to become stabilized and rebound significantly in the future and is difficult to return as an economic growth engine; traditional manufacturing has a low capacity utilization rate, external market demand is not optimistic, and investment in the manufacturing sector does not have much room for significant growth as affected by the supply-demand relationship. As a result, infrastructure construction and equipment renewal should become the focus of fixed-asset investment.

The focus of infrastructure investment should be on remedying shortcomings in old infrastructure and taking a moderately proactive approach in deploying investment in new infrastructure. This way, both new and old infrastructure can work together to increase the investment efficiency, making infrastructure a vital pillar of the economy. As technology, energy consumption and emission standards advance, it is critical to encourage large-scale equipment renewal.

To ensure investment in various localities and achieve future economic development goals, it is also important to maintain a moderate expansion of local government bond supply, enhance the precise implementation of special-purpose bonds, closely supervise project lifecycles and increase fixed-asset investment. These actions will also form more physical workloads and strengthen new growth drivers for sustained economic recovery.

Exports: “New three” with high value-added becoming new growth poles

Southern Finance: China’s foreign trade has been under pressure in recent years. Have you noticed any highlights or trends based on last year’s data structure?

Liu Xinghua: In 2023, China’s trade surplus decreased and its trade deficit increased year over year; the role of net exports of goods and services in driving economic growth weakened to -0.6 percentage points, and the contribution thereof to economic growth was -11.4%. However, the WTO’s most recent statistics indicates that the share of China’s exports in the international market maintained at a high level of around 14% in 2023. China’s stable market share indicates its overall robust competitiveness and, to some extent, the resilience of its economy.

Regarding export structure, China’s exports of high-tech products have been steadily rising in recent years, which may be attributed to its economic structural adjustment and industrial upgrading. In particular, automobiles and parts, new energy batteries, photovoltaic products and ships have become the products with the highest export growth this year. Among them, China’s automobile exports have exceeded 5 million vehicles, surpassing Japan for the first time to become the world’s largest automobile exporter; its exports of new energy batteries and photovoltaic products have grown by more than 30%; and its shipbuilding industry has ranked first in global market share for 14 consecutive years. The “new three” of China’s exports, new energy vehicles, lithium batteries and photovoltaic products, have replaced the “old three” of clothing, furniture and home appliances.

Southern Finance: In the face of a slowdown or even reversal of the global economic integration process, how should China respond in the field of foreign trade?

Liu Xinghua: Currently, the international environment is becoming more complex, severe and uncertain, the primary reason limiting China’s export development remains the ongoing slowdown in external demand, and protectionism and unilateralism will also continue to affect its exports. However, China’s export growth will see improvement this year, and the negative impact of net exports on economic growth will lessen with support from policymakers, industrial competitiveness, and collaborative efforts from all parties. Industries such as electronics, medicine, automobiles and new energy equipment may see high export growth.

In the medium to long term, it is important to make efforts in three aspects: firstly, promoting the transformation and upgrading of domestic industries, striving to maintain the stability of the industrial chain and supply chain, and enhancing the market competitiveness of exported goods; secondly, continuing to expand imports while striving to expand exports; and thirdly, steadily expanding institutional opening-up.

To expand imports, it is now important to truly change the way of thinking. Not only do imports play a significant role in China’s participation in global trade, but they also serve as a vital conduit between domestic and international circulations. Increasing imports helps to maintain international trade balance, reduce trade frictions, and expand domestic consumption and create more jobs in the service industry. The market is the scarcest resource, and China has the advantage of having a very sizable market. By increasing imports to a point where certain industries with scale-oriented economic benefits can directly supply the imported goods to the domestic market, they can also create comparative advantages for the industries in exports when their capacity exceeds domestic market demand in case of excess production.

China’s automobile industry is a prime example. Not just in the manufacturing sector but also in the service sector is this true. China still has a long way to go in fostering the development of the service sector, modernizing and upgrading the manufacturing sector, and developing new quality labor forces, through higher-standard opening-up of service areas including R&D design, modern finance, high-end consulting, data information, medical and elderly care, education and cultural tourism.

In terms of institutional opening-up, it is important to make efforts in the following three aspects:

Firstly, China should accelerate the building of a system dovetailing with international rules, regulations, management practices and standards, encourage deeper reforms within the country through higher-standard opening-up, create a new development pattern and quickly become a trader of quality.

Secondly, China should strengthen extensive economic and trade ties with countries worldwide through institutional opening-up, promote its in-depth involvement in the global industrial division of labor and cooperation, continuously improve the level of factor resource allocation in the world, maintain a secure, resilient and sustainable global industrial chain and supply chain, and uphold the openness and integrity of the global trading system.

Thirdly, China should take the lead in global governance against the backdrop of new economic globalization by actively contributing to the development and improvement of international economic and trade rules in the context of the new round of scientific and technological revolution and industrial transformation. Examples of this include developing new economic and trade rules with countries worldwide in the fields of digital trade, cross-border e-commerce, carbon emission reduction, artificial intelligence and virtual currency, and offering its knowledge and solutions to support economic globalization that is open, inclusive, balanced and beneficial to all.