Each March, China's top officials, legislators and representatives gather for two meetings that ultimately guide the course of the upcoming year in terms of political, economic, financial and social strategy. Called the "Lianghui" 两会, the meetings are held by the National People's Congress (NPC) and the Chinese People's Political Consultative Conference (CPPCC).
Given the importance of the Lianghui meetings, the Guanghua School of Management at Peking University, in partnership with the PKU Economic Policy Institute, holds an annual conference- “Lianghui: Economic and Policy Analysis.” This conference discusses the meetings’ most important policy and economic reforms and their future implications, as well as interesting national strategy points.
The Economy Update
The Economic Policy Institute kicked off the conference by outlining China’s economic prospects. China started the year with a GDP growth of around 6.8%. This number is expected to lower slightly and maintain an average of 6.5% over the course of the year. Further, the Chinese government will start curbing some of the financial risk it accrued during previous financing projects. Most notably, China will continue the process of liberalizing its exchange rate, which will allow the RMB to “maintain stability at a reasonable and balanced level.” Such moves will cause the exchange rate with the dollar to hover around 7:1 for the foreseeable future.
Rethinking Macroeconomic Policies
Guanghua Dean Qiao LIU spoke in large part to the decreasing effect of macroeconomic policies on economic output. Professor LIU began by stating that China’s economy has grown by over 6.7% in the past year under extremely difficult and uncertain situations. In previous years, China has employed financing options to drive GDP growth. However, these methods have recently seen decreasing marginal returns and increasing risks. Macroeconomic policy, he argued, must change.
According to Professor LIU, it is impossible to continue driving GDP growth through financing, because of increasing financial risks. Rather, the Chinese government should further marketize the economy. This will, in-turn, lessen the burden on private enterprises. Finally, Professor LIU added “in the long run, remodeling micro-foundation is the way for China to realize sustainable economic growth.” Further, he emphasized the importance of small businesses in this regard.
Better to Foster the Market Than to Intervene
Professor Xiaolei LIU spent much of her time addressing the issue of market v. intervention. She began discussing the Chinese government’s decision to reduce loan rates in favor of increasing mortgage rates. As a result, many bigger companies that previously bought land can now easily pay off their loans and continue to buy land. However, this policy adversely affects many smaller companies. They cannot afford increased mortgage rates, and thus, startup companies are squeezed out of buying land. Simply put, the rich get richer, and the poor get poorer.
Professor LIU warned that this sort of financial prioritization could cause another financial crash like the one in 2015. She further advised that the Chinese Government should focus less on direct intervention and more on educating investors and cultivating a healthy market.
The Value Investment Idea
According to Professor JIANG, China’s stock market has provided good returns for its investors since its inception. As with any market, smart investors will invest based on a company’s valuation and will not pay more than its worth. He then added that only “savages” are willing to hold a company at a price higher than the company’s intrinsic value. These savages often, more times than not, go down with the company.
Apart from the “savages,” Professor JIANG has a great outlook on China’s equity market. While some feel hesitant to invest, he noted that despite its youth, China’s market has already come so far. Confidence is rising and it should be.
Wealth Management is not a Zero-Sum Game
Professor Li JIN discussed the increasing popularity of the wealth management industry and its importance as it replaces real estate as the most commonly used method for storing wealth in China. Many believe that wealth management is a zero-sum game due its potential high risk. However, Professor JIN suggests that there are still too many difficulties in the market to prove that. He goes on to say that “too many retail investors are affected by emotion when investing, and many blindly pursue high returns without considering the risk—which makes wealth management seem like a zero-game.”
Professor JIN gave a simple solution to this issue: universities like Peking University will redouble their efforts to create leaders who will reshape China’s wealth management industry. This will lead to improvements in wealth management practices and create a more mature industry, overall.
China’s Economic Development & its Top Four Challenges
When it comes to China’s future economic development, Professor Yuyu CHEN boils its future challenges into four areas:
1. Tense geopolitics caused by globalization
2. Increased demand for public services
3. Relatively slow increases in agricultural productivity
4. The construction of a flexible labor market is becoming the biggest weakness and challenge of the market system
Professor CHEN argued that as China’s middle class increases, demands for various public services will increase faster than the speed of rising incomes. This issue will solve itself when China establishes a new labor market. The next 20-30 years will be very challenging, says Professor CHEN. What is the more immediate solution? Professor Chen provided two: (1) China’s labor market needs to shift vertically and become more skilled, or (2) shift horizontally by occupying more geographical space in China. Regardless, Professor CHEN made one thing clear: China’s labor market needs to become more flexible.
Finance and Tax Reform
Professor Hongbin CAI delivered the final presentation which primarily concerned China’s tax system. He believes that local governments should be given more discretion in regards to setting housing and land taxes, though they should still adhere to national standards. Further, he stressed the importance of reforming China’s current income tax system. He believes that individual income tax reform should lend itself to having wide tax brackets and lower tax rates. As it currently stands, China has a progressive tax rate that is defined into seven tax brackets. Many of these brackets directly affect the middle class. Professor CAI proposed that China reduce this number to, at most, three tax brackets with lower tax rates. This will allow the middle class to grow more freely.