Renowned Chinese economist Lian Ping shared his perspectives on China’s recent reforms and key issues in China’s macroeconomy. The Shanghai-based economist described the economic characteristics of Shanghai and its importance to the Chinese economy. He also shared his insights on recent key policy initiatives in China ranging from supply-side structural reform, common prosperity to capital market opening-up.

Lian is chief economist of Zhixin Investment, president of Zhixin Investment Research Institute and president of the China Chief Economist Forum, in Shanghai. He was chief economist at Bank of Communication, the fifth largest bank in China before joining Zhixin Investment Research Institute, a subsidiary specialising on capital market and macroeconomic research of Xinhu Wealth Management.

He gave lucid explanation on key economic issues in China, for instance, why demographic shifts will affect Chinese economy. And he explained that China’s leverage level is partly due to its high reliance on indirect financing, which will subside once the share of direct financing increases. He also illustrated a few cases of supply-side bottlenecks taking place in Chinese economy.

Lian also discussed the series of recent policy initiatives in China and the policy-making logic of them. He argued that China is further releasing the potential of market economy through a series of reforms, including supply-side structural changes, the common prosperity initiative, poverty alleviation and capital market reforms. Those reforms address key structural and persistent issues in the Chinese economy, such as unequal wealth distribution, supply-side bottlenecks and the relationship between private sector and state-owned companies.

Following key points were discussed:

• Shanghai has a relatively well-structured industry with a higher content of technology and finance.
• Demographics is the key underlying factor of China’s macroeconomy.
• Common prosperity is as much about making the wealth cake bigger and better as cutting it fairly.
• Supply bottlenecks are largely related to the lower level of market unification in China.
• State-owned companies in China receive preferences and conveniences in many aspects.
• China’s leverage level is due to its high reliance on indirect financing, namely bank credit or loans from other financial intermediaries.
• China’s capital market is projected to surpass the US market in size and become the largest capital market in the world.

Below is the edited transcript:

Emmanuel Daniel (ED): In my continuing series of conversations with economic influencers in China, I travelled to Shanghai to speak with Lian Ping, one of the leading economists based in the city. I wanted to understand for myself how leading economists in the different major cities outside of Beijing think their priorities and areas of focus.

Lian Ping was the distinguished chief economist at Bank of Communications from 2008 to 2020, the leading banks in Shanghai and the fifth of China’s largest banks. He travels regularly to Beijing and participates in policy discussions in universities and think tanks at the national level. He is currently the chief economist at Zhixin Investment and head of Zhixin Research Institute. Perhaps more importantly, he is also president of China Chief Economist Forum (CCEF), the think tank’s chairman is Mr Xia Bin, a state counsellor and a top policy official.

ED: Mr. Lian Ping, I am happy to see you in your Shanghai office. Thank you very much.

Lian Ping (LP): Mr. Emmanuel, I am glad that we have this chance to talk about issues that we are all concerned about.

Shanghai has a relatively well-structured industry with a higher content of technology and finance.

ED: You are a renowned economist. My first question is, what are the economic characteristics of Shanghai?

LP: Compared with other places in the country, Shanghai does have its own economic traits. From the perspective of basic operation, Shanghai’s economic operation is quite stable and orderly. This is one of the characteristics of Shanghai.

In addition, the level of high-tech industry is relatively high in Shanghai, and the proportion of finance is also relatively high. Moreover, premium manufacturing has a very good development momentum in Shanghai. All these have formed a relatively well-structured system.

Therefore, overall Shanghai has a relatively well-structured industry with a higher content of technology and finance, and the overall operation is stable and orderly.

We feel that such stability and orderliness are related to the characteristics of Shanghainese who are more cautious and careful in nature. You can see this trait in handling economic operational issues, such as policies and their execution.

Demographics is the key underlying factor of China’s macroeconomy.

ED: As an economist, what do you think is most important to China’s economy now?

LP: From our perspective, the most important thing is to understand that China has a very large population base. It has the largest population in the world with 1.4 billion people. China's population will perhaps maintain for a while.

A large population has a great impact on the entire economy. One of which is abundant labour at very low cost, which means competitiveness. It will attract global manufacturer to China, as it knows well what the global market needs.

Looking back, China’s economic development can prove this. After joining the World Trade Organization (WTO) in 2002, China’s economic growth has been accelerating. I remember China’s export grew rapidly during the five years between 2003 and 2007, with almost 30% growth each year.

As I’ve said earlier, we have abundant labour, and have started to take massive overseas orders for the processing business after the economy opened up, which led to fast expansion of the manufacturing industry, and the total order amount has increased rapidly.

This has been the case since 2002 when we joined WTO till now. This is a huge success and achievement for China and its population.

Another thing is, internally, our population is mobile. After the reform and opening up, most of the people that used to be in the rural areas have gradually entered the cities, leading to urbanisation, which results in higher consumption level. Consumption in the rural area is completely different from the cities.

The gradual entry of 700 to 800 million people into cities has significantly increased demand. This process has not been completed yet. There is not much room for large expansion of global processing business that we discussed earlier. However, there is a large room for urbanisation. We estimated that there may be 100 to 200 million people entering cities from the rural areas in the future, taking urbanisation to the next level.

In the past two years, another new direction of urbanisation appeared, that is, people from small cities are going to large cities. We see that the population of many important cities, including tier 1 and tier 2 cities as well as many provincial capital cities, is expanding, while the population of some small cities is decreasing. For example, Huai’an in Jiangsu, where I visited recently, is witnessing a decrease in population, while Nanjing’s population is significantly going up. This is bringing great demand to China, and consequently, its market will become larger.

Common prosperity is as much about making the wealth cake bigger and better as cutting it fairly.

ED: What do you think of common prosperity?

LP: Common prosperity is a very important goal that was proposed about two years ago, or we can say it is a strategic goal. I was thinking why common prosperity was brought up last year, why not sooner or later?

There is a clear context. With the development of China’s capital market in the past 10 years, there are more rich people, and many of people’s wealth has increased exponentially in a very short period. But at the same time, many people have very limited income growth, and many even live in poverty. This is a phenomenon in China. As a result, the gap between the rich and the poor is widening, and the gap in income distribution is widening, leading to social inequity and injustice.

This situation is not good for society. It poses a risk if left unattended. Social injustice will bring many social contradictions, which tend to intensify. Therefore, we need to solve this problem. Some years ago, China initiated a major project which is poverty alleviation. It is not right to talk about common prosperity if 60 million people are poor. That is why common prosperity was proposed as a strategic goal only when poverty alleviation was completed last year. The common prosperity that I understand may not be what many people imagine. Many rich people are somewhat worried that this is robbing the rich to help the poor, or that there will be policies against them seeing they have more money. This is an unnecessary concern.

My understanding of common prosperity is to make the cake of wealth bigger, and then we all share the cake together. It is not cutting a piece of wealth of the rich people and give it to the poor or low-income groups. I don’t think that’s the purpose.

During the economic work conference of the Central Committee, it was clearly proposed that we need to make the wealth cake bigger and better, cut the cake and distribute it appropriately. This explains two aspects, the increase and sharing of wealth. Overall, more wealth is good for everyone. In the future, it is equally important to cut and distribute the wealth in an appropriate way, which requires many institutional measures to be implemented.

For example, there is no property tax or inheritance tax in China, nor the many property-related taxes that exist in the West. These are what we need to work on moving forward.

But it takes a long time to introduce these taxes, perhaps it will take five to ten years of gradual introduction. One example is the property tax that is being discussed now. Not long ago, it was like the tax would be implemented soon. However, with the current state of the economy, especially the downward pressure on real estate, I don’t think that property tax would be introduced in 2022. It will most likely be a gradual trial introduction, a mild one, at controllable pace. This is going to be a long process, in which eventually systems will be utilised to cut and distribute the cake properly. To achieve this, incremental growth is more important. Once wealth is increased, it would be more appropriate to engage some of the country’s institutions to better distribute the incremental wealth, be it second or even third distribution, and distribute more to the low-income people. I feel this is the main direction for the future.

But it takes a long time to introduce these taxes, perhaps it will take five to ten years of gradual introduction. One example is the property tax that is being discussed now. Not long ago, it was like the tax would be implemented soon. However, with the current state of the economy, especially the downward pressure on real estate, I don’t think that property tax would be introduced in 2022. It will most likely be a gradual trial introduction, a mild one, at controllable pace. This is going to be a long process, in which eventually systems will be utilised to cut and distribute the cake properly. To achieve this, incremental growth is more important. Once wealth is increased, it would be more appropriate to engage some of the country’s institutions to better distribute the incremental wealth, be it second or even third distribution, and distribute more to the low-income people. I feel this is the main direction for the future.

Therefore, I don’t think the rich people need to worry about being forced to help the poor. I feel the future direction is clear, that is, secure incremental growth and distribute the incremental wealth properly. The most important thing is to make the cake bigger, then it will be easier to cut and distribute the cake.

Supply bottlenecks are largely related to the lower level of market unification in China.

ED: What’s the goal of structural reform?

LP: In recent years, China has carried out supply-side structural reform. This is one of the critical points of China’s economy. Since the reform and opening up, especially after China joined WTO in 2000, the growth of China’s economy has accelerated significantly, and the size of the economy has become increasingly large, forming many relative advantages in many areas. However, one issue is that there are so many problems on the supply side. The main problem is not in demand. Demand exists; it needs to be constantly increased, and its quality needs to be improved. But there are many issues on the supply side. There are many weak links. We have many “bottlenecks”. We do not have enough investment in supply, and some important things are not under our own control.

The most typical supply issue is real estate. We have big problems with real estate as policies are inadequate, but the key problem is the poor match between supply and demand. The supply of land and housing is not handled well, including financial support to building and development of housing. For example, housing price in some cities is too high, and there are simply too many bubbles. This is caused by insufficient supply. One very important thing in China is to continue to advance the supply-side structural reform, solving the problems on the supply side, and paving the way for solving other issues. This will contribute to the smooth economic operation.

ED: What is the most important thing in structural reform?

LP: First of all, China needs to further release the potential of market economy through the reform. This is because the so-called supply bottlenecks are largely related to the lower level of market unification in China. There are still many obstacles to the efficient flow of relevant factors, including capital, human resources, and technology.

Many reforms are required to drive solution. Currently, many local governments have set up some obstacles. In recent years, these obstacles continue to exist rather than be removed by the rapid economic development. They hinder the efficient flow of the factors mentioned above, as said in the so-called “dual circulation”. Lately, the state has driven significant improvement in market integration and unification. I feel that this is very important.

The second point is related to the system of the Central Committee. Moving forward, how can the fiscal resources be directed to places where they are most needed through the reform to stimulate the ability and function of supply and to promote better economic development? In particular, we are now going for high-quality development. To do this, we need to eliminate restrictions and bottlenecks through the reform, only then can we drive the better match between supply and demand and maintain stable economic growth.

ED: How is the structural reform of state economy going?

LP: After many years of reform, great changes have taken place in the state economy. First, its contribution to the national economy has declined. The size of the private economy has increased, and this is a basic structural issue. More areas, such as the service industry, and those related to the national economy and people’s livelihood are gradually opening up. Recently, there have been some slogans, indicating that many areas in the public service sector will be further opened to private economy.

Moving forward, the areas of state economy may further shrink, and more areas that were previously perceived as monopoly ones will be opened to the society, slowly. The proportion is declining, however, the key sectors of state economy, for example, those relating to technology, national defence and the most critical areas of public services will remain within state economy. Consequently, we will continue to consolidate and strengthen state economy. This direction is clear.

On the other hand, there is another phenomenon. After many years of reform and opening up, the development of the private economy is obvious to all. There are some issues with the private economy now. The government has made some adjustments, including slowing the listing of some notable private companies. There are some concerns now in the market, that the reform appears to have reversed with the state economy expanding again at the expense of the private economy.

Over the past 40 years of reform and opening up, the private economy has developed and increased in size. It can be said that the development of private economy is one of the huge achievements of China’s economic reform. Without it, China’s economy would not be what it is today. The development of private economy has triggered the growth of manufacturing, leading to a very good and stable employment. Most of the contribution comes from micro, small, and medium enterprises (MSMEs), which are mainly private companies. They solve the problem of employment, while at the same time provide a large number of consumer goods and ensure market supply. Around 40 years ago, China’s economy was a command economy, and people needed to use commodity vouchers to buy things. Private economy secured sufficient supply and provided employment as well.

Therefore, the prospects for the development of private economy are very good. It is not possible for China to return to 40 years ago. Moving forward, state economy will be consolidated and strengthened, but only in some important areas. Private economy will continue to have room for development. However, there are issues with private economy. With years of development, some private enterprises have grown large and regarded themselves as the best in the world, becoming strong-handed in many ways.

Some large companies have not followed rules. For instance, some large funds absorb a lot of deposits, and then make loans. They are financial institutions (FIs), but they are not regulated in accordance with the regulations for FIs. There are very clear regulations for FIs, as they need to have capital. But they do not have much capital, thus, they are not qualified as FIs. Yet, they continue to seek listing and relevant listing authorities give them green lights. All these are against the rules. Compared with state economy, private economy has gained more benefits that should not be obtained. To some extent, some private companies get whatever they want, and this should not be tolerated.

There is now a “red and green light set of regulation”. “Red light” means areas forbidden for private companies, non-compliant behaviours and or practices are given red lights. Of course, most of the cases are given “green lights”, only a handful will face “red lights”. That is why I say these adjustments do not mean to completely disrupt things. It is absolutely not possible to return to decades ago when state economy ruled everything.

State-owned companies in China receive preferences and conveniences in many aspects.

ED: What’s the relationship between private companies and state-owned companies?

LP: It is mainly cooperation, but there is also competition. In the West, there used to be many state-owned enterprises, but the number has been reducing slowly. China features a socialist market economy, and it is necessary for state-owned enterprises to exist for a long time. Our country regards them as an important basis, the basic resources on which the entire national economy stands. A socialist market economy without a state economy is unthinkable. State economy and private economy will co-exist in the socialist market economy.

In some areas, the state economy may still be dominant. In the market, it is called a monopoly. It is not completely the case. Let’s say it is a franchise in certain areas. These state-owned enterprises can better suit the needs of state policies in such relevant areas. However, overall, the private economy is entering more areas. Therefore, it is bound to have certain competition, but cooperation does exist.

The state should treat all the enterprises alike according to the norms - be it a private company or a state-owned company. They should be given equal treatment, but in reality, state-owned companies in China receive many preferences and conveniences in many aspects.

For example, state-owned banks feel more comfortable providing financing to government-owned companies and they do not have any concern. Banks tend to be more careful when providing loans to private companies because they consider more things such as relationship and risks. Relatively speaking, there are some differences in financial support.

Our policies need to emphasise more support for private companies, especially the MSMEs, and we should do that. Private companies have disadvantages in areas such as financing, so the state should give them more support.

ED: What role does the capital market play?

LP: We just talked about state-owned companies and private companies, and I cited an example of financing. There are differences in the way banks handle it. Currently, the capital market is developing rapidly. Private companies issue stocks, take loans and issue bonds. The market norms and environment are the same, but some private companies have inadequacies in the process of market operation and are relatively weaker. Their credibility is not as strong as that of state-owned companies, which have the state behind them to some extent and thus have a higher level of credibility.

Another example is that, although both are graded as 3A, the market trusts state-owned companies more than private companies. Some private companies are in a very good shape, and their various indicators are satisfying. The market has higher opinions of them. The capital market is more transparent, and fairer in financing, stock and bond issuances compared with the banking system.

Now, we particularly emphasise the development of direct financing and capital market. In capital market, the emphasis should be on the stock and bond markets. In the past two years, great efforts have been made. The future rapid and long-term standardised development of the stock and bond markets may provide better support to the private economy than before, and better than banks.

China’s leverage level is due to its high reliance on indirect financing, namely bank credit or loans from other financial intermediaries.

ED: Do we need to worry about China’s leverage?

LP: In the past five years, China’s leverage has been a very hot topic. There has been a lot of discussion. There was even a period when the discussion was not allowed.  Leverage has attracted much attention, which is a good thing.

Our current assessment of the level of China’s leverage - the leverage of our economy, that is, the debt to GDP ratio, is medium-high from a global perspective. We have studied how our leverage has got to where it is now. China’s leverage was not high 10 years ago, it was medium-low. Therefore, nobody talked about China’s leverage at that time. It was not an issue.

When did it become an issue? In 2009, when we were coping with the global financial crisis. We still remember there was a slogan talking about an investment of RMB 4 trillion ($629.8 billion) What was the most direct and substantive issue behind that? Credit grew by as high as 32% in that year, which means that the loans for the year accounted for 1/3 of the total loans of the past 30 years. A huge number of credits were released, and the debt level rose rapidly. The leverage level has started to go up since 2009, and at a very high speed, and there was inertia after that. There was still a fast rise in 2010 and 2011. In 2014 and 2015, the leverage suddenly reached a very high level. This is how leverage has gone up in China.

I will share my opinion about the leverage level. In 2016 and 2017, the state proposed to deleverage. I was worried. I accepted an interview of a newspaper and shared my thoughts. I said, we should be cautious about deleveraging. We’d better stabilise the leverage instead. Leverage was at such a high level, if we introduce a relevant policy to deleverage, it would definitely lead to economic contraction.

Is the economy heated now? If not, but, you take various fiscal policies especially financial measures to shrink liquidity, tighten the economy and curb demand. The economy would be suppressed and there would be many issues. For example, some enterprises might have liquidity issues and collapse. There would be risks. In my opinion, from the perspective of macroeconomic contraction, when the economy is heated, it is appropriate to go for contraction, and it would be fine. But when the economy is in stable operation, the sudden move to deleverage and contract the economy would lead to problems. About two years ago, the governor of the central bank said, “We still need to stabilise leverage”, at that time, there were some issues and the pressure was huge.

After serious study, my viewpoint regarding China’s leverage is not to worry about its current leverage level, which is medium-high. This has a lot to do with China’s economic structure. Most importantly, China is an economy dominated by indirect financing.” Financing is mainly driven by bank credit (debt). This is very different from the US, which mainly depends on the capital market, and stocks.  China relies on bank credit, and the more credit, the higher the debt level.

The best solution is, over time, bank credit growth will slow down while financing of capital market increases. This way, more direct and stock financing will replace bank credit, and the leverage level will be gradually lower, naturally.

We don’t have to work too hard. What we need to do now is to control the growth of leverage. Things will definitely change in five to ten years. We will rely more on direct financing rather than bank credit. I used to be in the banking industry, and I am familiar with the banking system. One important issue with the banking system now is that the growth of deposits is getting slower. In five to ten years, banks will not be able to release that much loan, as they won’t have that much deposits. The deposit level is increasingly lower, then where have the deposits, gone? To the capital market.

Therefore, as long as we stabilise leverage, after five years, the leverage level will naturally change accordingly. It will show a downward trend after the stabilisation. We don’t have to get anxious and try to regulate it now.

China’s capital market is projected to surpass the US market in size and become the largest capital market in the world.

ED: Do you think it is time for China to open its capital market?

LP: In the past two years, the opening of China’s capital market has accelerated significantly. For example, we are promoting the opening of our stock and bond markets to foreign investment. There are two parts of the opening of the financial sector to foreign investment; one, is the opening of the market, such as the stock, bond and foreign exchange markets; and the other is the opening of the financial industry, which includes insurance and securities companies, and banks. The financial industry is now open to foreign equity participation, which enables foreign parties to hold a controlling interest, including absolute controlling interest. In the capital market, there are some appropriate restrictions regarding foreign investment, mainly in speed and size. But overall, there is no major restriction.

After the developments in the past few years, foreign investment accounts for less than 3% in the stock market, which is quite low percentage. It is 20% in the stock market of the US, and over 20% in Hong Kong. Foreign investment in the bond market is a bit higher because of the Chinese government bonds with high credit ratings, for which return on investment is also good and relatively high globally. Foreign investment in the bond market is over 5%, but it is fixed-income investment, and the price of the bond market is less volatile. Again, the opening of the market has been accelerating and moving forward, it may not take long for China’s capital market, including the stock and the bond markets to surpass the US market in size and become the largest capital market in the world.

The development of the capital market will make things such as financing easier and drive the fast development of direct financing. Stocks and bonds will be issued, which will significantly reduce the demand for bank loans, as banks cannot lend too much money. As a result, the leverage level will naturally go down.

ED: Thank you for answering all my questions. Now, I understand your thoughts.

LP: Thank you very much. You asked very good questions, and they provide me food for thought. We have exchanged complementary ideas.