Boosting the economy

DW: What is your assessment about the current state of the Chinese economy?

Yu Yongding: I think China's economy is facing some difficult challenges. Our economy has been slowing down since 2010. We had hoped that the slow down would eventually stop and the economy would rebound but unfortunately the trend continues.

So the question now is whether the Chinese economy will be able to stabilize at the current level. We are not quite sure if it will happen, but I think there are many policy instruments the government can use to stop the trend.

For one, I think we should recognize that the Chinese economy is in transition. In the past, it was investment driven and export driven. But this kind of pattern is not sustainable so we have to make a change. We have to promote consumption and domestic demand. That is a big change and when you are trying to make big changes like this, there will be a transitional period where economic growth, more often than not, will slow down.

For example: we cut investment in real-estate development. If you do that but don't want the growth rate to drop, you need consumption to grow very fast to offset the effects. But unfortunately, consumption is primarily an endogenous variable. Even though policy will have some impact on consumption, most consumption decisions are made by households independently.

So while the growth in investment, especially in real-estate investment, dropped quite dramatically last year, from 40 percent to one percent, consumption grew by 10 percent. This offset the negative impact to some extent but then you also have an overall slowdown of the global economy.

So how do you deal with that situation? There are different options. One is to try your best to encourage consumption, but maybe the Chinese government has not been able to do that enough.

DW: So you think the Chinese government should interfere more?

YY: No. What I'm trying to say is that the Chinese government should accelerate reforms. For example: if the government makes the country's pension system more viable, the education system more friendly towards poor people and takes other similar measures, then I think consumption will increase. But it will take time.

Another issue is that investment in real estate in China has been too fast and we have spent too many of our resources on building houses, condominiums, five-star hotels, skyscrapers, etc. At the same time, China is still a poor country. There are many other areas where China can invest instead, like the country's infrastructure.

DW: Then why don't they do it?

YY: They are trying to do things and they did that during the world financial crisis. But because the government feared a tremendous slow down, it pushed those kinds of stimulus packages overzealously at the time and many of the projects were not well designed and a lot of money was wasted.

As a result, there is a stigma associated with trying to stimulate the economy by investing in infrastructure. So the government needs to persuade the people that even though last time we made mistakes, the fundamental direction was correct. We need infrastructure investment and this is not something that only the poor will benefit from, it will also help stabilize the economy. I therefore think we should do more to persuade the government to adopt an expansionary fiscal policy.

DW: So are you talking to the government about it? What is their reaction?

YY: Yes, we have discussed this issue with government officials. I think this kind of dialogue has some impact on their decision-making and now they emphasize striking a balance between structural adjustments and reforming lots of institutions while also using fiscal policy to promote economic growth. So they decided to increase China's budget deficit from 2.4 percent last year to 3 percent this year. Next year, it may be even higher and so forth.

DW: So what kinds of growth rates are you expecting for China in the next five years?

YY: China can probably maintain a target growth of six percent but there is also a consensus among Chinese government officials and economists that our potential growth rate should be something like 6.5 percent.

DW: You said consumption is crucial. How can China increase consumption?

YY: I think they need to improve housing. Not high-end housing but affordable housing for lots of young people. They need decent houses so the government is pushing affordable housing projects, trying to build around 10 million units a year. This is very important. The government is also trying to improve the health care system.

China's medical insurance scheme covers everyone but it isn't well-funded. A better system would mean that people don't need to put aside a lot of money to prepare for medical emergencies. Similarly, they are trying to improve the pension system as well.

But China is a big country, these are big challenges and we don't expect consumption to miraculously increase over night so the most immediate way to boost the economy is to invest in infrastructure.

We need a better social welfare system; we need more modern city utility systems. For example: China's sewage systems are often not very good and we need to improve sanitary conditions in rural areas. Even running water is a problem. All of this will cost huge amounts of money but if we can really design these kinds of projects very carefully and use a government budget deficit to finance them, then I think we should be able to stabilize the economy.

Yu Yongding is a former president of the China Society of World Economics and director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences. He is also a member of the Foreign Policy Advisory Committee of the Ministry of Foreign Affairs of the PRC, a member of the National People's Political Consultative Conference (NPPCC) and a member of the NPPCC's Foreign Affairs Committee.