ISSN 2330-717X

China’s Policy Logic And Economic Rationale – Analysis

By

By He Jun and Wei Hongxu*

Advertisement

Recently, Morgan Stanley mentioned that “we are standing at an important turning point in China’s economy and capital market. The resetting of the underlying logic of the economy brought about by the new goals is marked by the supervision of Internet giants. China is changing the underlying logic of economic development: shifting from priority growth to fairness”. In their view, this policy orientation, coupled with Chinese economic rationale, will have a long-term and far-reaching impact on China’s future development, business, and investment.

Since economic rationale is a part of social phenomenon, the fundamental basis of economy logic also lies in changes in demographic factors. Although human factors are crucial in economic activity, they are often overlooked due to the long-term and individual nature of changes in population quality and scale. On the contrary, industrial development and policy choices pay more attention to changes in external factors such as cost, technology, and capital. However, the underlying logic changes caused by demographic shifts are often decisive and could serve as the basis for corporate decision-making and macro-policy.

China’s transition from a high-growth era to high-quality diffusion shows that the underlying foundation of the country’s economic development has changed fundamentally. From the demand side, the past trend of counting on exports and investment as economic drivers will soon become obsolete. At the same time, driven by continuous investment on the supply side in the past, the steady growth of production capacity not only conforms to domestic demand, but also the subsequent expansion of exports has also turned China into the world’s factory, resulting in excess production capacity. After its rapid development, internal contradictions continue to accumulate, resulting in a widening gap between the rich and the poor, excessive collection of environmental resources, declining investment returns, and rising labor costs in the country. These factors have deprived China’s economy of its potential for scale expansion. On this basis, China’s economy began to turn inward. Upgrading value content and output efficiency have become the key to improving its industrial productivity and competitiveness.

From the underlying logic, China’s population structure is undergoing a trend adjustment. The declining share of labor force driven by continuous urbanization and the rural population transfer has alternated labor supply. The low-end labor force has now become relatively insufficient, while the industrial labor costs continue to rise. This makes cost-push expansion increasingly onerous. On the other hand, with the development of urbanization to a certain stage, rising land prices, housing, and education costs begin to erode the spending power of households, causing an increasingly inadequate domestic demand. These two aspects are eroding the long-term growth potential of the Chinese economy. The recent drop in China’s economic growth rate is not only caused by cyclical factors driven by demand, but also by structural factors at the supply side.

In terms of policy trends, whether it is the “13th Five-Year Plan” poverty alleviation, or the current policies on common prosperity and unification of the large market, the fairness of these supply-side structural reform policies is being strengthened. The purpose is to enhance the contribution of science and technology and human capital to the economy. By increasing household income and spending power, China’s economy can achieve endogenous economic growth. Despite increased macroeconomic pressures and the need for countercyclical policies, macro foundation has yet to change significantly. The focus remains on decisive regulation and quality improvement, which is the logic of the policy change.

Advertisement

While implementing the supply-side reform, the Chinese economy still needs to improve the structure of supply through incremental expansion to achieve a balance between efficiency and fairness. Morgan Stanley revealed that, on the one hand, the efficiency improvement brought about by digital industrialization is the main area for China’s future market expansion. On the other hand, further urbanization still has great significance in the market space. These two aspects will be the main essence of China’s economic growth in the future, and therefore the focus of policy support and catalyst. Overall, under the new underlying logic, increasing households’ income, reducing class gaps, and increasing the output of capital and labor would be the main lines of sustainable development in the future. This pattern suggests that economic expansion has become relatively less important in policymaking. As noted by Morgan Stanley, China “is shifting its regulatory priorities to a balance between growth, sustainability, improving social imbalances, and maintaining security. This will shift the division of economic benefits to workers and reduce corporate profits”.

Yet, the policy-oriented changes under this underlying logic could be precarious. Due to the dominant role of government policies in market supervision, education, transformation of scientific and technological achievements, as well as the allocation of public resources, the impact of policies on economic and market development is getting more pronounced. For the industry and market players, future development must consider even more policy influences. At present, education and the consolidation of internet platform companies have had a significant impact on related fields and investors. Concernedly, as policy influence continues to expand, so do the risks posed by policy excesses. Although the current policy does not emphasize “one-size-fits-all” but rather “precise regulation”, it is often strenuous to achieve “moderate” and “balance” in the current policy implementation capacity. Meanwhile, the risk of excessive supervision continues to cause harm to economic activities. Therefore, under the expanding policy influences, policy decision-making should be more cautious to prevent harm or excessive intervention in the market and economic activities.

*About the authors:

  • He Jun, Partner, Director of China Macro-Economic Research Team and Senior Researcher. His research field covers China’s macro-economy, energy industry and public policy.
  • Wei Hongxu, A researcher at ANBOUND, graduated from the School of Mathematics at Peking University and has a PhD in economics from the University of Birmingham, UK

Anbound

Anbound Consulting (Anbound) is an independent Think Tank with the headquarter based in Beijing. Established in 1993, Anbound specializes in public policy research, and enjoys a professional reputation in the areas of strategic forecasting, policy solutions and risk analysis. Anbound's research findings are widely recognized and create a deep interest within public media, academics and experts who are also providing consulting service to the State Council of China.

Leave a Reply

Your email address will not be published.