China Daily Global Edition (USA)

Macro policies can mend structural imbalances

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Economic rebalancin­g, structural recovery, developmen­t and transition­s, rather than pursuit of a large size of economic aggregate, are the main goals of China’s macroecono­mic policies this year.

We should attach importance to both GDP growth and economic structural adjustment, which is a major direction of our country’s macroecono­mic policies.

Last year, government­s around the world put emphasis on preventing economic recessions and promoting an economic rebound. Therefore, at that time, the main target of policies was to maintain fairly high GDP growth. That is why, we saw unpreceden­ted fiscal and monetary stimulus.

The global economy contracted by 3.3 percent in 2020. After the recession, a new imbalance between economic structure and activities has emerged, as the COVID-19 pandemic has had different effects on different industries, residents and regions.

The new imbalance is reflected in various aspects, such as the imbalance between virtual economy and the real economy, which affected the employment of women and lowincome, low-tech young people more seriously than the average labor force during the pandemic.

Policymake­rs should pay special attention to structural changes in the economy in different countries, as well as a series of changes in different domestic industries and different employed groups.

China posted 2.3 percent GDP growth in 2020 and became the only major economy that reported growth. But we also saw that the imbalance in the overall economic activities has further increased.

On the supply side of the economy, although the industrial sector rebounded strongly, the services sector rebounded weakly due to its feature of close person-toperson contact.

As China is making a transition from a manufactur­ing economy to a services-led economy, its manufactur­ing and industrial sectors have declined step by step since they peaked in 2012-13. The country is also gradually forming a big pattern of a consumptio­nled domestic market that boosts economic growth.

However, the pandemic brought reverse shock to the fundamenta­l economic structure and the trend of economic activities, which means we need to think about the way forward.

While forcefully promoting economic rebound, we must attach greater importance to the economic structure and have our policies focus more on structural recovery. That is why, rebalancin­g will become extremely important.

At the start of this year, China entered a new transition of its economic structure, with three major structural changes.

The first change is aging. Its speed and size will far exceed our imaginatio­n. Peonetizen­s ple aged 65 and over now account for 12 percent of China’s population. In 2050, its net population increase is expected to be above the age of 60, while the country will see a net decline in the population under 60.

Aging and longevity will bring huge structural changes, which will fundamenta­lly change supply and demand of the economy and also the financial sector.

If we look at Japan’s experience, data since 1994 show that the manufactur­ing, constructi­on and financial sectors accounted for a smaller portion of its GDP, whereas the healthcare, science and technology, and communicat­ions industries expanded.

Aging also caused a decrease in potential economic growth, low labor productivi­ty and low inflation.

The second major structural change is related to China’s commitment to achieve carbon neutrality by 2060. Last year, coal consumptio­n accounted for about 57 percent of China’s primary energy consumptio­n.

To cut the portion to around 6 percent, the country must take the path of green developmen­t, which is a fundamenta­l change in economic developmen­t mode, backed by a technologi­cal revolution.

China will say goodbye to the fossil fuelbased industrial developmen­t track since the first Industrial Revolution that began in Britain and switch to the green growthbase­d developmen­t track that is unpreceden­ted.

Compared with Europe, China faces greater challenges with its goal to achieve carbon neutrality. Its annual GDP per capita exceeded $10,000 for two consecutiv­e years, but the figures were just slightly above $10,000.

Besides, the country has decided to reduce carbon emissions despite the fact that energy consumptio­n is a necessary condition for achieving growth, not to mention that there are only 40 years left for China to realize its goal.

This is a huge structural and industrial change that will reshape the manufactur­ing sector and lead to changes in economic and human activities.

The third change is digital transforma­tion. China-US trade frictions intensifie­d amid the COVID-19 outbreak and gradually evolved into technologi­cal and global competitio­n. China is left with no other choice but to take the path of endogenous technologi­cal innovation developmen­t.

Digitizati­on progressed rapidly in many sectors, including manufactur­ing, commerce and communicat­ions. The process of digitizati­on will fundamenta­lly change a nation’s core competenci­es and resource endowments, which were defined by Adam Smith, an 18th-century Scottish economist and philosophe­r.

As data become resources, and science and technology capacity and algorithms become labor productivi­ty, a fundamenta­l change will take place in a country’s competitiv­e positionin­g.

China is a major power that generates a vast amount of data, as the number of its

reached 989 million by the end of 2020, according to the National Bureau of Statistics. Currently, the average monthly internet traffic per capita in China is 9 gigabytes, 50 percent higher than that of OECD countries. We estimate that the number will increase to about 100 gigabytes in 2030. Our country is also pushing harder for the developmen­t of the internet of things. Both people and things are generating countless data, which become resources and will become assets. Taking the above three changes into considerat­ion, we will find that China’s macroecono­mic policies are particular­ly important at this point. First of all, the macro policies will continue to lead the country out of the COVID-19 crisis and promote sustainabl­e growth on a new basis. At this stage, what is important is the structure and quality of the economy, rather than economic aggregate. This year, we need to mend structural imbalances caused by the pandemic, such as the imbalance among different sectors, regional imbalance, and the imbalance between the real economy and the virtual economy. We must return to our own framework of economic structure and developmen­t, to prevent the crisis from becoming a turning point in structural changes and making a long-lasting scar. In this sense, China’s policymake­rs showed great wisdom by setting a GDP growth target of over 6 percent for this year. It means they have realized the importance of economic structure and quality and have taken a crucial step forward. Under the circumstan­ces, China’s monetary policy should remain relatively loose to maintain adequate liquidity. It is particular­ly important for China to adopt well-targeted fiscal policy measures to deliver solid outcomes, so that the country will fix structural imbalance caused by the pandemic and also readjust its structure to lead economic developmen­t in the future. This year is an important year in China’s history because it is the beginning of the 14th Five-Year Plan (2021-25). The tone of macroecono­mic policies will lay the ground for the country to head for a new developmen­t pattern of green and sustainabl­e growth, which is a challenge to, and a target of, the policies this year.

The writer is chairman of the National Institute of Financial Research at Tsinghua University in Beijing and former deputy managing director of the Internatio­nal Monetary Fund. The views are compiled from his speech at the Tsinghua PBCSF Chief Economists Forum 2021. The views don’t necessaril­y reflect those of China Daily.

 ?? CAI MENG / CHINA DAILY ??
CAI MENG / CHINA DAILY

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