China has shifted to domestic consumption-driven economy, growth to average at 6.5%

A top Chinese economic advisor has rejected foreign criticism about the way China has handled the economic slowdown in the country and said it was on course to grow at an average annual rate of 6.5 percent between 2015 and 2020.

“We have shifted from an external demand-driven economy to a domestic demand-driven economy. Domestic consumption is now the most important driver of our development,” former Vice Premier of China H.E. Zeng Peiyan said.

He made these comments about the world’s second largest economy in a keynote address he gave at the House of Lords on the opening day of the 2015 World Chinese Economic Summit on Tuesday.

He explained the focus of the Chinese economy had shifted from quantity to quality and efficiency as the number of middle-income Chinese was rapidly rising. That number is expected to reach 400-500 million by 2020 and the tertiary sector was also expanding. “We have shifted from subsistence consumption to high quality consumption and from a net importer of capital to a net exporter of capital,” he explained, speaking through an interpreter. “We aim to lift 70 million rural people out of poverty by the end of 2020 which will also boost consumption,” he added.

Whilst last year China received a record US$123 billion of FDI (foreign direct investment), its ODI (outbound direct investment) has now matched that figure.

“I have never seen a period in which the world has paid so much attention to China,” he continued. In the past the China story was businesses opportunities and growing markets, he said. But now people wanted to know what impact China would have on the rest of the world.

Mr Peiyan, who has first-hand experience of mapping out and implementing major policies in China from his time when he was in charge of economic affairs in the State Council of the People’s Republic of China, said the Chinese Government was aware of the concerns the outside world had about the country’s economic development. He said their concerns focused on two issues: firstly, whether the economy had passed its peak and whether it would have a hard or soft landing; and secondly whether China would change its strategy of opening up its economy and tighten its policies towards foreign investors. Economic reforms in China to open the country up to foreign investment and privatise state-controlled companies began in 1978 and have continued ever since.

But Mr Peiyan said China had no intention of “suppressing foreign investment.” On the contrary it planned to expand market access for the services sector.

“Will the Chinese economy have a hard landing? No,” Mr Peiyan, Vice Chairman of the Boao Forum for Asia, continued. “It’s true the Chinese economy has been on a downward trajectory in recent years and the GDP growth rate has been below seven per cent,” he said, but he blamed that on the external world recovery leading to lower international market demand and overcapacity. “We need to adjust our economic structure and upgrade it,” he said.

“We have seen excess capacity to overcapacity in some traditional industries,” he explained. But the Chinese Government had addressed this and put may reforms in place, he said.

“We have tightened lending to certain industries, strengthened environmental protection, expanded the size of the fiscal deficit, used the stock in the fiscal budget, implemented structural tax cuts and lowered the deposit lending ratio and interest rate. Both the fiscal deficit and government debt are in the safe range and there is big room for fiscal and monetary policy manoeuvring so the fundamentals are good, as long as we can ensure we implement relevant policies,” he stated.

Mr Peiyan, who is also Chairman, State Development Planning Commission and China Center for International Economic Exchanges, pointed out the Chinese Government had responded to sharp rises and falls on the Shanghai stock exchange this year by providing liquidity which restored confidence among investors and in the market. But he said this led to unwarranted remarks about government intervention in the stock market. “But I think it achieved good results although there is room for improvement in the way the policies were implemented,” he said.

He defended the People’s Bank of China deliberate devaluation of the renminbi (RMB) in August.“This was a reaction to the piling up of expectation and a reaction to national market supply and demand. In my opinion international markets overreacted to this move,” he said. “We were very surprised by the strong reaction from international markets. After all the range of currency fluctuations was less than two per cent,” he said, though he admitted it did have some impact on some Asian currencies. “This exposed the lack of transparency and communication with market players when relevant policies are made.”

Click below to see photos of the World Chinese Economic Summit

He said the Government was aware of concerns about a bubble in China’s real estate sector. But he said that this year the Government had taken action to ease restrictions on purchasing homes and as a result sales of houses and house prices have rebounded. “But we have a very large inventory in China so the chances of a rapid rebound were slim. In the months to come with the demand of existing home owners and the consumption of the inventory I think the real estate market will be more stabilised,” he added.

Mr Peiyan explained that China was introducing a management model to promote foreign investment and trade liberalisation and to create an open and transparent legal policy. “We have announced that we will open our services industries further, expand the banking, insurance and pensions sector and promote unrestricted use of the RMB. Our FDI policy won’t change. China is implementing a strategy of innovation driven-development and pushing forward urbanisation. Seventy per cent of Chinese population will be urban by 2030,” he said. The country’s new policy to allow couples to have two children meant that 30 million more people would enter the workforce by 2050, he said. This labour force will prolong the population dividend.

“Per capita public infrastructure stock is still very low. It is less than one third of that of Europe and this represents great demand for investment in the future. The Chinese are committed to developing a low carbon economy so green buildings will enjoy a bright future..

China’s expenditure on R&D has increased to 2.1 per cent of GDP. “Even in the slowdown the number of new businesses registered in China exceeded 10,000 per day,” he said, adding China was committed to reforming its business environment. “These trends all show that economic restructuring in China is well underway,” he concluded.

naomi.canton@asiahouse.co.uk

To read what H.E. Zeng Paiyan had to say about China’s Belt and Road initiative click here.