Tian Xuan: In the short term, China's economy relies on consumption, and in the long term, it relies

May 6th,The Tsinghua PBC School of Finance Chief Economist Forum focused on "Global Financial Turmoil and Economic Outlook in 2023".The forum, themed "Finance and Economics at Tsinghua University's PBC School of Finance," was held at the Tsinghua University PBC School of Finance. Hosted by the PBC School of Finance and organized by the Center for International Finance and Economics Research (CIFER) at the PBC School of Finance, the forum combined online and offline participation, with live streaming in both Chinese and English, and global online access. The forum was attended by Chair Professor and Vice Dean of the Tsinghua University PBC School of Finance.Tian XuanAttending the forum roundtable discussion 1"China Economic Outlook"To share on this topic.

Tian Xuan stated that consumption is a crucial driver for boosting the economy in the short term, with two-thirds of the economic growth in the first quarter coming from consumption. However, current consumption levels have not returned to pre-pandemic levels, and the current retaliatory growth is unbalanced, with only a portion of people experiencing a consumption rebound while a significant portion has not recovered.

Tian Xuan pointed out that boosting consumption relies on increasing long-term income, because only with guaranteed long-term income can consumers maintain stable expectations and increase consumption. Increasing income depends on job growth. While first-quarter employment data appears positive, structural problems exist, such as a high youth unemployment rate. Boosting employment depends on the private sector; currently, the main problem for the private sector is insufficient confidence among entrepreneurs. Solving this problem requires properly managing the relationship between businesses and the government.

Speech transcript of Tian Xuan:

China's economy relies on consumption in the short term and innovation in the long term, with the private sector being the key driver from the very beginning.

Tian Xuan

Tian Xuan:Today's topic is the outlook for the Chinese economy, from the beginning of the pandemic to the present.Basically, GDP growth rates fluctuate, with one year being low and the next high.The GDP growth rate was 6.1% in 2019, 2.2% in 2020, and 8.4% in 2021, averaging 5.3%. It dropped a step from 6.1% to 5.3%. Last year's growth rate was 3%, and this year's government work report at the Two Sessions set a target of around 5%. Many people are optimistic, thinking it can reach 5.5% or even 6%. Even if we assume it reaches 6%, last year's was 3%, and this year's is 6%, averaging 4.5%, still a step down, and a further step down from the 5.3% of the previous two years. The first quarter has passed, and the data is quite good at 4.5%, exceeding expectations. The Politburo meeting also stated that the triple pressure is easing. However, I think that in the long term, if our country's economy is to return to its potential growth rate, a very important point is that in the short term...We need to rely on consumption, and in the long run, we need to rely on innovation. But the key factor that has been consistently applied throughout is the private sector. This is my basic viewpoint.

Why rely on consumption in the short term? As Professor Li Daokui just mentioned, I actually went to Shanghai with him two weeks ago to conduct research specifically on how to stimulate or boost consumption. Objectively, consumption is a crucial lever for short-term improvement, particularly in the first quarter.GDP grew by 4.5%, with consumption contributing 3 percentage points, meaning that two-thirds of the economic growth was driven by consumption. When we visited, we found that the pent-up desires from the past three years due to the pandemic—the urge to socialize, dine out, gather, and travel—have indeed been released. However, a closer look at the data shows that the economy has not recovered to pre-pandemic levels.

For example, during this May Day holiday, everyone felt that everywhere was crowded with people, and travel information was released.274 million trips—what does this 274 million trips mean? It counts as three trips to three tourist attractions. So some people estimate that roughly 50 to 60 million people actually traveled during the May Day holiday, including our tourism revenue of approximately 150 billion yuan, reaching 100% of 2019 on a comparable basis. I think this is a very tactful statement. What does 100% actually represent? It means that airfares and entrance fees are actually rising. In other words, while the number of trips is increasing, consumption hasn't; people are actually spending less. What does this actually mean? It means that our consumption hasn't truly returned to pre-pandemic levels. Many viewers or students might say, "I see everyone on my social media is going out to play, and people are..."Crowds thronged Zibo for barbecue skewers. They say the last time everyone flocked to Zibo was during the Warring States period when five states attacked Qi. All viewers, including those watching the forum, aren't truly consuming; that segment hasn't really taken off. In other words, our consumption is very unbalanced. Fifty to sixty million people traveled during the May Day holiday, but in reality, China has…Of our 1.4 billion people, 1 billion have never flown on a plane. What does that mean? It means we are a polarized society. What we see on social media is not quite the same as real life. Do we see delivery drivers, housewives, or cleaning ladies on our social media? Most don't. Looking back at our consumption, people feel there has been an improvement, but there hasn't actually been a real rebound or a retaliatory rebound, or even a balanced rebound.

What do we rely on to boost consumption in the short term? A crucial factor is income. Consumption is a function of income. However, economic theory tells us that short-term income alone cannot boost consumption. It's not that an extra 500 yuan bonus this month will change my spending habits. What's most important in changing our spending habits? It's actually our long-term income. In other words, what does long-term income rely on? Going back to what we said earlier, it relies on employment. Employment represents a stable cash flow. Having a job gives me a stable expectation for the future, which in turn strengthens my mindset.

Zhang Yandong:So I'd like to ask, is it possible to boost consumption in the short term?

Tian Xuan: I want to say that in the short term, our economic development relies on boosting consumption, but this doesn't mean consumption can be boosted in the short term. What does consumption rely on? It relies on increasing income, and income ultimately relies on employment. Employment is actually a very important indicator. The data for the first quarter seems okay, but what we see is structural employment. For example, a very important data point is...For those aged 18 to 24, our unemployment rate is 19.6%, which is quite high. This figure is very close to the 19.9% ​​recorded during the worst of the pandemic last year. Moreover, employment has a cycle, and we are not yet in the peak job-hunting season. We are currently in April and May, and this number will be even higher in July. If a student goes through 6 years of primary school, 6 years of middle school, and 4 years of undergraduate studies, it will take more than 10 years to graduate.It's regrettable not being able to find stable employment. What can boost employment? Primarily the private sector, which we are all familiar with.5, 6, 7, 8, 9. In a country where over 50% of tax revenue, over 60% of GDP, over 70% of innovation, 80% of employment, and even 90% of the number of enterprises depend on the private sector, if we look at the southeastern coastal areas, to Jiangsu, Zhejiang, and Shanghai, these figures are 6, 7, 8, 9, 10. The private sector is consistently the driving force. What is a crucial issue for the private sector? It's the lack of confidence among private entrepreneurs. Everyone keeps saying we need to boost their confidence and stabilize their expectations. Why is their confidence still lacking? A key reason is that we need to properly manage the relationship between the market and the government.I feel like I've been talking about it the whole time.

For example, during this year's Two Sessions, when the General Secretary visited delegations, he once again emphasized "two unwavering commitments" and "three unchanged principles." This is actually sending a very important signal to the market: we still consider the private sector our own, and we can rest assured. I looked it up, and the earliest mention of the "two unwavering commitments" was at the Third Plenary Session of the 11th Central Committee.The concept was proposed in 1978, and at that time, I felt it represented a significant theoretical advancement. The "three unchanged aspects" were first emphasized by the General Secretary on March 4, 2016, during a joint meeting of members from the China National Democratic Construction Association and the All-China Federation of Industry and Commerce at the Fourth Session of the 12th National Committee of the Chinese People's Political Consultative Conference. Therefore, maintaining confidence in stabilizing the private sector is extremely important, which means properly handling the relationship between the government and the market.

That's all for now. In the short term, it depends on consumption; in the long term, it depends on innovation; and from beginning to end, it depends on the private sector. I've only talked about the short term.

Zhang Yandong:You have extensive knowledge of innovation, and you mentioned that long-term technological innovation is key, a view that coincides with Professor Yao Yang's. Professor Yao Yang also said that the next step for technology is to become a driving force. Could you talk about the integration of technology and industry? In recent years, we have been conducting research in various regions and have found that this link is particularly important, as is the area of ​​technology capital. How can we transform technology and industry into productivity and integrate capital into it? Could you share your views on this? Thank you.

Tian Xuan:I think that's an excellent question. Continuing from what we were saying earlier, in the short term we rely on consumption, but in the long term we rely on innovation, especially technological innovation. Reform and opening up...The tremendous achievements we have made over the past 45 years are largely due to our adjustments to the original system and some of its less-than-ideal arrangements, which have unleashed significant productivity. Now, we see that further progress and a leap forward in the economy depend even more on innovation, specifically technological innovation.

In terms of innovation, the main drivers are actually enterprises, or in other words, private entrepreneurs. As mentioned earlier...Over 70% of innovation relies on private entrepreneurs. For example, universities are also engaged in innovation, with scholars conducting research, often driven by interest and spontaneous exploration. This differs from corporate innovation, or the innovation driven by companies themselves. People ask why companies need to innovate? These entrepreneurs aren't altruistic; they're not innovating for the sake of innovation. In reality, they're making highly targeted innovations driven by profit. We also know that innovation is extremely difficult; it's creating something from nothing, a process of going from zero to one.

As Mayor Huang just mentioned, much of the innovation in our country is actually just about buying and absorbing, expanding from one to infinity, rather than disruptive innovation from zero to one. If we want to achieve disruptive innovation from zero to one, we need to encourage these entrepreneurs. How do we do that? There's a very important point I didn't finish mentioning earlier: we need to properly handle the relationship between the government and the market.

In April, the Central Commission for Deepening Overall Reform mentioned supporting enterprises as the main drivers of innovation. What should the government do? I believe it should establish clear rules, defining boundaries and red lines, allowing the market to play a core role in resource allocation and ensuring that innovation entities have the freedom to explore. Therefore, a relaxed market environment is crucial for innovation, as it involves exploring unknown paths and many trials. If we are intolerant of failure and the environment is not sufficiently lenient, entrepreneurs may focus more on short-term investments than long-term innovation.

I believe that clearly defining the boundaries between the market and the government—defining which aspects we should allow the invisible hand of the market to play a role and which aspects we should allow the visible hand of the government to play a role—is a crucial issue. This is a global challenge. Even after studying and working in the US for over a decade after graduating, I found this to be a difficult problem. Returning to China, I see that we are constantly exploring the boundaries between government and the market. One situation we need to avoid is a situation where regulators or the government focus increasingly on the micro-level, while entrepreneurs focus increasingly on the macro-level. This is something we must try to avoid, especially as it negatively impacts long-term innovation by micro-entities or businesses. Therefore, from an innovation perspective, providing a good market environment, properly managing the relationship between the government and the market, and encouraging private entrepreneurs to make long-term investments are extremely important.

Zhang Yandong:I think there's a paradox. As we all know, private investment is still relatively low. When we were doing research in Suzhou, many entrepreneurs said they weren't investing, they were just observing because they couldn't see the direction. Many companies said the same thing. The paradox is that when companies aren't doing well, innovation requires investment. How do we resolve this contradiction? This is a very real issue in China today. Looking at innovation abroad, companies are doing most of the innovation, and it accounts for a relatively high percentage. How do we solve this problem in China when companies themselves aren't doing well, unlike a few years ago, yet technological innovation requires investment?

Tian Xuan:I will answer from two perspectives. First, from the macro-level government perspective, why do entrepreneurs lack confidence or have unstable expectations for the future? From the policy-making perspective, I think we need to ensure policy continuity, consistency, and stability. This is extremely important. This isn't just a casual remark; it's something we, as partners, utilize...Data from over 40 countries, published in top academic journals, revealed that a country's policies actually have minimal impact on businesses. Why? Because entrepreneurs are very savvy; they can adjust their investment decisions to adapt to national macroeconomic policies. Whether a policy leans slightly towards capital or labor, more proactive or conservative, it doesn't matter; entrepreneurs can adjust. But what's most important? It's the instability of the policies.In other words, when market entrepreneurs don't know whether the future will lean more towards capital, labor, the left, or the right, all they can do is wait and see. Therefore, I think a very important logic is that, objectively speaking, macroeconomic policies in our country play a very, very important role in guiding micro-market entities and business operations. This guiding role is significant; in previous years, everyone emphasized...TMT (Technology, Media, and Telecommunications) is a very hot market, but after we encountered problems, the government said we should invest in hard technologies, shift our focus, and strive for high-level self-reliance. The market immediately followed suit, investing in hard technologies, chips, new energy, new materials, and so on. Therefore, the government's macro-guidance plays a crucial role in the development of micro-enterprises. So what we need to do is to ensure that the government's macro-guidance...The policy of maintaining stability is paramount; we cannot change it. Local adjustments are acceptable, but stability is the most important factor. This allows us to create a continuous and stable expectation for the market, enabling long-term investment. This policy was discussed during the reform and opening-up period.This policy will remain unchanged for 50 years and 100 years. What does 50 or 100 years mean? In 100 years, none of us here will be around anymore. But the logic is that as long as we live, this policy will remain unchanged, and we can just keep doing it. This is very suitable for the important characteristics of innovation, which has a very long cycle and requires a lot of upfront investment. This is the first answer to your question.

Secondly, regarding the specific operations of companies today, which is something I've researched and consistently advocated, it involves strategic investment and corporate venture capital.CVC (Corporate Venture Capital) believes that companies face various problems with their internal R&D. It's better to invest in early-stage projects within promising sectors, nurture them, and allow them to grow gradually. Once they've matured, you can acquire them, including their technology and teams. This fosters innovation because disruptive innovation is rarely driven by large corporations. It's always done by very small, high-growth, risk-taking, and entrepreneurial micro-enterprises. For large companies to improve their innovation capabilities, it's crucial to...It involves strategic investment, specifically early-stage investments.CVC (Corporate Venture Capital) investment. Many international companies, such as Intel, Google, Microsoft, GE, and Oracle, as well as domestic companies like Huawei, Xiaomi, and BAT (Baidu, Alibaba, Tencent), are involved in CVC. However, these companies are ahead of the curve. Many listed and medium-sized enterprises in China haven't realized the importance of early-stage strategic investment. In fact, early-stage strategic investment is a win-win situation. What does "win-win" mean? It doesn't mean winning twice. It means that listed companies can strategically plan ahead while simultaneously channeling funds to the real economy, enabling small and micro enterprises to obtain funding and solve the problems of difficult and expensive financing.

Zhang Yandong:Due to time constraints, everyone left a final sentence about their outlook on the Chinese economy.

Tian Xuan:In China, we need to address cyclical issues through macroeconomic policies, while structural issues, as President Liu said, require reform. The direction of reform is marketization, rule of law, and internationalization, which is the direction of our country's institutional reform.