Lianghui Part 1: Professors’ Insights
March 21, 2016

The recent annual gathering of China’s two parliamentary bodies, known as ‘Lianghui’, recently concluded in the capital, with topics including the economy, Internet Plus and access to education all being discussed. In the article below, find out what CKGSB professors had to say about:

  • China’s 13th five-year-plan
  • Supply-side reforms
  • Internet Plus
  • One Belt, One Road and the AIIB
  • Poverty alleviation
  • Access to education
  • Stock market and banking sector
  • Housing prices
  • Hong Kong’s future as a financial center
  • Dividends for foreign firms in China
  • Globalization of Chinese companies

The 13th five-year-plan and overview

What aspect of the 13th five-year plan do you see as most significant and why? What will be the biggest challenge facing China’s economy this year?

Leslie YOUNG, Professor of Economics: The 13th five-year plan set a five-year economic growth target of 6.5% which would ensure that China would become a middle income country by 2020. The plan emphasizes that growth should be driven by domestic consumption rather than investment and exports. To achieve this, it emphasizes structural reforms in tax, financial and investment regulation, and promotion of competition.  It also emphasizes social welfare and health care reforms. These are timely, as China is no longer a poor country; the reforms also reduce the demand for precautionary savings and so support consumption-led growth.

What will be the biggest challenge facing China’s economy this year?

Leslie YOUNG: The five-year plan correctly targets the major issues facing China’s economy. Within these broad issues, the highest priority should be given to reducing pollution and ensuring that food and water are safe. These narrow issues have been neglected in the drive for growth, but now that growth has become entrenched, China can and ought to prioritize them as it is a state-led economy which is legitimized by protecting people’s livelihoods. Failure to do so would damage growth in the foreseeable future by shortening people’s working lives, raising health care costs to unsustainable levels and driving the most successful and talented citizens to live abroad, while discouraging the immigration of skilled persons.

Supply-side reforms, Internet Plus

How do you expect China’s supply-side reforms to play out? Can they successfully create a new driver for growth?

Leslie YOUNG: “Supply-side structural reform” echoes the tax cuts and deregulation advocated by Reagan and Thatcher in the 1980s. These were a reaction to Keynesian demand management which led to inflation and economic stagnation. The problems in China are quite different, as it faces a deficiency of demand. What it needs is “demand-side structural reform” redirecting purchasing power to use up excess capacity in heavy industry. One way to do so would be public-private partnerships in urban housing whereby local governments provide the land for privately-built, privately-owned apartments and receive a stream of rents in return.

Will Internet Plus continue to feature prominently in the government’s plan this year?

LI Yang, Assistant Professor of Marketing: Right now, the discussion about Internet Plus needs to go deeper, because this concept was already introduced a year ago and the government is hoping to use Internet technology to transform traditional under-performing sectors. But the government realizes that the current problems are not on the demand side: we still have strong demand, but now the problem is on the supply side. So now they are emphasizing supply-side reforms and the Internet Plus strategy fits very well into this category, because when you want to use the Internet to transform traditional operations and traditional marketing, that becomes a supply-side story. I think the government is definitely taking the lead when it comes to supply-side reform, because this reform affects most enterprises in China, including many state-owned enterprises. These companies need supply-side reform, in terms of their internal operations and management, but they also need technology. Internet Plus is more specific than supply-side reform, though, and individual companies have more freedom to say like how they want to implement these aspects into their business.

One belt one road, AIIB

One Belt, One Road and the AIIB were also hot topics last year. Do you expect to see these projects continue to be prioritized by the Chinese government this year? How do you see them changing global geopolitics both this year and further into the future?

Leslie YOUNG: One Belt, One Road and the AIIB remain useful for projecting China’s geopolitical reach, especially in strengthening partnerships with Russia and Iran, and also in using up excess capacity in heavy industry. China may have difficulty recouping its heavy investments in Venezuela and Nigeria, which have been hit by the collapse in oil prices. This illustrates the importance of writing long-term partnership contracts that can survive economic and political setbacks.

Poverty alleviation

Where does the growing income gap between rich and poor in China rank in terms of the country’s priorities? How urgently must this be addressed?

XIANG Bing, Founding Dean and Professor of Globalization and China Business: Addressing the gap between China’s rich and poor should be a top priority for the country’s leadership. It is imperative to act swiftly because even though China’s economy has hit a slowdown, it keeps growing at a pace that is the envy of the world. As growth continues, income wealth inequality widens, which could have ramifications for social instability. GINI coefficient data has shown that income wealth inequality in China is among the world’s worst, but with the right measures this can be rectified so that all can share in China’s growth story.

Access to education

What must China do to ensure fair access to education for all in the future? Are you optimistic about the prospects?

XIANG Bing: I have been encouraged by progressive improvements in the quality of facilities, curricula and teachers in rural schools and in efforts to make education free in both rural and urban schools. However, it is crucial to remedy the lack of quality education for the children of the country’s migrant population because their numbers are growing, while the number of students in traditional urban and rural schools is declining. CKGSB encourages all of its students to give back to society with educational projects chief amongst our philanthropic activities. For example, more than 260,000 Chinese children have benefitted from our Red Scarf Children’s Library Project, which has built 745 libraries.

Leslie YOUNG: A major education problem is faced by the millions of children left in the care of ill-educated grandparents while their parents migrate to the cities to find better-paying jobs. This is creating a generation of under-supervised and under-stimulated children who will have difficulty joining the middle-income society that China is becoming. The state needs to support the reunification of children with parents and ensure that they receive good quality education. Given that China’s workforce is decreasing in size, it cannot afford a decrease in quality also.

Stock market and banking sector

The stock markets have seen a huge amount of volatility over the last year, with many cases of manipulation and irregular dealings being prosecuted. What would you like to see happens in that regard?

OU-YANG Hui, Professor of Finance: The regulators should not interfere with the market too much, unless the market is dropping really seriously. They should just keep an eye on the stock market and let it perform by itself. Only when there is a big crash should the “national teams” step in because there is a large herd mentality: when the stock market drops, a lot of people look to sell without any reason or without any fundamental information. So otherwise, the regulators should stay on the sideline of the stock market and do the regulation, don’t interfere with the stock market.

What other reforms are urgently needed in the wider banking sector?

OU-YANG Hui: We are going through economic downturn. Normally banks are very vulnerable to the economic downturn. So we should actually not take on major bank reforms like the interest rate liberalization. I think interest rate liberalization is going too fast. We should let banks adjust slowly to this interest rate liberalization. At the moment, I do not think we should take major measures to actually reform the banks. We should actually watch very carefully with the non-performing loans and make sure we could help bank with non-performing loans but not doing major financial reform to the bank because we are going through this cycle.

Housing prices

What is the cause of the high price of school district housing in Chinese cities? What can be done about it?

LIU Jing, Associate Dean and Professor of Accounting and Finance: It is natural that real estate in prime school districts costs more. This is true also in the US. The extreme price differential underscores the enormous emphasis Chinese families place on education. Such emphasis has been acerbated by the one-child policy ― families cannot afford to fail since most only have one chance. It is also a reflection on today’s highly competitive society in China.

Hong Kong’s future as a financial center

Do you think Hong Kong’s role as the financial heart of China will change going forward? Do factors like the mainland-HK stock connect keep HK relevant, or is the city losing out to Shanghai?

OU-YANG Hui: Hong Kong’s financial future depends on its political future. If Hong Kong becomes less stable politically, then Hong Kong will not remain China’s financial center. But if Hong Kong and the mainland can work together peacefully and reasonably, Hong Kong can keep its place as China’s financial center. In the short term, I don’t think Shanghai will take over because Shanghai is still about 50 years behind Hong Kong’s in terms of its development. It’s not in China’s best interests to reduce the role of Hong Kong in terms of its financial strength: China is big enough to have two financial centers. But for the moment, as long as Hong Kong is politically stable and socially stable, it should remain the financial center, not just for China, but for the Asia-Pacific region.

Dividends for foreign firms in China

As China transitions to more of a consumption-based economy, how best can MNCs take advantage of this?

TENG Bingsheng, Associate Dean and Associate Professor of Strategic Management: First of all, MNCs can continue to offer the best products and services to Chinese customers because they do have some advantages that they have developed over the years. For example, Chinese consumers want the best entertainment products, so companies like Disney would have a head start in this regard. The second thing that they need to do is to treat the Chinese market as a first-tier market, equivalent to the US and Europe, by bringing the best products directly to Chinese consumers. If you offer your best products only to your homeland, then that is not going to be particularly attractive to Chinese consumers, who have already traveled around the globe to buy these products from other countries. Thirdly, because Chinese companies are doing better and better and are very competitive, I think some MNCs should figure out a better way of working with Chinese companies to offer unique products that are developed in China for Chinese consumers.

Globalization of Chinese companies

Which areas would you highlight to watch when it comes to Chinese companies expanding abroad?

LI Xiaoyang, Assistant Professor of Economics and Finance: The strategy China is now adopting in the manufacturing sector is “Made in China 2025”. Part of that strategy is the so-called Industry 4.0 to introduce some robotics into the manufacturing sector, but it also involves forming quite a few “national champions” who can compete globally with MNCs. China’s focus at the moment is on infrastructure investment because China is very good at these turnkey projects. If you want to build a port or a railroad, you can let Chinese companies do that for you so they can source the materials domestically. They can do all the engineering and the planning and also carry out the construction themselves. So they can really consolidate their advantages in many sectors, such as steel, cement, construction and mining. There are huge funding gaps worldwide when it comes to infrastructure, so China is very well positioned to do well in this sector.

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