- 2018-09-26
China's two economies
There are currently two judgments about China's economic situation. One is optimistic and the other is pessimistic. They are all right, but they are not comprehensive enough. Perhaps the optimist only sees the part worthy of optimism, and the pessimist only sees the part worthy of pessimism. These two parts are China's two economies. I call it the "old economy" and the "new economy". Generally speaking, the so-called old and new economies refer to traditional industries and emerging industries. Here, besides industry, there are also institutional factors. The so-called old economy refers to an economy in a traditional industry that still implements the old system. The so-called old system is a system with remnants of the planned economy, including both the social resource allocation system and the enterprise resource allocation system. Here, it mainly refers to an economy that is dominated by state-owned enterprises and relies on administrative intervention to allocate resources.
Most state-owned enterprises were established before the reform and opening up, and naturally engaged in the main industry at
that time, that is, the traditional industry. Although it has undergone reforms since the 1980s, the main institutional basis of state-owned enterprises has not changed, that is, the property rights arrangements have basically remained unchanged, and the corporate governance structure has also been inefficient. Therefore, in general, although there have been improvements, there is still a big gap compared with the property rights arrangements and governance structures of private enterprises, and they lack competitiveness. However, they still have advantages in political resources. From 1990 to 2000, they gradually gained the advantages of exemption of profits, uncapped wages and bonuses, and industry monopoly power, and continued to enjoy free state-owned land and low-interest bank loans. Continue to survive and develop with the help of non-market means. Therefore, we say that the state-owned enterprise group is an old economy that continues the old system and is in the old industry.
The so-called new economy is first and foremost in emerging industries. This mainly refers to an economy based on mobile Internet, combined with sharing economy, cloud computing, artificial intelligence and new energy. Because private enterprises are more sensitive to new profit opportunities, their corporate systems are more effective, and their decision-making mechanisms and implementation capabilities are more flexible and quicker. Therefore, the new economy is mainly formed by the sudden advances of private enterprises. For example, in the 1990s, private companies entered e-commerce. After some failures, Sina, Sohu, and Netease emerged. After 2003, companies such as Alibaba, Tencent, Baidu and JD.com were prominent. Especially in the entrepreneurial stage, they just rely on market rules and succeed with their own efforts and struggles. Therefore, it is both in the emerging industries and has a new system, so it is called the new economy.
Now, both of these two economies are large enough, and their performance is good enough to affect the GDP growth rate of China's economy by at least 1%. For example, according to Li Yang's "China National Balance Sheet 2015" (China Social Science Press, 2015), the total assets of state-owned enterprises are about 117 trillion yuan (2013), accounting for 17% of the country’s total assets of 691 trillion yuan . The private sector, including the new economy, has created all new urban jobs (172.59 million people) since 2000, and has also offset the reduction of jobs in state-owned enterprises. At the same time, it has an increasing share in the annual new GDP. In the industrial sector alone, it was 93.1% in 2015 and 90.4% in 2016; if you consider the service industry, this proportion is even greater. It can even be said that our economic growth in recent years has mainly relied on the private sector and the new economy. The nature and growth momentum of the old and new economies play a decisive role in China's economic development.
According to our continuous research on state-owned enterprises, since they have not broken through the old system, state-owned enterprises are generally inefficient, but rely on free or low-cost public resources, which appear to be profitable on the books. If you exclude the unpaid costs and government subsidies, the overall return on net assets of state-owned industrial enterprises in 2013 was negative 3.8%. Based on an estimate of 52 trillion yuan in net assets of state-owned enterprises (financial and non-financial) that year, the old economy dragged down China's economic growth rate by at least 3.3% that year. Moreover, in recent years, traditional industries have been saturated or even over-invested, leading to overcapacity, falling market prices, and reduced demand for raw materials, which in turn affects the development of resource-based traditional industries. In some industries, there are not only losses covered by monopoly and preferential treatment, but also negative growth. If someone is in this area, they will make a pessimistic judgment.
Regarding the new economy, there are currently no specific statistics. What we can obtain is e-commerce data. In the article "The Nature of the Economic History of Mobile Internet", I made a preliminary analysis and estimation based on the available data. The rapid development of the new economy, especially online shopping, has quickly made e-tailing an important driving force in the Chinese economy. From 2005 to 2015, the value of e-retail transactions increased by an average of 72.3% annually. In 2016, China's electronic retail transaction volume reached 5,170.8 billion yuan, accounting for approximately 15.6% of the total retail sales that year. Such a scale is already large enough to increase the GDP growth rate of that year by 1%. According to our analysis model, by 2025, e-tailing and the industrial added value it brings will grow by about 3.5 percentage points of GDP. This is just a static analysis of a field of e-commerce. If the entire new economy is taken into account, and dynamic factors such as the deepening of the division of labor and the changes in systems and technologies that have led to it, the new economy will bring greater economic power. If someone is in this field, they will feel optimistic.
In fact, the Chinese economy is a superposition and hedging of two kinds of economies. The old economy may hold us back, and the new economy will accelerate our progress. The background of China's economy is that it will go through the process of urbanization for more than two decades, and that China will maintain the "giant-power effect" in international trade for a long time. According to Kerman's new trade theory, under the same conditions, larger countries will have an advantage in international trade. Because a larger country will have a larger market, will bring a larger production scale, and then bring scale advantages. While China is the largest country in the world, it will bring significant economies of scale due to its huge country and huge market, lower average cost of products, and stronger international competitiveness. And now the average salary in China is still at least one-third of that in the United States, so it will maintain a competitive advantage for a long time. And according to Kerman's theory, due to the huge market, even when labor costs are high, there will be a competitive advantage.
Urbanization is a process by which rural population enters cities and towns. When rural people become urban residents, their incomes will increase significantly, their lifestyles will change significantly, and the amount of goods and services they buy will increase significantly. They have brought about a permanent increase in consumption, as well as demand for urban infrastructure and real estate. This requires a huge investment of trillions of dollars each year, which is a strong driving force for economic growth. In 2015, China’s urbanization rate was approximately 56%, while China’s current urbanization rate has increased by about 1.2% annually. It will take another 10 to 20 years to complete urbanization, that is, the urbanization rate reaches 80%. Therefore, urbanization is a stable driving force for the medium and long-term growth of China's economy. The two major factors of urbanization and the giant power effect determine that China's economy will continue to grow at a fairly high rate. The new economy and the old economy will increase or decrease it.
The logical conclusion is that by continuing to promote the new economy and reform the old economy, the Chinese economy will perform better. However, the new economy originally grew up in a market economy environment. If the government were to "promote" it, it might be counterproductive and cause excessive intervention, which would be detrimental to the development of the new economy. In the old economy, since the system is old and has not been improved for many years, it may be unrealistic to expect reforms in the short to medium term. The main measures of the current so-called "state-owned enterprise reform" are "mixed ownership" and "strengthening the leadership of the party." These are two contradictory approaches. A political party is a political organization, and an enterprise is an economic organization with different goals. Directly directing the enterprise by the political party can only weaken the effectiveness and flexibility of the enterprise in market competition. This will obviously limit the rights of each share and reduce the market value of the company. In a pure market environment, no private enterprise would be willing to buy such a share.
The primary task of the reform of state-owned enterprises is to make state-owned enterprises become equal competitors in the market. This must first abolish the monopoly of state-owned enterprises, require them to pay resource rents at market prices, no longer receive subsidies from the government, and follow market rules. Turn in profits to the people's shareholders. In the report of the 19th National Congress of the Communist Party of China, Mr. Xi Jinping also proposed to break the administrative monopoly and promote the reform of the factor market. However, we must not be too optimistic. Because the management of state-owned enterprises is a powerful interest group, they make trillions of yuan in unjust profits every year. No one wants to give away such a huge wealth. For example, in terms of breaking the oil monopoly, there were intentions as early as the previous government. Although the current government has entered into operation, the progress has been slow. It took about five years to only partially relax the oil imports of private enterprises. At this rate, we cannot expect to see fruitful reforms of state-owned enterprises in the short to medium term.
In fact, the relationship between the new economy and the old economy is not a good one. Since they are all under China's large institutional structure and in the same big market, they will inevitably influence each other, including transactions, competition, cooperation, penetration, and interleaving. The first is trading. The old economy is in the traditional industry, and it is also in the upper reaches of the industrial chain. They rely on administrative monopoly power and can suck trillions of yuan of benefits from the new economy. For example, in the petroleum field, according to our research, the pre-tax price of the regulated and monopolized refined oil was once 31% higher than the price of the same quality refined oil in major countries in the world. From 2009 to 2011, consumer losses caused by high monopoly prices reached 1.198 billion yuan. (Tianze Economic Research Institute, "Theoretical Research and Reform Plan of China's Crude Oil and Refined Oil Market Liberalization", 2013). In 2015, the pre-tax price of diesel in China was still 28% higher. The rapid growth of e-commerce has brought huge logistics demand. The logistics is mainly supported by fuel. The current increase is mainly due to the new economy.
Monopoly banks also used both regulated and monopolistic high interest rate differentials (3 percentage points), and mainly used the method of lowering deposit interest rates to extract benefits from depositors. In 2013, they obtained more than 1,470.9 billion yuan in income (Tianze Economic Research Institute). , "The Causes, Behavior, and Elimination of China's Administrative Monopoly" (Second Edition), 2015). According to both regulated and monopolized loan interest rates, most private enterprises, especially small and micro enterprises, still cannot borrow money, and they pay interest rates several times this in the off-bank financial market. The currency in the non-bank financial market is largely obtained by the beneficiaries of the old economy from the banking system at low interest rates and raised interest rates to lend. This is not only the exploitation of the new economy by the old economy, but also reduces the cost of the new economy. Earnings expectations will in turn slow the inflow of capital into the new economy.
On the other hand, the new economy is challenging the old economy. Online payment methods have been developed in the online transaction platform, which quickly made up for the payment defect of the lack of popularization of credit cards due to the inefficiency of state-owned banks in a very short period of time, allowing the majority of the Chinese people to directly leapfrog the stage of credit cards, online payment Leading the world. Due to the superiority of online payment methods, a large amount of funds was deposited quickly, enabling online trading platform companies to quickly enter the financial field. They attracted a large amount of deposits in a short period of time with interest rates higher than the interest rates of state-owned monopoly banks, forcing the disintegration of the controlled interest rate system and promoting the marketization of interest rates. In 2015, the Central Bank announced that it would no longer regulate deposit interest rates. Since then, the interest rate differential of major monopoly commercial banks has dropped from about 3 percentage points to about 2.5 percentage points.
Similar examples have appeared in the taxi, education and medical fields. For example, Uber and Didi taxi competition is not only a competition with taxi drivers, but also an important factor in depressing the "money" of taxi drivers. Online open courses and distance education enable high-quality educational resources to be shared by more people. Mobile medical treatment and remote diagnosis will also make excellent medical services less extremely scarce. The most potential challenge is the challenge of new energy. For example, in August 2017, solar power generation increased by 34% over the same period of the previous year (China Business Industry Research Institute, "China Business Intelligence Network", September 25, 2017). Since solar power generation can be distributed, the roof of each household can be a power plant. They are in competition and are also an important force in the collapse of large-scale power generation monopolies. These new economic challenges to the old economy prompted the reform of the old economy.
Of course, cooperation between the new economy and the old economy is also possible. State-owned enterprises have many monopolies and franchise rights, as well as many free or low-cost resources, but their production efficiency is low. They can sell low-priced resources to private enterprises at a premium, or they can entrust private enterprises to process them, they can also hand over the more difficult parts of their main business to private enterprises, or even entrust private enterprises to revitalize improperly allocated assets. In theory, although some of these practices are suspected of rent-seeking, they have a certain degree of economic rationality, that is, improved resource allocation and increased social welfare. It should be said that there have been many successful cooperations. For example, private oil refining companies process refined oil for oil monopoly companies, and private telecommunications companies promote basic services for state-owned monopoly telecommunications companies. Even the development of online financial platforms is carried out in cooperation with state-owned monopoly banks. For example, Alipay is not only a means of payment itself, but also can be used as the front-end of bank credit cards. It is said that 57.8% of credit card users use online payment platform application terminals to swipe their cards. of.
There are successes and failures in cooperation, and the prospects are not clear. It depends on which system can prevail. If the new system (market system) prevails, the effective governance structure of private enterprises will improve the governance structure of state-owned enterprises, and the way private enterprises allocate resources will improve the allocation of stock resources of state-owned enterprises, which will promote the transformation of the old economy to the new economy . However, the inertia of the old economy is also great. Even without the protection of administrative control, they are monopolistic behemoths. For example, after the marketization of interest rates, there is a tacit understanding of interest rate cartels among the large state-owned monopoly banks. They have maintained the interest rate differential at about 2.5 percentage points and will no longer reduce it. This is still higher than the interest rate differential of countries with developed financial markets of about 25-66%. When disputes arise in cooperation between state-owned enterprises and private enterprises, the latter often loses in litigation due to lack of political resources, which also hinders many private enterprises.
Furthermore, the old economy will also impede the new economy. The advantage of the old economy is the abundant political resources. The monopoly department can use the administrative department to restrict the entry of competitors from the new economy into the market of the department. For example, many cities have promulgated regulations on online car-hailing regulations, which impose many restrictions on online car-hailing, such as the household registration of online car-hailing drivers, the displacement and model of cars, etc. Even in the field of new energy, there are government encouragement policies, such as allowing households to invest in solar power generation on the roof and providing subsidies. However, because the grid connection still needs to be approved by the power company, the latter has no incentive to give their competitors the green light. So this policy is very difficult to implement. In fact, China's solar power generation in 2016 was only 0.6% of the total power generation. Behind the intervention of these administrative departments, there may be monopoly interests.
The worst result may be the collusion of the old economy and the new economy, using the system of the old economy to make profits. The old economy can enter the new economy through market operations, such as the purchase of company equity, or non-market means. This may be mixed. old
The economic entry into the new economy will strengthen the political resources of the new economy and will also accept some of the new economy's institutional rules. At the same time, the old economy will bring the old system to the new economy. These old systems, such as administrative monopolies, may be important motives for the old and new economic cooperation. If it is not relying on market competition, but relying on the intervention of the administrative department to restrict the entry of competitors, and superimpose the monopoly of the old economy on the huge scale of the network platform, it may form a monopoly power that no one can shake. Once so, the vitality of the new economy will weaken or even disappear.
The actual situation is very complicated, and the prospect of China's economy is indeed a suspense. However, if we simplify the problem, assume that the economic growth brought about by urbanization and the giant country effect contributes approximately 5-6% growth rate, while the state-owned economy still maintains the status quo, bringing a negative annual growth rate of 3.3%, while the new economic belt The gradually increasing contribution to economic growth will increase GDP by about 3.5% in 2025 and 5.5% in 2030. The resulting GDP growth rate is shown in the figure below.
Of course, this is only a simplified and static estimate, and it may not be fulfilled. What will happen to the facts, we don't know. The only certainty is our current actions, because the best prediction is action, and it is our efforts that can make the bright future more certain. In China, both the central government and ordinary people have the responsibility to promote the new economy and reform the old economy. Although the resources they control are vastly different, it should not be underestimated that unknown soldiers in a big battle can play a role in turning the tide of the war. The biggest characteristic of the old economy is to use administrative power to maintain the visible benefits, while the biggest characteristic of the new economy is to produce unexpected but strategic innovations. History often shows that the new system will eventually replace the old system, but there is no guarantee that this process will be fast.