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"In an era where all kinds of 'narrative traps' are rampant, I would like to remind everyone not to fall into 'narrative traps' in your future journey." At the end of June, Liu Qiao, dean of the Guanghua School of Management at Peking University, reminded students in his graduation speech not to fall into various "narrative traps", including the "narrative trap" about the Chinese economy.

Liu Qiao's reminder may not only apply to graduates. In the current speech market, there are all kinds of diametrically opposed judgments on China's economic prospects. People are accustomed to falling into a dispute over positions, but often ignore the facts and logic on which different positions are based. Why do different "narratives" about China's economic prospects emerge? To this end, China Newsweek interviewed Liu Qiao and asked him to interpret the underlying logic of the "narrative" about China's economy.

Liu Qiao Photo/Provided by the interviewee

Judgment on China's economic prospects

Depends on what?

China Newsweek: Why are you so concerned about different narratives about the Chinese economy?

Liu Qiao:In recent years, the biggest change in the speech market is the rise of social media, which makes it easier to express opinions. As a result, we see a lot of opinions, but rarely discuss the facts and underlying logic behind the opinions. On social media, the more extreme the opinions, the easier it is to get traffic, thus forming a negative feedback mechanism. But I think a correct narrative needs to be based on facts and then have a reasonable interpretation of the facts.

Different narratives about China's economic prospects have a huge impact, directly affecting people's expectations and confidence in the future. Currently, there is a kind of "narrative trap" about China's economic growth prospects, namely the "China Summit Theory", which mainly exists in the Western public opinion field.

"China Newsweek": What do you think of the Western public opinion on China's economic prospects?

Liu Qiao:I have always believed that the judgment on China's economic prospects depends on how we understand the changes in total factor productivity since the reform and opening up, and especially how to predict its future trends.

As for the "China's rise to the top theory", the underlying logic is that China's total factor productivity growth rate will inevitably decline after completing industrialization, just like the United States, Japan, Germany and other industrial countries have experienced. For example, the total factor productivity growth rate in the United States is less than 1%, and the corresponding economic growth rate is about 2%. Therefore, when China's total factor productivity growth rate has dropped to less than 2%, it is difficult for the economic growth rate to maintain a relatively high level. This judgment is based on past history and believes that China will inevitably join the "low-growth camp". In addition, the Chinese economy is already facing many structural problems, which adds to the pessimism about China's economic prospects.

Therefore, the disagreement lies in whether it is possible for China's total factor productivity growth rate to recover to a more reasonable level after it has already declined, reaching 2% or even higher, and achieving a "V-shaped rebound."

I believe that we can achieve a "V-shaped rebound" in the growth rate of total factor productivity by deepening reforms and developing new quality productivity, and I believe that there are enough positive factors to support this judgment. For example, for existing industries, "re-industrialization" can be achieved through technological transformation and energy transformation; for another example, there will be many investment opportunities in the future, such as new infrastructure and people's livelihood. These effective investments will also improve total factor productivity. Of course, there are still challenges to give full play to the role of these factors and turn them from theory to reality, but this does not prevent China from proving that it has a systematic response strategy when facing a decline in the growth rate of total factor productivity.

"China Newsweek": What is the relationship between total factor productivity and economic growth?

Liu Qiao:According to modern economic growth theory, a country's economic growth can be explained by the growth of factors (capital, labor) and the growth of total factor productivity. The growth rate of total factor productivity comes from the additional output of the same factors brought about by factors such as technological progress and improved resource allocation efficiency. For example, the output of the same amount of capital, labor and other factors is different in different business environments.

In the more than 40 years of China's reform and opening up, the input of factors such as capital and labor has grown rapidly. At the same time, factors such as technological progress are also affecting economic growth, making the growth rate of total factor productivity relatively high, above 4% all year round. We have conducted data analysis and found that from 1979 to 2022, the correlation coefficient between GDP growth and total factor productivity growth is as high as 81%, and the two are highly consistent.

In recent years, the growth rate of China's total factor productivity has declined. The main reason is that China's economic structure has changed, namely, industrialization has been completed, and the investment cycle supported mainly by infrastructure, real estate, and export-oriented manufacturing has entered its end, coupled with some uncertainties brought about by the "great changes unseen in a century."

In industrial countries such as the United States, the growth rate of total factor productivity accounts for about 40% of the GDP growth rate. That is to say, if the growth rate of total factor productivity reaches 1%, the corresponding GDP growth rate is 2.5%. In the future, at least during the 15th Five-Year Plan period, we need the GDP growth rate to reach about 5%, and until the 16th Five-Year Plan period, we can lower the target to about 4.5%, so that by 2035 we will have a greater chance of achieving the goal of doubling the total GDP compared to 2020.

In addition, at the moment when we emphasize the development of new quality productivity, it is precisely the substantial improvement of total factor productivity that is the core symbol. According to my understanding, the development of new quality productivity and the improvement of total factor productivity can be "equated" to some extent. Of course, as a theoretical system, the connotation of new quality productivity is richer, but this also constitutes an important background for the current emphasis on total factor productivity.

Confidence in a “V-shaped rebound” in total factor productivity

Where are you from?

China Newsweek: Why are you so confident in the technological changes taking place now and believe that they can drive "re-industrialization"?

Liu Qiao:In human history, economic growth was very slow for 95% of the time, and the human living standard was greatly improved after the advent of the industrial civilization era. If you analyze it carefully, you will find that the changes brought about by the industrial revolution are nothing more than two points: one is the change of energy, from biomass energy to fossil energy, and then to electricity; the second is the way people interact with each other, including travel and communication methods, from telegraph to telephone, and then to the Internet, which is essentially changing the way people interact with each other and breaking through various restrictions. From a long-term perspective, I believe that in the next 50-100 years, the energy field and the way people interact with each other will inevitably change again. We are at the entrance of a new historical stage, and people are about to see a revolutionary change, and unlike the previous industrial revolutions, China is at the starting line this time.

"China Newsweek": From a historical perspective, an increase in the proportion of the service industry usually leads to a lower growth rate of total factor productivity. Is ensuring a certain proportion of manufacturing industry an important condition for achieving a "V-shaped rebound" in total factor productivity?

Liu Qiao:Almost all industrial countries face the challenge of insufficient growth in total factor productivity after completing industrialization, and China is also facing this situation now. However, the characteristic of China is that the proportion of manufacturing in GDP is relatively high, which may cause concerns about overcapacity on the one hand, and on the other hand means that there is room for transformation in the manufacturing industry. I don’t want to emphasize that the proportion of manufacturing in GDP must be maintained at a certain proportion in order to achieve a total factor productivity growth rate of 2% or higher. However, the manufacturing industry is relatively large in scale, and it is undergoing iterations, and the momentum for transformation such as intelligence and greening is sufficient, which is an important advantage for the future recovery of total factor productivity growth.

"China Newsweek": At a time when the international industrial chain is being restructured and facing the pressure of manufacturing moving abroad, how can we maintain the advantage of a relatively large proportion of manufacturing?

Liu Qiao:At present, the proportion of manufacturing industry in GDP has not declined, still reaching 27%, and the proportion of secondary industry in GDP is still relatively high. The tertiary industry accounts for more than 80% of GDP in the United States, but this figure is between 53% and 54% in China. However, there is indeed a phenomenon of manufacturing industry moving overseas, especially to Southeast Asian countries.

From another perspective, China's manufacturing industry is still in a middle-to-lower position in the global value chain. If it moves up upstream in the future, masters core technologies and brands, and controls key raw materials and components, it means that China's manufacturing industry's influence or ability to create added value will be stronger, and its contribution to total factor productivity may also be greater. There will be fewer concerns about the "hollowing out" of the industry.

We need to look at the relocation of manufacturing industry dialectically and pay attention to the reasons for its relocation. Is it because of the change in the business environment or because some European and American countries have set up tariff barriers on Chinese manufacturing, so Chinese companies have to relocate their production capacity in order to enter foreign markets. In the latter case, if Chinese companies still control the upstream of the industrial chain, this is an independent choice of enterprises to cope with changes in the external environment. However, for those manufacturing industries that could have stayed but chose to leave, we need to ask why they left and reflect on whether there are problems with the business environment. Therefore, the relocation of manufacturing industry, especially the relocation of downstream assembly departments, cannot be generalized, but a structural analysis should be conducted and targeted policies should be introduced.

On April 28, at First Heavy Industries Longshen (Qiqihar) Composite Materials Co., Ltd., workers were producing wind turbine blades in the factory. Photo/Xinhua

Developing new quality productivity also requires considering the demand side

"China Newsweek": How do you view the challenge of "overcapacity" in China's manufacturing industry as claimed by Western countries?

Liu Qiao:This is a view emphasized by some Western countries. According to their understanding of "overcapacity", does exporting mean "overcapacity"? I think this is a false proposition. Eighty percent of the Japanese auto industry's market is overseas, so it cannot be judged that the Japanese auto industry has "overcapacity" based on this.

At present, the accusations against China's overcapacity are more directed at the "new three things". China's production capacity accounts for a relatively high proportion of the world, and the domestic market cannot digest it. There is a fierce competition among enterprises. However, energy transformation is a value judgment of most people in the world. Even at a time when China and the United States have such great differences, the more rational mainstream views of the two countries in dealing with climate issues are still relatively consistent. China just invested in this area earlier and has already implemented it in action. It is difficult to accuse China of "overcapacity" in the field of new energy.

Of course, I will not generalize that China does not have overcapacity. Any economy may face overcapacity when there is an imbalance between supply and affordable demand. The key to solving this problem lies in industrial restructuring. For China, for example, the marginal value generated by investing in "railway, highway and infrastructure" projects is relatively small. After two or three decades of high-intensity investment, the investment cycle in this field has entered its end. If we still rely on investment in "railway, highway and infrastructure" to drive economic growth, it will inevitably lead to further overcapacity.

However, there is insufficient investment in some emerging fields. For example, in the field of carbon neutrality, according to the Paris Agreement, the temperature rise will be controlled within 1.5 degrees by 2050, but it is considered difficult to achieve. It is even considered difficult to control the temperature rise within 2 degrees because it requires large-scale investment. Data shows that starting from 2030, the world will have to invest 10 trillion US dollars every year to achieve this goal. According to our calculations, China may need an investment of 300 trillion yuan.

Of course, we may also need to reflect on the fact that we are used to using the "government + market" model to quickly push an industry to the point of "involution", with companies competing with each other and almost no profit margins. This is not a good phenomenon for the sustainable and healthy development of the industry in the future. Both the government and companies should think about the fact that investment should focus more on the long term and further consolidate core advantages, rather than focusing more on expanding market share and increasing pricing power in the short term.

"China Newsweek": How do you view the "involution" in some industries at this stage?

Liu Qiao:Any overcapacity is relative to demand. We often talk about how to better promote the development of emerging industries, and put more emphasis on the supply side, believing that this is the only way to develop new quality productivity. However, the development of new quality productivity also requires establishment before destruction. What should be "established"? I believe that any emerging technology must have its application scenarios. In the process of "establishment", we must also consider the demand side, predict effective demand, and also consider what can be done to better release effective demand. At present, the investment strategy for some emerging industries may not be particularly reasonable. The main reason is that there may be an imbalance between supply and demand. When we make corrections, we also need to consider introducing some targeted policies from the demand side.

"China Newsweek": Should current macroeconomic policies also pay more attention to the demand side?

Liu Qiao:I think macro policies are changing and leaning towards the demand side. For example, the central bank recently provided refinancing for local governments and local platform companies to purchase existing commercial housing and convert it into affordable housing. But I think macro policies still don’t pay enough attention to the demand side. For example, during the two sessions of the National People’s Congress this year, it was decided to issue 1 trillion yuan of special long-term government bonds. So far, the issuance progress has been slow, partly because special government bonds still focus on the supply side and need project support, but there are few good projects in the investment field.

At present, there is an urgent need to strengthen market confidence, corporate confidence, consumer confidence, and a substantial increase in real demand, so policies need to be implemented on the demand side. Especially in the process of industrial transformation, there will be short-term imbalances in the labor market, leading to greater employment pressure. Small and medium-sized business operators, including a large number of individual industrial and commercial households, have solved more than 80% of employment problems. They are closer to the demand side, and if macroeconomic policies are tilted towards the demand side, they will also be beneficiaries.

There are many ways to tilt macroeconomic policies toward the demand side, such as whether to reduce or exempt some taxes for small and medium-sized enterprises, whether to directly transfer payments to low- and middle-income groups, and stimulate their consumption capacity and willingness through the issuance of cash coupons, etc. Another example is that in terms of monetary policy, the interest rates of existing mortgage loans can be reduced to alleviate the pressure on some home buyers. All of these require funds, and are also directions that the government can consider investing in.

Improvements in total factor productivity in many sectors

Both face institutional constraints

China Newsweek: You are optimistic about investment opportunities brought about by energy transition, but where will the funds come from? Should government bonds play a more important role?

Liu Qiao:Treasury bonds cannot be an important source of funds, but they are indeed a "medicine lead". For some key areas, government-led investment should pay more attention. Of course, in the process of China's economic structural transformation, it is necessary to maximize the support of the financial system to the real economy and transform private capital and residents' savings into industrial capital required by emerging industries. At present, we have a lot of money, but very little industrial capital. For example, the market value of the three largest listed companies in the United States, Nvidia, Microsoft and Apple, has exceeded 10 trillion US dollars, that is, more than 70 trillion yuan, while the total market value of more than 5,300 listed companies in the A-share market is less than 80 trillion yuan when it is relatively bleak. This is related to the technological content of A-share listed companies and whether their profitability can give investors confidence. It can be seen that industrial capital has not been well formed.

I believe that government investment, especially government bonds, can play a role in two directions in promoting the improvement of total factor productivity.

On the one hand, basic research requires more government support. At present, China's basic research expenditure accounts for only about 6.5% of R&D expenditure, with an investment of 221.2 billion yuan, while the United States is about five times this level. Basic research is a typical public product. The cost is borne by investors, but the whole society benefits from it. The government should assume more investment responsibilities. At the same time, enterprises should also realize that investing in basic research is an important source of building the core competitiveness of enterprises. In the United States, about 35% of the basic research investment is borne by enterprises, but in China, this proportion is only about 9%.

On the other hand, the focus of developing new productivity is to improve total factor productivity, but the improvement of total factor productivity in many fields is currently facing institutional constraints. For example, in agriculture, there is a lot of room for improving total factor productivity, but it is necessary to increase industrial capital investment and carry out intensive production, which involves further reform of the land transfer system. In addition, the urbanization of agricultural migrant population is not thorough. There is an 18% difference between the urbanization rate of permanent population and the urbanization rate of registered population, which means that more than 250 million people live in cities, but do not have urban household registration. The consumption willingness of this group is bound to be affected. Improving total factor productivity does not necessarily require technological change, but also requires deepening reform to break some factors that hinder the improvement of total factor productivity. Government investment should also focus on these areas.

"China Newsweek": In addition to the moderate tilt of macroeconomic policies toward the demand side, what other suggestions do you have for the government and businesses to cope with the current economic cycle?

Liu Qiao:The government cannot talk about improving the business environment in an abstract way, but must solve specific problems in the business environment. A specific example can cause great damage to the confidence of entrepreneurs. We need to think about why some incredible specific examples are shaking confidence while the decision-makers continue to emphasize the creation of a good business environment. I think these prominent problems need to be classified and solved specifically. For example, many companies have high accounts receivable, which means that some companies may have sales revenue on the books, but no real cash flow. What can companies use for investment and dividends? We can consider further rectifying the arrears of payments to companies, especially the arrears of payments to companies by local governments, as a special task.

For entrepreneurs, some suggestions may seem powerless, but I think it has always been difficult to run a business. We have done research on the history of American business development. A considerable proportion of excellent companies were born in times of crisis, that is, in economic downturns. They often show better discipline in investment and financing, and are cautious enough in operations. For companies, the most important thing at present is to survive. In this process, they need to make some investments to increase their core competitiveness in the future, try to avoid falling into a debt crisis, and return to the essence of business as much as possible to create value. If a company can go through this period of time according to this belief, it may have a completely different gene, and when it faces the challenges and opportunities brought about by future technological changes, it can better adapt and embrace them.

Reporter: Chen Weishan

Editor: Min Jie