Building new engines of economic growth, the Chinese way: Premier Li Keqiang

This is the tenth Annual Meeting of the New Champions, or the Summer Davos, as it is known. There is a Chinese saying which goes, “It takes ten years to grow a tree.” If we could compare the Summer Davos to a tree, after ten years of careful nurturing, it has grown into a luxuriant tree with bountiful fruits. It has showcased to the world the process and achievements of China’s reform, opening up and modernisation. It has also contributed wisdom and strength to the common development and prosperity of China and the world.

Lacklustre Global Economic Growth

When the international financial crisis broke out eight years ago, countries resorted to various policy tools to grapple with the crisis and stimulate growth. Eight years on, recovery of the world economy has fallen far short of people’s expectations: global trade and investment are lacklustre; commodities and financial markets have experienced volatility from time to time; growth prospects of developed and emerging economies are diverging; and geopolitical risks and destabilizing factors are both on the rise. Just a few days ago, the UK voted to leave the EU in a referendum. This is already making an impact on the international financial markets and adding to the uncertainties in the world economy. Against such a backdrop, to promote world economic recovery and the growth of all economies, we need to make joint efforts to tackle challenges, strengthen confidence, foster a stable international environment and find solutions to address root causes of the problems we face. European countries are important partners for China. Under the new circumstances, China will continue to maintain and grow its relations with the EU and the UK. We hope to see a united and stable EU and a stable and prosperous UK.

Fourth Industrial Revolution

The theme of the forum, “the Fourth Industrial Revolution and its Transformational Impact”, offers people a new perspective and is thus forward-looking and relevant. Let me share with you a few thoughts in this connection.

First, to promote steady recovery of the world economy, we must actively carry out structural reform. To address the deep-seated problems in the world economy, we need to both strengthen demand management and advance structural reform to eliminate the root causes that trigger problems. Countries may face different situations, yet they should all move toward addressing economic imbalance by way of promoting fiscal and financial reform, easing regulation, facilitating competition, supporting innovation and expanding opening up, and should all work together to ensure strong, sustainable and balanced growth of the world economy.

Second, to promote steady recovery of the world economy, we must speed up economic transformation and upgrading. For the world economy to walk out of the woods, the ultimate solution lies in shifting the growth model and replacing old growth drivers with new ones at a faster pace. The advent of a new round of technological and industrial revolution has provided a historical opportunity for this. The emergence of new technologies, new tools and new materials, which are of pace-setting and transformational significance, has given a strong boost to the growth of the new economy and the upgrading of traditional industries. Countries should follow this prevailing trend by focusing their policies on supporting economic transformation and upgrading, and strengthen the new drivers of economic growth.

Third, to promote steady recovery of the world economy, we will need efficient and orderly global governance. In the face of common challenges, we need to uphold the spirit of solidarity and work for common progress. This is a sure way for us to move forward. Countries need to adopt more growth-friendly policies, strengthen macro policy coordination, steadfastly advance trade and investment liberalization and facilitation, firmly oppose protectionism and build a fairer, more just and open international economic system. The world’s major economies, while making macro-economic policies, should consider not just their own growth needs but also the spillover effects of their policies. This September, the G20 Summit will be held in Hangzhou, China. The ongoing Summer Davos has a special session on “China’s G20 Agenda”. I find it highly relevant as it will contribute insights and recommendations to China’s hosting of the G20 Hangzhou Summit.

China’s New Normal Growth Rate

Having experienced years of rapid growth, China’s economic development has now entered a new normal. In the face of mounting downward economic pressure, we have not resorted to indiscriminate strong stimulus. Instead, we have focused on exploring new models of macro control, vigorously advanced structural reform, and concentrated our efforts on cultivating new drivers of growth while upgrading traditional ones. As a result, we have maintained steady economic development, ranking among top of the world’s major economies in terms of growth speed, and made positive progress in structural adjustment. The journey we traveled these years has been fraught with risks and challenges, and we have made painstaking efforts along the way. Nevertheless, it is encouraging to see that new drivers in the economy are rapidly growing. Although they cannot yet compare with traditional drivers in size, they do play a bigger role in sustaining development, securing employment, and promoting economic transformation. Given time, the rise of the new drivers will open up new prospects for the Chinese economy.

This year, despite continued slowdown in global growth, the Chinese economy has on the whole maintained stability while making steady progress, and has performed within the appropriate range. This is indeed not easy. China’s GDP expanded by 6.7% in the first quarter of the year, and registered steady growth in the second quarter. Summer grain production is expected to be another bumper harvest. Corporate profits in the industrial sector are steadily rising. The service industry is growing rapidly, and market sales are steadily expanding. CPI is basically stable, the drop in PPI has narrowed, and energy intensity and emissions of major pollutants have continued to fall. In particular, the employment situation is stable. In the first five months of this year, 5.77 million new urban jobs were created, completing 58% of the annual employment target. The surveyed unemployment rate of 31 major cities in May was 5.02%.

An important reason the Chinese economy has maintained steady growth in the first half of the year is that reform, innovation, adjustment and transformation have all played an important role. Reform efforts to streamline administration, delegate power and improve government services have given a strong boost to mass entrepreneurship and innovation, and further unleashed development potential. Now every day in China, some 40,000 new market entities are being created, including over 13,000 new enterprises. Such increase is bigger than the previous two years and has given a strong boost to job creation. The leading role of consumption and services is becoming more visible. New areas of consumption such as information and communication, smart phones and new energy vehicles are rapidly expanding. The five “happiness industries” of tourism, culture, sports, health and old-age care are rapidly growing. The service sector has grown into the biggest industry in the national economy, both in terms of its output and the number of jobs it created. An innovation-driven economy is brimming with vitality. High-tech industries, high-end manufacturing, e-commerce and other new business forms are booming. Enterprises, sectors and regions that have made an early start in economic transformation and upgrading and that embrace faster growth of new industries have all taken on a sound momentum of growth. On the whole, the Chinese economy is better structured; its quality is improving and a stronger momentum is being gathered.

We are also aware that given the complex and challenging international environment and the deep-seated domestic problems accumulated over the years, the foundation underpinning stable performance of the Chinese economy is yet to be strengthened. The driving effect of external demand on growth is waning. Private and manufacturing investments are sluggish. Latent risks still exist in the financial and other sectors. In some industries with serious overcapacity and regions with monotonous economic structure, there have been relatively more problems. Downward economic pressure remains and the difficulties are not to be underestimated. However, the fact that we have recognized and stood up to challenges shows that we have the determination and ability to overcome difficulties. For the Chinese economy, there is always more hope than difficulties.

The fundamentals of the Chinese economy have remained unchanged, and our macro policies will maintain continuity and stability. In the meantime, we will continue to innovate means of macro control, implement the proactive fiscal policy with greater intensity and efficiency, and carry out the prudent monetary policy in a flexible and appropriate fashion. We will channel more resources into areas that help strengthen weak links, increase the momentum of development and take development to a higher level, as well as into areas of the new economy that serve to promote economic transformation and upgrading. The current debt ratio for the Chinese government is around 40 percent, and is only around 16 percent for the central government, lower than many other major economies. This has given us space for a proactive fiscal policy. A high savings rate in China means huge potential for the development of multi-tiered capital markets. It also means major leeway for improving financial regulation methods and financial resource allocation. We are in a position to create conditions to gradually lower corporate leverage ratio and financing costs in a market-based and law-based manner. We not only have sufficient policy tools to keep economic performance within the reasonable range. We also have strong ability to prevent systemic or regional risks. In the stage of transition, short-term fluctuations of economic growth are hardly avoidable, but the Chinese economy will not head for a “hard landing”. And we will be able to achieve the main economic and social development targets set for this year.

The Way Ahead

Looking ahead, the Chinese economy has huge potential, strong advantage, broad space and bright prospect. China has a 900 million strong workforce, among whom 170 million have received higher education or training in professional skills. Every year we produce over seven million college graduates and over five million graduates from secondary vocational schools. We are No.1 in the world in terms of the number of science professionals and No.2 in R&D input, with an input of over RMB 1 trillion made last year. China is the second biggest economy, the largest manufacturing country, a major trading nation in goods and services, and a major destination and source of foreign investment. It is also the world’s second largest consumer market. Its middle-income population is in the hundreds of millions and is still expanding. The number of the rural poor is falling year by year, while that of permanent urban residents is growing by over 10 million each year. All these make China a major emerging market with the biggest growth potential. It makes China a big stage where people from every corner could tap into their intellectual potential and start their business. We are optimistic about the current state and future prospect of the Chinese economy. Optimism is a sign of confidence, and in market economy conditions, confidence guides people’s expectations. This in itself generates powerful strength.

The Chinese economy is at a crucial stage of transition from old to new growth drivers and a stage of economic transformation and upgrading. We will focus on development as the top priority and promote steady progress as we pursue innovative, coordinated, green, open and shared development. We will ensure that the government’s macro policies are stable, industrial policies are well-targeted, micro policies are flexible, reform policies are solid and social policies meet people’s basic needs. While appropriately expanding aggregate demand, we will steadfastly advance supply-side structural reform, concentrate on cutting overcapacity, reducing inventory, deleveraging, lowering costs and strengthening weak links, so that China’s development could be less reliant on natural resources and be more driven by human resources and innovation. This will enable the Chinese economy to maintain medium-high growth rates and move to medium-high development levels.

Innovation key to transformation

We will guide economic transformation and upgrading through innovation. Innovation is the primary driver of development and an important part of supply-side structural reform. We need to further implement the innovation-driven development strategy, and step up efforts to build an innovation-driven country and a strong country in science and technology, so as to provide robust support for economic transformation and upgrading.

We will accelerate the development of the new economy and cultivate new growth drivers. We will vigorously advance innovation in science and technology, work for breakthroughs in major, key technologies, and promote the commercialization of innovation results. We will also advocate mass entrepreneurship and innovation, further promote the “Internet+” strategy, extensively apply the new generation of information technologies such as the Internet of Things, big data and cloud computing. We will promote integrated development of different sectors and facilitate the emergence of more new industries, new forms of business and new business models. It is also necessary to roll out new products and services that better meet the needs of the market and build platforms for mass innovation, crowd sourcing, collective support and crowd funding. This way, we could pool strengths to accelerate innovation and cultivate new areas of economic growth.

We need to transform and upgrade traditional drivers of growth at a faster pace. Innovation is not only about developing the new economy. It is also about transforming and upgrading traditional industries to give them new vitality. We will implement the Made in China 2025 initiative to make manufacturing more IT-based and smarter. We will conduct custom-tailored and flexible production to meet consumers’ diverse needs. We will accelerate changes in models of production, management and marketing and create new industry chains, supply chains and value chains. This will make Chinese manufacturing more competitive.

Sharing Economy

The new vision of development that we advocate is also about developing a sharing economy. The sharing economy is one of mass participation. Greater economic globalization and the spread of the Internet have provided a big stage and broad space for entrepreneurship and innovation by the people. Through mass entrepreneurship and innovation, we will combine the innovation activities of the elites with the grassroots, the on-line with the off-line, and companies with research institutes, so that individual efforts of numerous market players will lead to greater synergy for innovation-driven development. If we could make full use of the Internet to efficiently match the massive amounts of information about supply with that about demand, we could then bring about cooperation among and sharing of R&D and professional expertise and skills. The sharing economy is something that everyone can take part in and benefit from. It could unleash everyone’s potential, facilitate reasonable income distribution, expand the middle income group, allow more people, in particular the young, to fulfill their dreams through hard work, and promote social equity and justice.

We will enhance economic transformation and upgrading by comprehensively deepening reform. We have relied on reform for the remarkable achievements we made in the past 30-plus years. And fundamentally, we must rely on reform if we are to remove the institutional obstacles hindering development and advance economic transformation and upgrading. We will firmly deepen reform to unlock market vitality and social creativity to a greater extent.

We need to advance structural reform, in particular that on the supply side. The structural problems facing the Chinese economy are about both the supply and demand sides, especially the supply side. We need to advance structural adjustment through reform, reduce inefficient and low-end supply, and expand effective and medium- to high-end supply. This is conducive to economic transformation as well as growth. A major task for us is to phase out outdated production capacity and address overcapacity, especially in steel, coal and other sectors that face difficulty in operation. Initial progress has been made in recent years, as is shown in the lowering production of raw coal and crude steel, but our efforts must well continue. We will adopt a market-based and rules-based approach and apply strict standards in environmental protection, quality and safety. The biggest challenge is how to address possible layoffs in this process. Businesses need to take multiple measures to ensure that their employees will get reemployed. Both the central and local governments should provide necessary support to take care of the affected employees. Overcapacity is a global challenge. The fact that we have taken the initiative to cut overcapacity demonstrates that China is indeed a responsible country.

We also need to further streamline administration, delegate power, strengthen regulation and improve services. We need to transform government functions more rapidly, improve efficiency, and ensure a level-playing field for all players and a pro-innovation institutional environment. We need to give priority to “simplicity” by taking away undue government powers and delegating them directly to the market and society wherever possible. At the same time, we need to strengthen and innovate in market oversight, explore inclusive and effective prudential regulation, and guide and support the healthy development of new business forms and models. For those players that follow the right direction but have encountered problems, we need to give them prompt guidance, fix the problems and remove potential risks. We need to give them reasonable space for development instead of rejecting them outright. As for those conducting illegal operations or fraud in the name of innovation, we will punish them to the full extent of the law. We need to strictly protect intellectual property rights. We also need to promote the “Internet plus government services” model, and set up an open platform of government public services, so that government data could be shared as much as possible. This will make it easier for individuals and companies to get things done and start up businesses, and it will enhance government efficiency.

We will promote in a coordinated way reforms in the fiscal, taxation, finance, investment and other key areas. We have put in place a nation-wide reform to replace business tax with value-added tax. This major effort to cut taxes and lower the tax burden will facilitate the innovative development of modern service industry, SMEs and micro businesses. We will deepen the reform of the financial system, accelerate the improvement of the modern financial regulatory regime and increase the efficiency of financial services in supporting the real economy. We will also intensify reforms in SOEs, rural areas, investment and financing, foster a social credit system and unleash even greater vitality for economic development. The private sector is an important force driving economic development. We will do more to remove obstacles for private businesses, lift unreasonable restrictions on market access and strive to stimulate private investment.

Opening-up

We will transform and upgrade the economy through opening-up. Opening-up, being one kind of reform itself, will in turn spur reform efforts. No matter how developed China will become, it will always need mutual-learning with the rest of the world, and it will open still wider to the outside. We will enhance our open economy, open wider the service sector and general manufacturing sector, provide more investment opportunities to foreign businesses and foster a fairer, more transparent and predictable investment environment. All companies registered in China, Chinese-funded, foreign-funded, joint ventures or independently-owned, will be treated as equals. Their legitimate rights and interests will be protected, and they will have access to better public services. Facing the current complexities and fluctuations in the international financial markets, China will adhere to a managed, floating exchange rate regime based on market supply and demand with reference to a basket of currencies. The fundamentals of the Chinese economy determine that there is no basis for persistent depreciation of the RMB. We have the capacity to keep the RMB basically stable at an adaptive and equilibrium level. China is committed to peaceful development and a win-win strategy of opening-up. We stand ready to work with all other countries to promote inclusive and balanced growth as well as green and sustainable development.

Tianjin is a big port in the world, where people could start a voyage to sail to the vast ocean. For a giant ship to sail far, sustained and strong driving force is needed. China will work with other countries to seize the opportunities brought by the new round of technological and industrial revolution. Together, we will build new engines of economic growth, promote steady recovery of the world economy through transformation and upgrading, and jointly usher in a better future for the development of mankind.

(This is the edited text of Chinese Premier Li Keqiang’s speech delivered at the opening ceremony of the Annual Meeting of the New Champions 2016, also known as the Summer Davos Forum, in Tianjin, on June 27.)

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