Yao Yang Interview on Chinese Economy 2023
Interview with Yao Yang, “There is Room for both Optimism and Concern On the Subject of China’s Future Economic Growth”[1]
Introduction and Translation by David Ownby
Introduction
This is one of the texts translated for the collaborative project with GreatFire on Reading and Writing under Chinese Censorship.
Yao Yang (b. 1964) is one of China’s leading economists, and a professor at the China Center for Economic Research at Peking University. Yao is also a public intellectual who has spent the last few years trying to engineer an upgrade of Confucianism that will help to solve China’s and the world’s problems. Representative samples of his writing available on this site include “The Challenges Facing the Chinese Communist Party and the Reconstruction of Political Philosophy,” "An Analysis of Confucian Liberalism," and "Three Days Back in the Village," among many others. I have also translated a book by Yao, which is available here.
I chose to translate this text – an interview with Yao Yang by the very mainstream journal Sanlian Life Weekly - because GreatFire indicated that it had been taken down, which struck me as somewhat strange, given Yao’s position as a powerful figure at Peking University, but not unimaginable, because he can be very critical in his opinions of government policy. In my reading, Yao is a liberal in that he wants markets to function and private entrepreneurs to be free to work their magic, and a socialist in that he wants government intervention to ensure equality of opportunity rather than putting out fires and helping state-owned enterprises and those who are already wealthy. We see some of Yao’s impatience in this text: he thinks the government should stop propping up the real estate market and should make it easier for Chinese consumers to purchase electric cars (regulations made bank loans for such purposes difficult at the moment Yao was writing).
At the same time, Yao Yang gives lots of interviews, most of which mix optimism with frank criticism as he does here. I see nothing out of the ordinary in this one, although it is possible that Yao was a victim of bad timing, that he denounced something Thursday that the government wanted to implement on Friday.
In fact, looking more closely, it appears that an oral version of Yao’s interview is still available online on the Sanlian Weekly Reader site, and that what was taken down was the transcript of the talk subsequently posted on the WeChat feed where Yao works, at the China Center for Economic Research. It also appears that the post was taken down by the author and not the platform (I assume the author here is Yao or his Center but am not sure). It could well be that Sanlian Weekly Reader told Yao’s Center that they didn’t have the rights to publish the transcript, although the transcript clearly gives credit to Sanlian Weekly Reader. My impression, however, is that texts move around the Chinese Internet with little friction, so this proprietary gesture by Sanlian Weekly Reader strikes me as improbable, although not impossible. Perhaps some other minder told Yao his post was problematic, and he subsequently took it down.
In any event, it is not strange that the same interview be available on one site and removed from another.
Translation
Sanlian (the journalist’s name is Zhang Congzhi 张从志): After the release of statistics for the first quarter of this year, many people began to worry that China's economy is entering a period deflation because of the low rate of increase in the CPI [consumer price index], coupled with the fact that the PPI [producer price index] has been negative for many months in a row. What are your views on this? Where is the Chinese economy headed right now?
Yao Yang: In my view, we should see China's economy as being in the early stages of recovery, especially since things on the consumption side have been a bit better than expected. This is mainly because there was only one wave of infection after the covid controls were lifted at the end of last year, and despite some talk of a more recent second wave, not much happened on that front despite all the moving around during the Labor Day holidays in early May. This meant that there was no interruption in our consumption recovery, which is one important reason why our economic growth rate reached 4.5% in the first quarter. Recent data also shows that more people traveled for Labor Day this year than in 2019, and tourism spending was slightly higher as well, although per capita tourist spending was slightly lower. Consumption is slowly rising, which is a good sign.
People are concerned about what is being called deflation mainly because our CPI increase is close to zero and our PPI is negative. My understanding of this is that while consumption is rising, there remains too much accumulated capacity on the supply side. Thus when the economy began to recover, everyone did their utmost to produce, wanting to use up as much surplus capacity as possible. But demand has actually not fully recovered, and there has been basically zero growth for the past three years, which means that we are still facing the problem of insufficient demand. So enterprises have no choice but to start cutting prices in order to capture the market, which pushes the PPI down, even into negative territory.
But I think it’s still too early to say we have entered a deflationary period, as some commentators have. The CPI would have to stay negative for several months in a row before we could make such a pronouncement. And in terms of long-term deflation, it would require that consumption stagnate or even contract, after which prices would continue to fall. In my view, as long as consumer demand is recovering, I think that it's unlikely that prices will continue to fall for a long time.
Sanlian: In fact, people are talking about deflation because they worried about the lack of demand in the economy as a whole. So far this year, many enterprises are experiencing a lack of orders and a reduced capacity utilization. First quarter statistics also show that the growth rate of value added by secondary industries is 1.2 percentage points lower than the overall GDP growth rate, and especially that the value added by industry only increased by 2.9%, which again is obviously lower than the GDP growth rate. How should we understand this?
Yao Yang: This is how things have been over the past three years, but overall, things are now a bit better than during the pandemic. The situation is uneven. Some industries have recovered well, such as aviation, tourism, and food services, and are now starting to make money. Everyone is worried about exports, and on that front, although overall recovery is slow, there are some bright spots, such photovoltaic cells, power batteries, and electric vehicles, where the numbers look pretty good, even if traditional industries are having a hard time. So it depends on who you ask, because the data is all over the place.
Another example is that, in terms of corporate profits, state-owned enterprises are clearly doing better than private enterprises. State-owned enterprises are generally cyclical and fairly vulnerable to economic volatility, while private enterprises attempt to ride out the cycles, meaning that when times are bad, they don’t suffer as much as the SOEs, and when times are good, they don’t outperform them that much either. So SOE profits improve as soon as the economy recovers. SOEs are in industries like travel, air travel, rail travel, and automobiles, which touch all of us directly, so when the economy recovers, so do these industries, and SOEs start to make money. SOEs are also monopolies, while private industries face competition, and if your competitor goes back to full production, you have to do the same thing, which of course drives prices down, which means that profits are down for private industry.
Sanlian: Speaking of private enterprise, in the past few years, many people have been talking about how to boost confidence in the private economy. What do you think the next steps should be in terms of policy adjustment?
Yao Yang: In my view, entrepreneurs in the private sector are not expecting any particular policy or orientation, and don’t really need anything like that. To boost confidence, the first thing is that the economy should be growing, should be in good shape, at which point everyone's confidence will naturally come back. This is very simple. For example, if by the second half of this year, the economy has recovered and businesses are making money, a big amount of confidence will definitely return.
But fundamentally, I have always felt that the biggest problem we are facing now is a lag in theory, or to be more precise, our theory of China's basic economic system is lagging behind reality. We continue to say that our economic system is based primarily on public ownership, together with other sorts of ownership. I think this no longer fits the facts in terms of definitions. We currently use the shorthand “56789” to refer to the private economy, meaning that it contributes more than 50% of China's tax revenue, more than 60% of GDP, more than 70% of technological innovations, more than 80% of urban employment, and more than 90% of the number of enterprises. If the lowest number in all of that is 50%, then what should be considered primary?
Can we not say that we have a mixed economy, with the private economy as the main body and state-owned enterprises dominating in certain strategic industries? This is a theory that squares with the facts. What does it mean after all to be primary? Thirty percent? Seventy percent? As long as this is not clear, private entrepreneurs are of course going to be nervous.
Sanlian: During last year’s Two Sessions, you mentioned that the policy focus in recent years has been focused on the supply side, and that we should reflect on this and give more consideration to the demand side. How did you arrive at this assessment? Do you feel more strongly about this given developments this year?
Yao Yang: What I meant at the time was that during the pandemic, our policy was too focused on stabilization on the supply side and paid less attention to the demand side. The impact of the pandemic on the economy was of course huge, and the government had two major concerns at that time, which were to protect production and to protect the market mechanism, so there were very strong policies on that front, including tax cuts of more than two trillion RMB. But what are the problems with such policies?
First, at a basic level, we were short on demand, not on supply. When there’s not enough demand, stabilizing production produces overcapacity. Logically, you should shore up demand, which is what many other countries did, by giving money directly to the people who spend. Second, many people overlook the fact that this kind of policy actually produces a huge distributional effect, because only enterprises that are in a position to produce can get tax exemptions and reductions, while small and medium-sized enterprises simply close down and can't produce anything at all, so these policies do them no good. So most of the two trillion in tax cuts wind up going go to large and medium enterprises because they are more risk-resistant, while large numbers of small and medium enterprises disappear.
We are a socialist country and I believe we want to create an equal society, but some of our policies clearly create new problems. For example, there are various restrictions on purchases and prices in some parts of the real estate market, which has played havoc with the prices of new housing and older housing, so that if you get your hands on a new house you can sometimes flip it and make a fortune. This kind of thing winds up creating all kinds of gray markets where the rich and powerful are in position take advantage. Many people are reluctant to talk about this, but I think we have to. Although the central government says constantly that we have to control the price of housing, no local governments are really willing to let housing prices fall.
Sanlian: The real estate market was extremely rocky last year, and the drag on the economy was very clear indeed. Many people are worried about where real estate is headed next, whether house prices will fall, and whether the government will inject stimulus as it has in the past.
Yao Yang: I think housing prices have not yet fallen enough, and that the real estate market is now facing the problem of insufficient demand because people don’t dare buy or can’t afford to buy. Why is this? Because of the “three red lines” policy introduced over the past couple of years, the goal of which was to slow down the real estate industry, and which was a major blow to that industry. Last year, real estate experienced negative growth of more than 20% and has yet to recover, something which has a great impact on the economy. What should be our next move? Local governments all over China are promising to make companies deliver the units they have promised, but people are still not buying, because they are nervous.
This kind of government pressure is external, with governments trying to move companies in one direction or another from behind the scenes. Wouldn’t it be better for the government to adjust its policy so that real estate companies had economic incentives to make good on their promises? What would these incentives look like? First, the banks have to ease up on calling in the loans, and not strangle the companies overnight. Things are a little better on this front for the moment, but banks don’t dare really ease up because central government policy has not changed. Second, we have to allow real estate companies to set their own prices. They are under financial pressure, and they also want to reduce prices, clear their inventory, and pay their debts. This could bring down housing prices at the same time.
Sanlian: But some people's reasoning is that a sharp drop in home prices could cause a crash in the property market, triggering even greater risks.
Yao Yang: First, if that's true, then let’s let the market teach a lesson to these developers, banks, and speculators. They can live with the risk of the stock market, so why not the property market? If the market does not teach them a lesson, in the final analysis it’s the government that winds up carrying a huge burden. Housing becomes something fixed and rigid and the “adjustment” of government policy serves only to prop up the price of housing. They can’t let prices fall because of this or that risk. They’ll just wait for the economy to pick up, and housing prices will resume their rise. Here, the lesson the people will learn is that housing prices cannot fall substantially because the government will always intervene to shore them up.
This is the kind of cycle China's property market has been in for the past twenty years. Whenever the government intervenes, the people expect housing prices to go up. There are obvious bubbles in current property prices, and there are many cities where prices should not be so high. During the Asian financial crisis in 1998, Hong Kong's property prices fell by one-third, but society did not fall apart. Sure, some developers folded, and some people who otherwise might have bought a house did not take out a loan. But a lot of these people were speculators, and finally their balance sheets just did not cut it. This is how a market economy works, by discarding the old and bringing in the new. At present, we are relying on administrative measures to paper over and contain the problem, but the problem will only get bigger.
In fact, if we you let prices fall to a certain level, people will be relieved, especially now, when a lot of inelastic demand is still being suppressed. People feel like when the price is right they will of course buy, and the real estate market can slowly bottom out and rebound. This is also crucial to the recovery of market demand in the domestic economy as a whole, because real estate is not just about building the house, it also involves decorating and renovating and the purchase of all kinds consumer durables. Some people have calculated that real estate and related industries together make up 15% to 17% of GDP. So if real estate does not pick up, it will be hard for consumption to come back. Real estate is key to the unstable elements in this year's economy, and we’ll have to see if it can produce positive growth, or at least achieve some stability and not fall back into negative growth.
Sanlian: What can the government do in terms of boosting consumption?
Yao Yang: We usually say that there is not much the government can do to promote consumption, because houses and cars are the only big things people buy. But now there are limits on the loans banks can make for cars, and in the first quarter of this year things look really bad, especially for traditional, gasoline-engine cars, which no one wants anymore. They say that the purchase of traditional cars should be discouraged because of pollution, which I get, but by the same logic they should let up on measures for electric vehicles.
They argue that traffic is too bad so people should buy less cars, but what should we do about traffic? In fact, there are more flexible policies out there that we could use, such as taxes for entering the city or for parking. Singapore and London are doing this, and it’s working. But local governments in China are still not used to this decentralized approach to solving problems and prefer administrative decisions, which essentially means that they don't believe in the role of the market, and don't believe that each person's own decision-making can solve social problems.
Sanlian: In your opinion, how much more potential demand exists in the real estate and automobile industries?
Yao Yang: According to my calculations, China is currently selling some 25 million cars a year. If we use Japan as a model – Japan is a very crowded country – then we might at the highest point be able to sell 40 million. But after that, everyone who wants a car will have one and we’ll fall back down to 30 million. So you can't say there's no room at all to grow. Right now, electric cars are a bright spot, and people are more and more open to them, so if all the purchase restrictions were removed, we might see significant growth there.
In terms of real estate, looking at the country as a whole, per capita housing area is close to Japan, but that might not mean that it’s enough. There is a problem of regional imbalances here, in the sense that there are lot of big houses in the countryside, where no one lives. If we leave this out of the calculation, China's per capita housing area remains still very low, and many migrant workers and young people are living in tiny places, with seven or eight people crammed into a collective dormitory. The needs of these people are not being met.
Sanlian: So you are relatively optimistic, looking forward?
Yao Yang: I'm not relatively optimistic, I'm probably one of the most optimistic people out there right now. I think China has made up for lost time, and as far as the economy is concerned, the future looks bright. This is because we are at the forefront of the world's science and technology, especially in applied technology. We picked the right “technology basket.” For example, in theory we were behind on electric vehicles, and Japan started way before we did, with very advanced hybrid technology and fuel-cell technology. But the size of China’s market finally won out, with its scale effects, so production wound up coming here…Or look at clean energy technology. Twenty years ago photovoltaic was the big thing, but there was a lot of skepticism and a lot of competition, and a lot of companies failed. I remember that Wuxi Suntech alone owed tens of billions of dollars in debt at that time but look at today. Thanks to the great development of the photovoltaic industry, Wuxi has become the city with the highest per capita GDP in China, except for the two resource-based cities of Ordos and Karamay, reaching more than 30,000 US dollars. With regard to nuclear fusion, artificial intelligence, quantum computing and other technologies, we are also among the leaders. China's next round of economic growth is definitely going to be driven by these technologies.
Notes
[1]姚洋, “中国经济增长喜忧并存,” originally published on May 25, 2023 on the WeChat feed of China Center for Economic Research at Peking University, the transcript of an interview with Sanlian Life Weekly that is still available online.