China’s four challenges?

China is about to negotiate a turning point. The new take-off of the digital economy and the upheaval in international relations prompt it to review its forecasts and direction. Yao Yang, Director of the Development Institute of Peking University, discusses the challenges to be met in the coming years: the aging population, the environment, the financial system, and its reform, and the role to be played on the international scene.

Summary of Yao Yang’s October 20, 2020 conference :

Demographically, the country faces a powerful trend, the aging of the population, which I fear will surpass our imagination. On the sustainable development front, two concrete objectives have been set at the United Nations General Assembly. Our country’s entire growth model will change radically in the future. The first ambitious goal is to ensure that China’s carbon dioxide emissions peak by 2030. China’s carbon emissions continue to rise, and coal still accounts for 60-70% of all energy in China. The question of whether we can reach a peak in emissions and then start to decrease over the next decade is a big challenge. The second challenging goal is to achieve carbon neutrality by 2060.
Besides, we have not completed the reform of state-owned enterprises and the financial sector, and we need better corporate and financial structures for the next stage of economic growth. These are the challenges we face.
Our think tank at Peking University Research Institute and the Brookings Institution, a U.S. think tank, have jointly produced a report entitled “China 2049,” resulting from two years of collaboration.
We believe that the next 30 years’ challenges will mostly come from changes in the international context. This academic exchange between the Brookings Institution and us also proves that, despite the deterioration of relations between China and the United States, cooperation between the two countries has not ceased. The fact that two very prestigious think tanks in China and the United States are still able to meet now and research China’s vision is significant in itself.


In this strategically forward-looking research project, we begin by reviewing seven decades of growth. From this base, we envision the challenges that will arise over the next three decades.
The last seventy years can essentially be divided into two parts, the first three decades and the previous four. It is relevant to our understanding of the new China’s history to take stock of a developing country’s experience of catching up and how we will move to the next stage. Our study suggests that the two parts should be considered whole, rather than two separate pieces. The first three decades set the stage for economic take-off. We made a lot of mistakes, but the groundwork has been laid. Economically, at least two achievements played a crucial role in the next four decades’ economic take-off.
On the one hand, a solid industrial base was put in place. To take a simple example, about 80 percent of the world’s shipbuilding tonnage is now built in China, and our 10,000-ton giants were launched in the 1960s. Without the foundations of that time, we would not be in the position we hold today in the global shipbuilding industry. On the other hand, the first period also performed relatively well in terms of the Human Development Index. If we compare with India, we can see the achievements more clearly. For example, our life expectancy had reached 66 years in 1978, and India was about ten years behind us. Our literacy rate was close to 70% in 1978, 20 points above India. All of this has had a positive impact on our economic take-off over the last four decades.

Forty Years of Reform and Openness: The Flexible Application of Neoclassical Growth Theory

What has been the success of the last forty years?
A country cannot develop without savings and investment.
The increase in the level of human resources, including the quantity and quality of the workforce.
The third is the progression of the level of technology.
Many people say that our economy has developed without technological progress, mainly through capital accumulation and the increase in the supply of labor. This is false because the data shows that the contribution of technological progress (in this case, the improvement in total factor productivity efficiency that remains after eliminating labor and capital growth) to the Chinese economy over the last four decades has been about 40 percent, which is already at the level of developed countries.
In this respect, one could attribute China’s rapid growth over the last four decades to a more judicious application of neoclassical economics’s economic policy guidelines. Still, China 2049 does not deal with the political economy.
The next 30 years will see the peak of China’s renaissance cycle.
Four major challenges

The challenges we will face over the next three decades are daunting.
1. Will the social system be able to support/finance the aging of hundreds of millions of people? This is the central issue raised by the aging of the population. The “baby boom” period from 1962 to 1976, during which approximately 300 to 400 million people were born, will pose unprecedented challenges for the country as it ages. The China 2049 report notes that this challenge is not primarily on the supply side of the labor force, as labour is likely to be replaced by artificial intelligence and automation; nor is it on the demand side, as China’s level of urbanization is still relatively low, and the increase in the level of urbanization may offset to some extent the decline in consumption caused by aging.
2.Can industrial restructuring contribute to the ambitious goals of emissions reduction and sustainable development? In the next 5 to 10 years, the direction of China’s economic development will undergo significant changes, with many industries likely to disappear.
3. State-owned enterprises and financial reform have a long way to go. The gap is even more significant in the financial sector, where reforms are the most needed. Measures were taken after 2010 have not been significant enough, especially in shadow banking, so a new cycle of “deleveraging” has been launched in the last two years. So can a new regulatory balance be found after the “deleveraging”? How can we maintain financial sustainability without creating risks similar to those of 2010-2017?
4 . Making a difference in the international environment and changing roles. In the past, the strategy was to bide our time, but now that our country’s weight has become so great that “it’s hard for an elephant to hide behind a tree,” we no longer have the space to bide our time. The environment has completely changed and the international community has long since stopped allowing China to continue biding its time. We must, therefore focus on improving the situation. The key to the next step is how to make a difference, especially in a rapidly changing international environment.
In the international arena of the future, the challenge of moving from being a follower to being a legislator is enormous and involves many changes, even philosophical ones. I don’t think our country is quite ready for that.
It also means that I fear that the next 30 years’ biggest challenge will come from the international environment’s uncertainty. In a very uncertain international environment, what position should China take to participate in the reconstruction of the global climate? After the trade war between China and the United States and the many frictions and changes in recent years associated with the massive “withdrawal” of the United States, China has objectively had the opportunity to participate in the formulation and maintenance of the new international order. Still, at the same time, it has also tested our determination and wisdom to integrate openly with the different countries of the world. “

Yao placed China in a 100-year cycle of rebirth: the period 1949-1979 laid the foundations on which the country was able to develop during the next four decades of the era of reform and opening up. The three decades 2020-2050 will see the culmination of China’s renaissance cycle, not only over a hundred years but also over a millennium. One could smile in the face of such confidence. Some would call it propaganda, but the achievements and results of the past 70 years speak for themselves. The future is not a long quiet river, as it describes four significant challenges: the aging population, the industry’s alignment with sustainable development objectives, the reform of state-owned enterprises and the financial system, and the adjustment of China’s place in the new international order.
This speech by a researcher is to be classified in the songs that must be officially sung. When talking about social protection and aging, it would also have been relevant to raise the difference between urban and rural protection systems, civil servants, and the private sector.
Yao proclaims that saving is a strength of China. It also shows weakness. Indeed, the exceptionally high savings (more than 30%) are made mainly to make up for the lack of comprehensive social protection for part of the population. The paradox of a government that calls itself socialist!
Inequalities that do not diminish are not addressed.
The structural problems of the economy, long fueled by investment and indebtedness, need to be addressed. Consumption is still lagging.
Despite all these difficulties, the population’s dynamism, economy, and government can be counted on. This summer in China, we weren’t thinking about vacations (if we could take a vacation with the virus factor, like in France). We wondered how to work harder to make up for the delay at the beginning of the year! Another world.

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Decoupling and protection

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Sources: 姚洋:中国走向世界经济强国的四个严峻挑战

8 November 2020

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