The services sector should be prioritized for job creation
Editor's note:
Teng Tai, an economist and co-author of "Great Transformation" (2022), discusses the economic challenges confronting China today, and how the country should respond to achieve its most compelling objectives. As early as 2012, Teng, who is also the director of the Wanb New Economy Institute and delivered speeches at State Council meetings, argued for supply-side reform and put forth the new-supply economics theory.
Shanghai Daily columnist Wan Lixin spoke to Teng to understand more about the challenges facing China today.
Q: In the book "Great Transformation," you explored the economic impact of COVID-19. What is your assessment of the situation?
A: With China's economy growing at 2.5 percent in the first six months, and less than 1 percent in the second quarter, it would be a formidable task to achieve the annual 5.5 percent growth target. Since July, there have been obvious signs of recovery, so if the GDP grows at 6 percent for the second half, then China might be able to manage an annual growth of 4 percent, though even this growth would give rise to a range of economic and social problems, including employment.
China's economy needs a thorough transformation as the momentum for growth has proved unsustainable.
For the past two decades, China's growth has been chiefly driven by investment. But today, with real estate and infrastructure investment playing a lesser role in leveraging growth, more should be expected from consumption. But with Chinese personal income adversely impacted by the slowdown in growth, consumption would be much less or even end up in negative territory in Q2.
If investment proves unsustainable, and consumption remains low, unless incentivized by proffered subsidies or coupons, then economic growth could only hope to be sustained by transformation, in terms of new demand created by new supply, such as the surge in the consumption of new energy vehicles (NEVs), whose sales are expected to reach 5 million units this year.
Bolstered by its huge market potential, China is already a forerunner in innovation in batteries for NEVs.
Chinese enterprises show a similar edge in other forms of new energy, for instance in wind power storage, particularly with regard to household use. China's energy storage products are in high demand, whether at home or in Europe, registering real growth in excess of 100 percent.
While new supply in NEVs, wind power and solar energy, and energy storage is fueling huge demand, it is inadequate for a country with a GDP of 114 trillion yuan (US$17 trillion). Hence the need for more innovation to catalyze deep transformation in the Chinese economy.
Policy-wise, more financial resources should be deployed to shore up consumption, in the belief that only a conceptual leap forward could lead to sustainable growth.
Teng Tai
Q: In your book, while elaborating on the new growth created by the new economy, you also discuss the new economy's tendency to monopolize, and its coercive effect on the traditional economy. What could be its policy implications?
A: In recent years, there has been a tendency – in many sectors – by leading companies, particularly those favored by excessive capital, to quickly establish and consolidate their monopoly status, aggravating the business environment for middle and small enterprises.
In terms of market share, this has given rise to the "2:8" or even the "1:9" phenomenon, that is, the phenomenon of one or two enterprises accounting for 80 or 90 percent of the market share, or profits. Since 2019, in China's stock market, the market capitalization of these companies valued at 50-100 billion yuan has been growing much faster than those companies valued at below 10 billion yuan.
With money, talent, technology, and land fast flowing to enterprises in the dominant position, this, in turn, aggravates the economic imbalance, making it harder for middle and small enterprises to survive. This could be attributed to the following factors: the winner-takes-all effect, which was amplified by the digital economy; the new wealth creation pushed the limits that were formerly imposed on traditional agricultural, manufacturing, and services businesses; the setting up of a unified market, the hubris of capital, and the generous policy support enjoyed by the new economy in its infancy stage.
This monopoly status was fast neutralizing benefits to consumers, with some digital giants abusing their leading position to exact exorbitant "rentals" from companies they were allegedly serving.
With our economy digitalized, and as the commodities and services provided by some leading digital companies increasingly acquire the features of public goods – and given the dependence of smaller enterprises on these leading digital giants – there is a crying need for these market leaders to be subject to rational and stringent regulation and supervision.
Q: How will global inflation affect China?
A: Global inflation, from what we can see now, has had a limited effect on China, and hence the subtitle for the aforementioned book of mine: "In times of great differentiation, how should China cope?"
Global inflation today refers exclusively to developed countries in the West, as represented by Europe and the US, while prices in China remain stable in relative terms. The major problem confronting China now is the economic slowdown.
Normally, global economic trends should converge, meaning that if inflation occurs in the West, it should happen elsewhere.
But the problem confronting us might have stemmed from the different anti-pandemic measures adopted since 2020. In the face of the pandemic, there have been stimulus packages in Europe and the US – amounting to giving out money to consumers – which succeeded in sustaining growth and historical high employment, as well as high inflation.
In China, rather than giving money to people, they have kicked off a large-scale investment binge aimed at stabilizing the supply chain. The fast recovery of production, and lackluster consumption, could account for our predicament today.
While inflation ravages the West, China is actually facing a degree of contraction, and vigorous demand from overseas.
In my humble opinion, your prescription should be made from your own symptoms. While the US is raising interest rates to combat inflation, China should cut rates to stabilize growth, and significantly reduce business costs for financing. Today, with the amount of credit for non-financial enterprises exceeding 100 trillion yuan, lowering the interest rate by 1 percentage point will be tantamount to a reduction of at least one trillion yuan in terms of financing costs for businesses.
Similarly, for Chinese homebuyers and consumers, the lower interest rate will knock 500 to 600 billion yuan off their debts, given the total size of 50 trillion yuan in loans for Chinese consumers.
Q: What is the impact of the pandemic on small and middle firms, and what should be done to substantially help the real economy?
A: The hardest hit in the pandemic is consumption, hence the need to stabilize consumption. The service sector has also taken a severe lashing, hence the need to stabilize the service sector. But whether in terms of consumption or the service sector, the hardest hit are the middle and small enterprises, which are chiefly in the service sector anyway and essentially about consumption. Therefore, giving out consumption subsidies or coupons will be a good idea for middle and small enterprises.
It would also be good if these firms were provided with subsidies so that they would not shut down or fire employees. There is a need for substantial measures, whether to safeguard employment or lend support to middle and small enterprises.
The measures we have taken to stimulate growth so far could benefit the economy in general but are not significant for middle and small businesses because these measures chiefly involve infrastructure projects that benefit larger enterprises involved in construction.
The same can be said of tax rebates, which also chiefly concern bigger enterprises. Those companies affected by the pandemic and remained closed in Shanghai from April to May, are not going to benefit from the scheme for having registered no income at all during that time. For middle and small enterprises to benefit, they would need to be subsidized directly, for hiring, or for their rental.
Q: What is your assessment of the job market today? How do you think the potential labor force should adapt to meet the challenges?
A: The job market is grim, with historically high unemployment rates of 6 percent in general, and nearly 20 percent for young people. Depressing factors come mainly from three aspects.
First, jobs are needed for fresh college graduates, and for young people without college diplomas.
Second, surplus rural labor. With the agricultural sector more reliant on machinery, pesticides, genetics, and chemical fertilizers, the increased efficiency has depressed the need for labor, resulting in a growing surplus.
Third, and more aggravating, would be the surplus labor in manufacturing that came about from growing automation, with each robot having the potential to replace 25 to 50 workers. Given this tendency, it is projected that in the next few years, the number of industrial workers needed will drop from the current 230 million to below 200 million.
That leaves services as the only sector to absorb labor. Today, the service sector accounts for 54 percent of the total GDP, almost double the 27 percent in manufacturing.
Given our traditional stress on production over consumption, and emphasis on investment over consumption – which is right to a degree for being the basis of the national economy – in addressing the employment issue, it is clear there should be more attention to the service sector.
Of course, the development of the service sector and manufacturing are not incompatible and could be mutually beneficial. For instance, for the past 20 years, the weight of services in GDP has risen from 33 percent to 54 percent, while that of manufacturing has dropped from over 30 percent to 27 percent. Significantly, during this time, China also emerged as the No. 1 global manufacturing power.
This is because the service sector could make manufacturing more competitive by delivering more in education, R&D and logistics, all in the category of the service sector.
Q: Could you briefly explain the transformation entailed in your book?
A: At the state level, this involves two major changes.
First is the historical change from investment-driven, to consumption-led, with relevant readjustments in state policy and financing.
The second is the transformation from growth driven by industrialization and urbanization, to one led by services. In the wake of the pandemic, there has been much emphasis on the resumption of operations of manufacturing entities, to the relative neglect of the service sector. As a result, many entities in the service sector remain suspended. It would be unrealistic for the economy to be normal if the service sector, the hardest-hit, and accounting for 54 percent of the economy, remains well below par.
There must be a change in priority from the creation of material wealth, to non-material wealth. The latter, not achieved at the expense of natural resources but satisfying people's spiritual yearning for a better life, would be the future engine for economic growth.
Q: Could you say something about the work you are engaged in?
A: I am continuing studies in the new economy, with particular attention to NEVs, energy storage, wind power, solar power, and metaverse.
