The key to a country's successful reform lies in whether it can design a more efficient institutional supply. When China's capital formation efficiency gets worse and its debt ratio grows fast, it should activate the market through a deep reform to boost capital formation and allocation efficiency and promote China's quality growth.
In 2015, China's central bank lowered financing costs to reduce the debt burden of enterprises, and its monetary policy went through “two cuts” (interest rate cut and reserve requirement ratio cut) for three times. However, capital efficiency has shown no fundamental change and investment rate has declined. In fact, the macro environment that a high investment model depends on has taken a big change. The trend tells that the changing population age structure has caused the labor supply change; policy and population structure have changed the saving rate; the total factor productivity caused by the labor reallocation pattern will also change.
For most manufacturing enterprises, “demographic dividend” will fade. Labor supply has rapidly declined while labor cost has increased. The whole economy has stepped into the period of increasing production factor cost. The scissors difference between industrial and agricultural products has narrowed driven by the imbalanced demand and supply. Thus, the industrial sectors will likely earn smaller profits.
When the profits of the enterprises drop sharply, some large enterprises hope to engage in capital arbitrage through borrowing. Standard & Poor's report released in June 2014 estimated that the Chinese corporate bond market surpassed the US one year ahead of the market expectation. Its scale reached $14.2 trillion at the end of 2013, more than the $13.1 trillion of the US. The private debt in foreign exchange borrowed by the business sector through irregular channels could have reached a considerable scale (for example, the enterprises raised funds overseas and transferred them to China through currency-swap deals with domestic enterprises' overseas institutions). The ratio of debts and profits of the manufacturing enterprises is increasingly high. The RMB has gradually appreciated (especially in the past three years) and the US dollar lending rate was even lower than the RMB deposit rate because of its relatively low interest rate. So, liabilities in foreign currency can easily bring enterprises significant gains, the main reason why enterprises now love borrowing so much.
Besides, since the global financial crisis, because of the investment expansion led by the local governments, those local governments hungry for capital have received the capital in the forms of off-balance-sheet loans and inter-bank debt financing. A large amount of capital has flowed to the local financing platforms and the industries in which local governments have invested, large state-owned enterprises in particular.
It then caused the big increase of asset-liability ratio of the government and the large state-owned enterprises to a large extent. Their balance sheets apparently deteriorated. Meanwhile, “soft budget constraint” also caused an over support of financial resources and a continuous misallocation to the large state-owned enterprises with an excessive production capacity. Because the relationship between the government and the state-owned enterprises has remained unclear, even after the policy of responsibility for one's own profits and losses was implemented, the enterprises can still enjoy the invisible government guarantee, which greatly increases the asset-liability ratio of these enterprises.
Coming to grips with China's high investment and high savings rate will determine China's future development road. Over the past 35 years, China's GDP growth rate averaged at 9.8% with the biggest contribution from capital accumulation, accounting for about 60%. The rate and structure of investment and savings can be said to be decided by the specific phase of China's economy and demographic structure. With the enhancement of China's economic development and the change of per capita income as well as the change of demographic structure, the rate and structure of investment and savings will become more reasonable. They cannot be deliberately adjusted, nor directly judged by the index of the developed countries that have long entered the stage of post industrialization and high income.
At present, there is no trade-off relationship between China's economic reform and economic growth. China's reform should be interpreted as growth-containing. China must strengthen the supply front to substitute the old supply with the new supply and can really create new supply and efficiency dividends through reform. The reform on the supply front requires the improvement of capital formation efficiency as the core in pushing the reform of the related areas for the next five years.
It is now more urgent to further deepen the reform of investment system, breaking the barriers between different departments and regions, breaking the market segregation, in order to guarantee the power over investment decisions by the enterprises and individuals. That means transforming the formation mechanism of the factor price, eliminating the multi-track system” of the factor price, quickening the formation of a “unified, open, competitive and orderly” market system and releasing the vigor of the principal market investors.
Besides, government investment efficiency should be improved, allowing the government to play an important driving role in technological innovation and R&D investment. Through the macroscopic guidance role of government investment, strengthen the financial support to the R&D activities in the common technological areas of basic research and industrial development. Encourage the government, industry, education, research and finance to jointly establish an innovation alliance. Promote the technological innovation and human resource accumulation as well as the investment in the equipment modifications by the enterprises.
It is more important to comprehensively deepen the negative list system to activate the private investment. In the future, a sharing economy, the Long Tail economy and a zero-cost economy will emerge. A new generation of information technologies such as big data, cloud computing, mobile internet, internet of things and artificial intelligence should comprehensively and deeply integrate with economy, industry and technology, constantly producing new industrial format, new products and new models. To further adapt to the new situation, the already approved negative list system should also strengthen the institutional supply, modify in time the Catalog of the Guidance of Industrial Structure Adjustment and upgrade the new projects in the restricted category and those in the eliminated category in line with the principle of encouraging innovation and lowering the threshold of entrepreneurship. The implementation of the negative list system should also effectively guarantee market access and activate the market potential, restrain local governments' competitive investment, activate the private capital market and further improve the efficiency of social capital formation and allocation.
