1、Facing an L-Shaped EconomyEditors Note： China has entered the 13th Five-Year Plan period （2016-20） ， which is pivotal for building a moderately prosperous society， and this year its also confronting the arduous task of carrying out supply-side structural reform. In the first quarter， China managed s
2、ound economic growth， structural upgrading and the improvement of peoples livelihoods despite numerous complex domestic and overseas factors. At the same time， it still faces a series of deep-seated contradictions and problems. How can the Chinese economic restructuring be assessed and how will the
3、reforms be carried out？ In a recent interview with the Peoples Daily， a top government source shared views on these issues. This is an edited excerpt from the interview： Overall economic situation Q： In the first quarter， Chinas GDP grew 6.7 percent year on year， which remains within the reasonable
4、range and is higher than market expectations. Other economic indicators showed a recovery. These， in the eyes of some people， indicate “a good start”or a moderate rebound of the economy， which bodes well for future growth. Some optimists even believe Chinas economy has bottomed out and will see a “U
5、-turn.” Is it safe to say that Chinas economy is turning around？ Whats your prediction on the short-term and mid- and long-term trend of Chinas economic growth？ A： By and large， Chinas economy has realized stable growth since the beginning of this year. The overall situation is in line with expectat
6、ions， with some sectors faring better than anticipated. However， inherent problems in economic development still persist， and new challenges have emerged. Given that， its hard to simply describe the situation as “a good start”or a moderate rebound. To make an accurate analysis， one should take into
7、consideration Chinas development phase as well as the international context it operates in. In the first quarter， some sectors realized stable growth as hoped， and there was even a recovery in some areas. With GDP growth standing at 6.7 percent， employment was stable， incomes increased， economic and
8、 financial risks were brought under control. Furthermore， the price of some industrial products bounced back， the performance of industrial enterprises began to rally， and fixed assets investment picked up. The number of newly started projects also increased， and supply and sales were robust in the
9、real estate market with the acceleration of de-stocking measures. Progress was also made in sectors that we had hoped to boost. The service industry accounted for a larger share of the national economy， new models and types of businesses sprouted up， and some high value-added and hi-tech products ex
10、perienced rapid growth. In addition， household consumption kept upgrading， and domestic tourism boomed during the May Day holiday （April 30-May 2）. Moreover， the Yangtze River Delta and Pearl River Deltatwo developed regions in east and south China， respectivelytook the initiative to adapt to the ec
11、onomic “new normal”by pursuing innovation， quality and efficiency， and saw their economic growth become more stable. Beyond that， all regions and sectors became more conscious of the importance of the supply-side structural reform， and carried out the reform according to requirements from the Centra
12、l Government， which has yielded some results. However， there is no denying that some inherent problems have not been completely resolved and that new ones have surfaced. Stable economic growth still relies heavily on investment. In some regions， the balance between financial revenues and expenditure
13、s faces great pressure as economic risks have increased. Whats worse， as investment from private enterprises declines precipitously， risks from real estate bubbles， excess production capacity， bad loans， local government debt， and volatile stock， foreign exchange and bond markets， as well as illegal
14、 funding， have all increased. In regions featuring a lower degree of marketization， lowend industries and single industrial structure， downward economic pressures are accumulating， employment problems are becoming prominent and social conflict risks are growing. Therefore， improvements are necessary
15、 to establish a foundation of economic stability. More progress should be made in solving supply-side， structural and institutional problems， regardless of how long it may take to accomplish such a task. So far， the new growth engines are not strong enough to prop up stable economic growth. All thin
16、gs considered， Chinas economy is likely to experience an “L-shaped” trajectory， rather than a “U-turn” or a “V-shaped” rebound. Whats worth mentioning is that the L-shaped trend will not come to an end within one or two years. In the next few years， sluggish demand accompanying overcapacity is not l
17、ikely to experience a significant improvement， and the economy is unlikely to register consecutive rapid growth following a rebound as seen in previous years. We are nonetheless confident in the future of Chinas economy. Given its huge potential and strong elasticity， Chinas economic growth will not
18、 suffer a sharp slowdown. Therefore， one should not be overly optimistic or distressed about the rise or fall of some economic indicators. While Chinas overall economy shows signs of recovery， economic development remains polarized with growth in east coastal areas picking up and other regions strug
19、gling. What does this imply？ This is inevitable for the economic development of a market economyresources always flow toward high-yield fields， which eventually results in excess production capacity. Excess profits will consequently diminish due to over-competition. Then， some resources will shift t
20、o new fields， leading to innovation， and other resources will stay where they are. That is how economic development becomes polarized. Under the “new normal， ” China urgently needs to optimize resource allocation， foster new growth engines， and form new industrial structures. Some regions， sectors a
21、nd enterprises will stand out. Those that dont fare so well will learn a lesson and will have to adapt， which is a good phenomenon. Since Chinas reform and opening up in 1978， its economy has become polarized. In this process， a batch of vibrant regions， competent enterprises and famous brands have
22、sprung up. After the global financial crisis in 2008， the world economy has also become increasingly divided. Entering the “new normal， ” Chinas economy has begun to experience further polarization. Last year， the Central Government noted that businesses which chose to adapt themselves to the “new n
23、ormal” and value innovation， quality and efficiency experienced prosperous development， while those failing to do so confronted great pressures. This year， the trend continues and has become more conspicuous. In the foreseeable future， more energetic regions， internationally competitive industries a
24、nd enterprises will emerge， while some regions， industries and enterprises will find it more difficult to survive. Its better to confront such challenges and find out solutions rather than putting up with the problems. Now， the people and government officials in these regions， industries and enterpr
25、ises are trying to get rid of any delusions， become self-reliant， and embrace reform and innovation in an effort to catch up. Macroeconomic control Reviewing the economic situation in the first quarter， we found that the rebound of fixed assets investment played a leading role in stabilizing economi
26、c growth. Therefore， some people argue that a short-term stimulus is still viable and effective and should be employed again. What do you think about that？ Its a question arousing great attention both at home and abroad. Whether or not China is able to properly handle such a policy will have both sh
27、ort-term and far-reaching impacts for the countrys future. To promote healthy macroeconomic development， measures should be taken from the perspective of both the supply and demand. The focus changes with different development stages. At present and for a long time to come， China will take steps to
28、push forward supply-side structural reform while expanding aggregate demand. Thats to say， the major issue lies in the supply side， and carrying out supply-side structural reform should be the main target. Since the demand side can only create the environment necessary to settle the main problem， in
29、vestment should be properly expanded. While advocating the new development concepts of innovation， coordination， green， opening up and sharing， adhering to the general principle of seeking improved stability， and carrying out a stable macroeconomic policy， accurate industrial measures， flexible micr
30、oeconomic policies， practical reforms and inclusive social security， three points should be highlighted in formulating the macroeconomic policy： The first is expanding the aggregate demand and sticking to a proactive fiscal and prudent monetary policy. Another is firmly pushing forward supply-side s
31、tructural reform by focusing on rectifying the mismatch in supply-demand structure and allocation of production factors. The five tasks of de-capacity， de-stocking， cutting costs， de-leveraging and shoring up weak growth areas should also be carried out. In addition， efforts should be made to promot
32、e the positive anticipation of and confidence in economic development. Looking back at the first quarter， we found that some problems were being settled， and at the same time， some new problems emerged. What should be the focus of macroeconomic control？ Different countries face different difficultie
33、s，which also vary with different stages of development. The question is how to correctly analyze the difficulties and find out solutions. Since Chinas reform and opening up， the nation has been courageous and has persevered in confronting and overcoming difficulties and has made significant progress
34、 on this front. Admittedly， a number of problems are emerging from Chinas economic development. For one thing， the pressure of an economic slowdown is looming. For another， the real economy faces high leverage. If we rush to alleviate the downward pressure， the leverage ratio will rise even further.
35、 Therefore， efforts should be made to analyze the problems in order to discover the crucial factors needed to surmount the dilemma. In China， the contracting labor force and upgrading industrial structure will help make sure that even if there is a remarkable slowdown， employment will remain stable，
36、 not to mention that the chances for a sharp slowdown are small. However， high leverage will definitely lead to high risk. If its not well controlled， high leverage may spark a systematic financial crisis and negative economic growth. Many might lose their savings. Therefore， policies targeted at th
37、e stock， foreign exchange and housing markets should be committed to resuming their functions and respecting their rules of development， rather than being used as an instrument to maintain economic growth. Stock market policies should resume their financing functions， protect the rights and interest
38、s of investors， and give full play to the regulation function of the market mechanism. They should also improve the fundamental systems concerning issuance， delisting and trading， strengthen market supervision， elevate information disclosure quality， and crack down on insider transactions and stock
39、price manipulation. Foreign exchange market policies should give priority to the improvement of the monetary policys autonomy and give way to the self-correcting mechanism of the international balance of payments. They should also facilitate the formation of an exchange rate operating mechanism that is flexible in both directions and is based on market demand and supply. For the real estate market， excessive inventory should be reduced in the process of pursuing people-oriented urbanization. In carrying out these policies， attention should be paid
