The outlook of China’s economy for 2019 was a hotly debated topic at a recent high-profile seminar.

Convening its annual meeting on February 16, the Beijing-based Chinese Economists 50 Forum, an academic grouping composed of 50 prominent economists, officials and entrepreneurs, looked at how China can tide over the current economic downshift that caused the gross domestic product to moderate to 6.6 percent in 2018 from 6.9 percent a year earlier.

Wei Jie, professor at Tsinghua University’s School of Economics and Management, said he was “prudently optimistic” about China’s economy for the current year.

He aired the same remarks during a November speech delivered at Hupan University in Hangzhou, capital of Zhejiang Province.

Wei acknowledged problems such as soaring business costs, corporate defaults and irrational stock market performance, saying they combined to depress growth.

Nonetheless, “China’s economic fundamentals remain strong,” he insisted, pointing to the insatiable desire of ordinary Chinese to become rich.

Despite the faltering growth, China remains the world’s second-largest economic entity with 1.4 billion people and a growing middle class.

Wei dismissed the notion that consumers were trading down just because there was an increase in sales of cheap foods like instant noodles and pickled vegetables over the last few months.

‘Sound fundamentals’

He said during fact-finding trips he found businesses had instituted a series of cost-cutting measures to offset the impact of rising labor costs. But industries were not leaving China, or relocating to less expensive regions, Wei noted.

The other two things that could be said in China’s favor is the willingness to press ahead with reform and opening-up, and the country’s level of infrastructure.

That Chinese growth rate decreased despite “sound fundamentals,” Wei explained, can be blamed on multiple problems arising at the same time.

Individually, they can be tackled with ease. But collectively, they tend to be mutually intensifying.

The first challenge is financial risk prevention. China’s efforts to deleverage has proved to be a double-edged sword that cuts both ways — mitigating the risks while also hurting bottom lines.

Another challenge has to do with the ongoing supply-side reform.

The reform entails looking for new growth engines to replace floundering industries like real estate and traditional manufacturing that used to be a chief propeller of growth.

Wei said he expected three pillar industries to emerge along the way.

The first is strategic industries like new energy, new materials, bio-engineering, artificial intelligence, mobile Internet and autonomous driving, among others.

The second is services tied to industrial production, consumption and spiritual enrichment.

The third is modern manufacturing, such as the production of aerospace and high-speed rail equipment.

As the Chinese economy shifts to lower gear, short-term pains are inevitable. The rise of new industries will take time, and at the moment the dynamics they unleash is unable to replenish the lost momentum in the economy, said Wei.

China’s greater emphasis on environmental protection has also taken its toll but in the better sense of the word. A slew of official regulations governing the proper treatment of sewage and other industrial pollutants have compelled businesses to buy cleaning equipment that eventually hiked up their costs.

“In the past, we said ecology and environment should give room to development. Now it’s the opposite,” Wei observed.

Another factor clouding the economic outlook is the trade dispute with the United States.

Unlike some pessimistic pundits, Wei believes that damage caused by the trade row is manageable.

His confidence hinges upon the fact that exports play a dramatically reduced role in driving growth. The ratio of exports to GDP peaked at 30 percent in 2008 but began to fall steadily thereafter. It stood at 15 percent as of 2017.

Ten years ago, China would be easily vanquished if the US were to wage a tariff war, said Wei. But China is now on firmer ground after systemic efforts are made to reduce its dependence on exports. The bigger blow of the trade tensions appears to be psychological, as media coverage of new US tariffs contributed to the slide of China’s stock market.

But whatever the result of the trade talks between China and US, Wei noted that China definitely won’t enter a so-called period of recession, as alarmist market watchers have warned. Instead, the country will be grappling with a period of restructuring that he expects to last at least three years. He suggested a three-pronged approach to overcoming the difficulty. First, China should stabilize the financial market to prevent turmoil and volatility.

This means the financial authority will have to adopt a moderate monetary policy and pump liquidity into the financial system at a time when many businesses are cash-strapped.

Steps have already been taken. China lowered the reserve requirement ratio by 0.5 percentage point, releasing 800 billion yuan (US$120 billion) into the market.

Support the real economy

Wei pointed out that banks need to tweak their lending policy to support the real economy and private sector. Specific criteria ought to be set out as to how much of new bank loans should go to smaller businesses.

Another uphill battle is to deleverage the economy. The mounting overall debt ratio has raised the alarm for Chinese policymakers as household and government debts add up to 250 percent of the country’s GDP as of 2017.

It is generally believed that a debt-to-GDP ratio of 270 percent is a catalyst for a financial meltdown. Chinese regulators have thus rolled out measures to halt the incurring of new debts, especially on the part of local governments and state-owned enterprises (SOE).

State authorities have made it clear that they will no longer bail out highly-leveraged SOEs should they defy warnings against reckless borrowing.

Wei argued that the financial watchdog will also be tasked to stem risks from the housing sector. Both a steep rise and fall in home prices are undesirable.

A real estate sector gone awry is widely blamed for triggering the financial crises and precipitating a boom-to-bust cycle in a few countries.

Japan staggered into a lost decade after its bubble economy collapsed in the early 1990s, while the subprime mortgage crisis sent the US and global economy into a tailspin in 2008. Wei said these are cautionary tales for regulators to heed.

A crash of home prices will cripple the housing market and take banks with it.

Apart from stabilizing the financial market, another imperative is to stabilize growth rate, said Wei. In his opinion, if the growth rate plummets, it might frustrate the overall expectations for the economy to bounce back, thereby hurting the economy.

The 67-year-old economist explained that China must adopt a more robust expansive fiscal policy, as the room for monetary policy to work magic is actually “very limited.”

A centerpiece of an expansive fiscal policy is to cut taxes, which include across-the-board reduction of taxes ranging from corporate tax to individual income tax.

In what appears to be the first in a series of moves to cut tax burden, national tax authority adjusted the tax regime in January to make household outlays like rent, children’s education and mortgage partially exempt from taxation.

Wei hailed the tax cut as a move in the right direction and expected more to come.

He, again, advised the top leadership to create conditions for China to thrive in the three pillar industries he outlined. “These are areas from which China may emerge as a world leader,” he said.

The Hon Hai Lecture professor who teaches innovation and strategy at Tsinghua added that the government can finance certain strategically important sectors and choose to quit at certain points after these sectors find success.

The last priority on Wei’s list is to stick to the doctrine of opening-up. China should handle its relations with the US with the utmost caution, first by realizing that the trade tensions represent a broader US attempt to overhaul the bilateral relationship than just redress trade imbalances.

According to Wei, China should seize the chance to spontaneously open up its market to foreign investors. This is something that is already happening.

As one of the world’s largest consumer markets, China can only benefit by becoming more open and intertwining its interests with those of other countries.

Finally, Wei envisioned a bigger role for the Belt and Road Initiative, but thorny issues about infrastructure, cross-border financial and legal services must be resolved before BRI can make substantial progress and become a lever for greater market access.

If executed well, the three imperatives will guide China into a phase of new, higher-quality growth. Newfound openness will inject vigor into the domestic market and catalyze long-awaited reforms, Wei said.