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Third Circulation Advocated

Oct 29-2021   



Both internal and external circulations are important for China’s economic growth, but to break away from current quagmires, a third circulation needs to be improved, says Dr. Xu Gao, Assistant President of BOC International (China) and part-time professor of the NSD. He advocates facilitating the income circulation between the corporate department (in particular SOEs) and the household department through income distribution reforms, so as to increase household incomes and consumption.

 

Speaking in an NSD event, he says that viewed from long-term economic cycles, China’s economic performance is subject to the influence of both overseas demand and domestic macro policies. Its dependance on external circulation will continue for a fairly long time if a third circulation – that between corporate and household departments – cannot function smoothly.

 

Only when more corporate revenues flow to households and turn into consumers’ incomes and consumption will China’s internal circulation run properly and reduce its reliance on external demand and domestic stimulating polices. That will in turn push the Chinese economy to a more endogenous and sustainable mode of growth, says Dr. Xu.

 

A range of statistics points to the fact that Chinese household incomes have little to do with corporate profits, unlike what’s assumed in Western economic theories. Chinese SOEs account for 54% of total corporate assets while foreign-invested companies and those with Hong Kong, Macao, and Taiwan investment amount to 10%; therefore, the other types of domestic firms hold 36%, which is what Chinese residents have an actual stake in. Take out the business interests of billionaires like Jack Ma, then only a paltry amount belongs to the ordinary residents.

 

The ‘pierce the corporate veil’ phenomenon, i.e., the positive link between corporate profits and household incomes, usually leads to negative correlation between household savings and corporate savings. However, the two are both high in China. The ownership structure of SOEs means that their profits aren’t channeled to households. As a result, even if the SOEs had a bumper year, the common folk wouldn’t spend more and save less.

 

On the other hand, Chinese investments are insensitive to changes in interest rates and have stayed at a high level for years, resulting in an output that greatly outstrips demand. The disequilibrium between demand and supply has become an entrenched problem.

 

Dr. Xu agrees with the viewpoint that the Chinese GDP still has the potential to grow at 8% annually in the long term, but he emphasizes the pre-condition of generating sufficient market demand. He believes that China should follow Keynesian prescriptions and invigorate the economy through the creation of demand. That will bring out the multiplier effects of overseas demand and domestic macro stimulating policies.

 

Third Circulation Advocated

Oct 29-2021   



Both internal and external circulations are important for China’s economic growth, but to break away from current quagmires, a third circulation needs to be improved, says Dr. Xu Gao, Assistant President of BOC International (China) and part-time professor of the NSD. He advocates facilitating the income circulation between the corporate department (in particular SOEs) and the household department through income distribution reforms, so as to increase household incomes and consumption.

 

Speaking in an NSD event, he says that viewed from long-term economic cycles, China’s economic performance is subject to the influence of both overseas demand and domestic macro policies. Its dependance on external circulation will continue for a fairly long time if a third circulation – that between corporate and household departments – cannot function smoothly.

 

Only when more corporate revenues flow to households and turn into consumers’ incomes and consumption will China’s internal circulation run properly and reduce its reliance on external demand and domestic stimulating polices. That will in turn push the Chinese economy to a more endogenous and sustainable mode of growth, says Dr. Xu.

 

A range of statistics points to the fact that Chinese household incomes have little to do with corporate profits, unlike what’s assumed in Western economic theories. Chinese SOEs account for 54% of total corporate assets while foreign-invested companies and those with Hong Kong, Macao, and Taiwan investment amount to 10%; therefore, the other types of domestic firms hold 36%, which is what Chinese residents have an actual stake in. Take out the business interests of billionaires like Jack Ma, then only a paltry amount belongs to the ordinary residents.

 

The ‘pierce the corporate veil’ phenomenon, i.e., the positive link between corporate profits and household incomes, usually leads to negative correlation between household savings and corporate savings. However, the two are both high in China. The ownership structure of SOEs means that their profits aren’t channeled to households. As a result, even if the SOEs had a bumper year, the common folk wouldn’t spend more and save less.

 

On the other hand, Chinese investments are insensitive to changes in interest rates and have stayed at a high level for years, resulting in an output that greatly outstrips demand. The disequilibrium between demand and supply has become an entrenched problem.

 

Dr. Xu agrees with the viewpoint that the Chinese GDP still has the potential to grow at 8% annually in the long term, but he emphasizes the pre-condition of generating sufficient market demand. He believes that China should follow Keynesian prescriptions and invigorate the economy through the creation of demand. That will bring out the multiplier effects of overseas demand and domestic macro stimulating policies.