Recently, organized by Harvest Capital, a live broadcast with the theme "Outlook for Economic Recovery: Growth Challenges in the Era of System Reset" took place.

Guest Speakers:

- Song Xiangqian, Founding Partner and Chairman of Harvest Capital
- Xiang Songzuo, Economist and President of the Shenzhen Greater Bay Area Financial Research Institute

Compiled by Wang Yaxin, an advanced note-taker.

01 China's Economic Growth Drivers

Song Xiangqian: When we look at economic data, we not only consider the overall figures, such as GDP, fiscal revenue and expenditure, and disposable income.

In terms of growth rate, China's economic growth began to slow down about 10 years ago. In 2013, the concept of the "new normal" was introduced, followed by the emphasis on supply-side structural reforms and high-quality growth.

The pandemic has posed significant challenges to the economy, and we hope for more flexible, scientific, and resilient measures to overcome the economic difficulties.

In the era of system reboot, where does China's economic growth momentum lie?

1. System Reboot

Xiang Songzuo: China's domestic and international environment has undergone historic changes, with the most significant being the drastic shift in Sino-U.S. relations. China's reform and opening-up over the past forty years are closely tied to the development of Sino-U.S. relations.

Without the improvement in Sino-U.S. relations and the establishment of diplomatic ties in early 1979, it is challenging to imagine that China's reform and opening-up would have been so smooth. When we talk about the system reboot today, it revolves around the question of where Sino-U.S. relations are headed.

Because it will affect our path in technological innovation and talent development, impact our comprehensive relations with major developed countries worldwide, and influence our position in the global industrial chain, trade chain, and global monetary system. More importantly, it will have a comprehensive impact on our security.

Not long ago, Vice Premier Liu He spoke about six major security issues at the 16th Academician Conference of the Chinese Academy of Engineering, all of which are closely related to Sino-U.S. relations (life safety, security of industrial chain and supply chain, food security, energy security, cybersecurity, and urban management security).

Whether each security aspect can be achieved depends not on individuals but on technology.

02 Drivers of System Reboot


Xiang Songzuo: The driving force behind the system reboot comes from entrepreneurs.

The driving force behind China's economic growth comes from private enterprises. Vice Premier Liu He often emphasizes that private enterprises contribute 5, 6, 7, 8, 9 (50% of taxes, 60% of GDP, 70% of trade and technological innovation, 80% of employment, and 90% of new enterprises) to the Chinese economy.

In 2021, Chinese private enterprises contributed 59.4% of tax revenue, while state-owned enterprises contributed 21%, with the rest coming from foreign-funded and joint ventures. To find the driving force, it is essential to activate the vitality of private enterprises.

① We have a socialist market economy and always adhere to two unshakeable principles. The Third Plenary Session of the 18th Central Committee of the Communist Party of China proposed that the market should play a decisive role in resource allocation. Essentially, this means allowing entrepreneurs to play a decisive role in market resource allocation.

② In the recent past, there have been many voices condemning, negating, and smearing private enterprises. If a certain enterprise or entrepreneur has problems, the criticism should not be generalized or universal.

③ There is objective discrimination against private and non-state-owned enterprises in many industries, such as a bias in credit resources towards state-owned enterprises.

④ In November 2018, President Xi Jinping held a symposium with private entrepreneurs and outlined six points, with the sixth point emphasizing the need to protect the personal safety and property of entrepreneurs. Today, to activate the economy, we can only do so by energizing private entrepreneurs.

I don't deny the role of consumption vouchers, but they are only auxiliary. We must think about what the core driving force is to promote the economic growth of a country or region.

It can only be entrepreneurs.

Why are people unwilling to consume now?

Because they lack income, and their expectations for future income are pessimistic.

The basic principles of economics tell us that current consumption depends on one's expectations for future income.

If it is pessimistic, consumption will weaken.

Activating consumption also depends on entrepreneurs. If entrepreneurs are energetic, increase investment, boost employment, and provide not only jobs but good jobs, with strong future expectations, consumption will naturally rise.

When thinking about stimulating the economy now, people immediately think of loosening fiscal and monetary policies, issuing consumption vouchers, engaging in infrastructure projects, and promoting investment. These are all auxiliary measures and not the key core driving force.

丨Joseph Schumpeter

His contribution to human thought can be summarized with two key concepts, which I consider to be the most crucial perspective for understanding the human economy.

1. **Innovation and Entrepreneurship:** Keynes never mentioned the term "enterpriser" in his books. However, Schumpeter believed that the fundamental force driving human economic growth is entrepreneurship and innovation. According to him, without entrepreneurs, there would be no innovation, and without innovation, there would be no growth and development.

2. **Creative Destruction:** This concept refers to the replacement of old industries by new ones through the creation of new business models, formats, and companies. This process is known as creative destruction.

The spectacular validation of Schumpeter's theory can be observed in China's economic development over the past 40 years. It has been an iterative process of creative destruction.

One of the most significant changes in China before and after the reform and opening-up was the emergence of a large number of private entrepreneurs. Today, the majority of globally respected companies are private enterprises.

In the United States, massive fiscal deficits and stimulus policies, starting from the Obama era, have led to severe inflation. While Keynesian policies might seem effective in the short term, the long-term consequences far outweigh the positive benefits.

丨John Maynard Keynes

Why do government officials worldwide favor Keynes? Because adjusting monetary policies, such as interest rate reductions and reserve requirement cuts, is relatively simple. However, if you want to encourage a large number of entrepreneurs to emerge continually, the government must decentralize power and retract its visible hand. If the government's authority is too extensive, the growth of entrepreneurs is hindered.

In recent years, Chinese entrepreneurs have mainly emerged in the Yangtze River Delta and the Pearl River Delta because the government has provided a more relaxed environment.

This interpretation is based on the theories of two economists, explaining where the driving force of China's economic growth lies today.

03、Factors Influencing China's Economic Development


Song Xiangqian: In the National Conference on April 29 and the Economic Summit on May 23, we observed the nation's expectations for the economy, undertaking various long-term structural adjustments and arrangements. Initiatives such as establishing a unified national market, reforming factor markets, and implementing policies related to population structure, income distribution, common prosperity, and a green low-carbon economy are part of these structural slow variables that will have a long-term impact on China's economic development.

Xiang Songzuo: In the early stages of development, a country experiences relatively high growth rates. However, as many industries approach saturation in the supply chain, an overall slowdown in economic growth becomes an inevitable trend.

No country's economy can sustain high-speed growth indefinitely. Once economic growth enters a slower phase, the most crucial aspect is to enhance quality to achieve growth.

Population is a long-term variable, and changes in population can influence growth rates. However, a country's ability to achieve developed status depends not on the quantity of its population but on its quality. Many developed countries worldwide are not characterized by large populations.

Therefore, the fundamental driving force for China today is entrepreneurs propelling economic growth.

① The government must work on the four foundations (basic education, basic science, basic research, basic industries) because it is challenging for businesses to engage in these activities. What I hope for in terms of "system reboot" is for the government to fundamentally change its approach and focus on these four foundations.

② Whether a genuine transition to a rule-of-law society is possible is also crucial. The "system reboot" we discuss today involves a shift in mindset, not relying on short-term real estate and infrastructure but genuinely activating growth drivers.

Song Xiangqian: Yes, China is a socialist market economy with Chinese characteristics and is navigating its path cautiously.

Market economies usually prioritize efficiency while considering fairness. Today, the emphasis is on fairness first, simultaneously considering efficiency and the initial, secondary, and tertiary distribution of social wealth.

On the issue of land finance, we have comprehensively and deeply engaged in the systemic economic life, so we have more leverage points and stronger capabilities.

The current direction of reform is the establishment of a unified large market and the reform of factor markets. Often, the initial intentions are good, but the subsequent expansion and contraction of actions result in an undesirable pendulum-like movement.

It's like having two cornerstones – state-owned economy for consolidation and development, and private economy for support and guidance.

As the saying goes, "With constant property, there is constant determination." When property rights are safeguarded, entrepreneurs will wholeheartedly seek development, devote themselves entirely to reforms, and only then can there be long-term expectations.

Why doesn't China have century-old enterprises? Because the intensity of safeguarding long-term property rights and the legal environment still needs improvement.

04 Discussion on the Consumer Sector

I have always believed that the next two to three decades will be the era of the rise of China's consumer service industry, marking the golden age for the birth of super brands and super companies in China.

China needs a social progress movement where productivity matches production relations. Brand entrepreneurs also need long-term development and substantial accumulation before reaching their peak.

China truly started doing business after joining the WTO in 2001, integrating into the global economic cycle and becoming the world's factory, contributing to the global supply chain and value chain.

The impression one gets from the megacities like Beijing, Shanghai, Guangzhou, and Shenzhen can be misleading, making China seem comparable to the United States or Japan.

China is a folded society. While the megacities may seem developed, conducting a month-long field survey in a county town with a population of 500,000 will reveal the true state and level of China.

With over 900 million employed population, the quantity is substantial, but the quality is lacking. This is mainly due to two reasons:

1. Insufficient Time

Since the opening up and reform, entrepreneurs have made progress, but there is insufficient time for further development, improvement in management capabilities, and a deeper understanding of the market economy. While I have a long-term optimistic view, there might be short-term pessimism; macroscopically, we need to learn to accept it, but microscopically, we must be proactive.

2. Transition from a Production-oriented to a Consumption-oriented Society

China is in a period of transition, where the government needs to step back, providing public goods and services, while enterprises need to take on a more important role. Particularly, after emphasizing competition, enterprises no longer distinguish between state-owned and private, domestic and foreign - all have the same identity, that of a legitimate entrepreneur.

Chinese society is transitioning from a production-oriented to a consumption-oriented society. Taxation is an indicator that reflects the issues China is currently facing, and enterprises are indeed under significant pressure with different tax environments.

Emphasizing the importance of valuing consumption serves as a stabilizer and cornerstone for economic development.

As China's economy transforms from a per capita income of 10,000 to 12,000, shifting its GDP from a medium-income to a high-income country, the key sign of success will be the stimulation of domestic demand and the improvement in per capita consumption and disposable income. Because when people have money, they dare to consume and are happy to do so.

In the past, there was not enough emphasis, so tax reduction, profit-sharing, and tax refunds were all directed towards enterprises. Directly supporting livelihoods, directly supporting small and medium-sized enterprises, directly supporting individual businesses, helping them overcome difficulties. Resetting costs too high is a tremendous waste of social wealth.

In the long run, I am very optimistic about the rise of Chinese consumption.

Many investors tend to see consumption and technology as opposing forces, but I believe consumption and technology are twin brothers. In the future, China will only have one main contradiction, which is the dual-drive of consumption and technology.

Consumption provides a ballast and stabilizer for technology, offering scenarios for its application. Technology cannot move into society without scenarios and applications.

Indeed, consumption plays a stabilizing role in supporting technology financially. Technology requires long-term investment, and these investments ultimately come from the fiscal capacity of society.

Technology alone cannot solve employment issues; the progress of artificial intelligence and big data will lead to unemployment for many, and modern services will be crucial. In mature Western economies, the tertiary sector basically accounts for 80%-90%, while China is currently around 60%.

With the end of the demographic dividend, the dividend of human hearts is just beginning; with the end of the traffic dividend, the brand dividend is just beginning. Historical experience has shown that the rise of China's consumption and service industry is an inevitable trend in history, it's not a matter of if, but when.

05 Understanding the Relationship between Institutions and Innovation

Xiang Songzuo: One of the most significant contributions to economics in the 20th century is the field of New Institutional Economics.

In the 1930s, following the outbreak of the Great Depression, the economic situation in Western capitalist countries was dire. The Soviet Union appeared to be thriving, leading some top intellectuals in the United Kingdom and Europe to believe that capitalism was doomed, and communism had triumphed.

In this context, neither public ownership nor planned economies seemed viable. The most crucial contribution of New Institutional Economics was to demonstrate that the private property rights system is a prerequisite for all economic growth and prosperity.

Over the past forty years of China's reform and opening-up, especially in the early stages, the existence of these enterprises and private entrepreneurs would not have been possible without the protection of private property rights.

China needs further reforms and improvements in its legal system, and each of us should strive for this. It's not about becoming a remarkable figure; rather, it's about standing on the side of common sense and truth, choosing the right direction.

Private property rights inevitably imply a rule-of-law society, requiring the protection of property rights through the rule of law. It involves a comprehensive system of institutional mechanisms.

As a simple example, the system that protects private property rights means that I live in this house, and no one can enter without my permission.

06 How to View the Future Development of China-US Relations

Xiang Songqian: The post-WTO era of the global free trade order led by the United States and the global industrial rebalancing have had a significant impact on China. Many people say that in the next three to five years, if we don't stabilize foreign investment and foreign trade, if we don't attract and retain foreign investment, the value chain and supply chain advantage of the past 20 years of globalization will be lost, posing a threat to the Chinese economy.

Xiang Songzuo: The core of the system reboot is the change in China-US relations. The United States is now determined to decouple from China, stating that it will decouple in trade, fully decouple in technology, gradually decouple in education and culture, and essentially decouple in investment. Therefore, the Indo-Pacific framework and the Free Trade Agreement do not include China.

The United States is a hegemonic country, but China-US relations used to be very good. Why has it come to this today?

The United States believes that many of the commitments China made when it joined the WTO have not been fulfilled and has even invented the term "promise installment."

The reason the United States believes it has the ability to push China out is because they know that in many crucial core technological areas, China's dependence on the United States and its allies is far greater than their dependence on us.

This is not something that can be solved by criticizing the United States and embracing Russia today.

The more the United States does this, the more we need to work to avoid this decoupling. From the perspective of national interests, it is crucial to seriously and systematically study the United States. Only by doing so can we understand why the United States is so powerful. It has a large number of entrepreneurs and scientists at all times. To surpass the United States, China must rely on the rise of its own talents.