The report will mainly feature three macro debates. The first is about the conflict between China’s structural reform and economic growth. We believe that overemphasis on GDP growth rate has many perils and hindering structural reforms is inevitably one of them. The second debate is about the middle income trap and we think what Latin America has suffered is not a result of some man-made income levels, but the failure of populist economic policies. Third, we analyze the profound changes of international merchandise trade and cross-border capital flows in the context of populism anti-globalization wave, and we believe China will still appeal to international investment.
- The dual theme and variations: reform and growth. With Chinese economic growth slowing down and multiple risks mounting, the balance between structural reform and economic growth-at-all-costs becomes necessary. Given the declining potential growth rate, pursuing higher growth speed may be difficult and futile. Even worse, overemphasizing the GDP growth rate will jeopardize China’s economic structure. For example, it will force China to reply more on traditional sectors and state-owned enterprises, as well as raising macro leverage ratio.
- Middle income trap: the fate of populist economic policy. Latin American countries have long been stuck at the middle income levels and unable to enter the high income group. In my view, the root-cause of middle-income trap phenomenon in Latin America relates to the left-wing populist economic policies after WWII. Now, we are facing the situation where right-wing populism is on the stage for the first time in a century. It means that the whole set of political and economic theories after the Cold War have begun to lose their explanatory power. But history shows that populist leaders have no ways to realize their grand plans and always fail to keep promises they made to the people.
- Profound changes of global merchandise trade and capital flows. We expect that in the near future, China's export growth, especially exports to the US, will slow down further, hitting the production of China's export manufacturing industries, causing China's import demands to fall, and then affecting other countries’ exports to China, and ultimately lowering global trade. About capital flows, negative interest rates have become the new normal for monetary policy operations in Germany, Japan etc., As one of the few countries with a normal monetary policy, China's assets, both bond and equity, have global appeal especially for long-term institutional investors. In the future, if China further opens up its financial markets and establishes a better institutional environment, I believe that China will still appeal to international capital, which will be the key investment theme that can last for several years to come.
