Li Keqiang's report on the economic situation at the 16th National Congress of ACFTU

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Editor's note: On October 21, Chinese Premier Li Keqiang delivered a report at the 16th National Congress of the All-China Federation of Trade Unions (ACFTU). In his report, Li expressed his concerns about China's economy and mid to long term trends. He spoke about China's macro-economy, based on his research and analysis, using simple language and anecdotes. The full text of the report is as follows:

Comrades, first of all, on behalf of the Central Committee of the Communist Party of China (CPC) and the State Council, I would like to offer congratulations on the opening of the 16th National Congress of the All-China Federation of Trade Unions (ACFTU), in which the new leaders were elected. I offer my regards to the millions of employees and the officials working in the trade unions and my highest respect to the workers of China, who are the major force behind China's development. At the request of the conference, I would like to take this opportunity today to talk about three major issues, as you are all very concerned about China's economic situation.

First, China's economic development trend

The current economic situation should be viewed as part of the global economic environment. Since the newly elected government took office, we have encountered a complicated environment both in China and abroad. The world economy is sluggish, growth in developed economies declining, it is at best only around 1 percent and at worst there is negative growth. Several of the largest developing and emerging economies have grown no more than 2 percent, with only a few hitting nearly 5 percent. In 2010, we obtained two-digit growth, reaching 10.4 percent. However, in the fourth quarter of last year, because of multiple complexities, growth decreased to 7.8 percent, and it continued to fall to 7.7 percent in the first quarter this year, and 7.5 percent in the second quarter. Why am I talking about Gross Domestic Product (GDP) first? You will probably say we should not focus single-mindedly on GDP. This is true. But we are still a developing country and development is the key and the basis for us to solve all our problems. More importantly, when we focus on GDP, we are actually focusing on employment. We once increased employment by 1 million people for every percent of GDP growth. Due to the economic restructuring in the past few years and the accelerated development of tertiary industry, every one percent of GDP growth has created 1.3 million to 1.5 million job opportunities. The Ministry of Human Resources and Social Security and relevant departments calculated the statistics more than once, on my request. They said that if we are to ensure that 10 million job vacancies are created and registered unemployment remains at about 4 percent in cities and towns, we need about 7.2 percent GDP growth. We need stable growth in order to create employment.

How, then, should we deal with the declining economy? We have two options to maintain economic growth and sustainable employment. One is to increase the fiscal deficit and expand the money supply. This might be effective in a particular year, but fiscal and monetary policies need to work together. Short term stimulus policies cannot be sustained. Our deficits have already reached 2.1 percent. What does that mean? Look at the European Union. It passed regulation to prevent deficits from exceeding 3 percent of GDP. However, many countries did not conform to the rule and their deficits went above the warning line. You all know the consequence: the European debt crisis broke out and has lasted for several years. The economies in some countries have been in continuous decline. Unemployment is growing and the welfare is often not fulfilled. In terms of currency, the outstanding broad money supply (M2) in our country by the end of this March has exceeded 100 trillion yuan, twice as much as our GDP. In other words, there is enough money in the pool. Had it increased any more, inflation would probably also have increased. You all know that hyper-inflation would not only destroy the market, but also have huge negative impact, put pressure on people's lives, and even cause a panic among people.

The second option is to carry on without expanding the deficit and neither loosen or tighten monetary policy. This requires us to maintain sustainable policies. Some of you will say, does this mean doing nothing and just standing where we are? We can't do that. If you don't move ahead, you will be like a cyclist. If he stops, he will sway several times and may fall off. So we have to move ahead, to move forward while maintaining stability, and that is the fundamental point that has been made by the central government. How can we move ahead while maintaining stability? We need to be innovative in our macroeconomic control, taking effective and focused measures according to the changing situation. To do this, we have focused on the following areas:

Firstly, we have struck deep and have endeavored to release huge dividends from reform. Comrades, you may still remember, from the Second Plenary Session of the 18th CPC Central Committee (Feb. 26) to the National People's Congress (Mar. 5-17) and Chinese People's Political Consultative Conference (Mar. 3-12) held this year, we have put forward simplifying governance and decentralizing power. This means both downsizing the government and transforming its functions – and there is huge potential in both areas. As you know, there are the so-called "two hands" – the invisible hand is the market and the visible one is the government. Some people say that the government's "visible hand" has become a "restless hand," because all business has to be approved. You may have seen on the television that someone drew a "Long March Map" of administrative processes, saying that it can take more than 100 official seals to approve a business. On top of that, various inspections and fees have overwhelmed start-up businessmen. One minister told me that he once got a complaint letter, saying that a young man, after he graduated from university in Beijing and returned home, wanted to start his own business in a county town in central China. Considering the various proposals, he chose to open a bookstore in a bid to improve the cultural atmosphere of the county. After borrowing more than 20,000 yuan from his parents and relatives, he spent three or four months getting dozens of papers stamped with official seals, which was necessary to get the license. Not long after he rented a place, inspectors came. A batch of law enforcement officers went in, and said the shop's window glass was the wrong color, as the reflection would cause "light pollution" in the street, and told him to fix it. The young man replied saying he was out of money. The law enforcement officers then offered to take books instead of money, and went away with dozens of books. Did the books contain any adult or illegal content? No. In fact, his was a social science bookstore. Most of his stock was textbooks and he had no problems in this area. Eventually, the graduate could not afford the inspections and chose to close down the store. In my opinion, it was not that his books could not pass the inspections, but that he could not afford to have the inspectors come so frequently. Feeling aggrieved, he wrote a complaint letter, and the ministry sent people to investigate the matter and found that his complaints were true. Think about it. While we are doing our best to create new jobs and facilitate entrepreneurship, numerous approval procedures and inspections are destroying people's enthusiasm for starting their own business. This is why we are determined to simply administrative approval processes. Over the past six months, the central government has put in a huge effort in abolishing or decentralizing 221 administrative approval processes. Simplifying governance and decentralizing power has sent a positive signal to society and the market, which will encourage people to obtain employment or start their own businesses. The other day I checked the business registration authority's data. In the third quarter of this year, the number of new market players increased by 18 percent year-on-year, and private business went up by 31 percent. This is explosive growth compared with previous years, showing that the reform has had a remarkable effect. In light of this, we have taken transforming the government's functions as an entry point for reform. The China (Shanghai) Free Trade Pilot Zone were established with one vital aim for simplifying governance, decentralizing power and exploring a new approach in negative list management. The government should let go of what should be let go and control what should be controlled.

Of course, reform means more than transforming government functions. We have to come up with more solutions. As economic development always requires the financing to support it, in times of difficulty, we have to liquidize existing assets. How do we do this? We agree that the government should carry out an austerity plan if we want people to live a comfortable life. The CPC's central authorities have put forward the "eight rules" on frugality, while the government has also drawn up the "three agreements," to cut public expenditures. Central government agencies took the lead and took a 5 percent cut in their administrative expenses. In this way, we have freed up some money. One part of the savings is being used to fund micro and small businesses by giving them tax cuts. Businesses whose revenue is under 20 thousand yuan are exempt from value-added tax and business tax. This involves 6 million businesses with up to 10 million people.

At the same time, we have reformed the investment system. During this round of institutional reform, we dissolved the Ministry of Railways, changing it to China Railway Corporation. More than two million people worked on the railways. Their contributions to the country and people are so big they are not replaceable. But as the former Ministry of Railways was a government agency with no clear distinction between the functions of the government and enterprises, it had financing difficulties. It had to rely on state financing and the country's sovereign credit to issue bonds – resulting in a slowdown in railway development in recent years. So what should we do? China's railway mileage is only 100,000 km; by contrast, the United States has 250,000-270,000 km. Our railway mileage per capita is also meager compared with developed countries. It is fairly to say there is still great potential for railway development in China, especially in the central and western regions. This is why we were determined to transform the Ministry of Railways into China Railway Corporation. This has separated the functions of the government and enterprises, and enabled railway authorities to gain finance on a larger scale, effectively letting social capital in. Certainly we have to ensure the safety of railways and that of the country. For the returns on building railways, there is a lot of social capital willing to join in the ventures. We need to build a platform and create the conditions to speed up railway development in less developed regions.

But, comrades, this doesn't mean that there will be no pressure if we go with the second option. You may have heard about the so-called "money squeeze" in June. The inter-bank lending rate surged to 13 percent overnight, a remarkable figure bearing in mind that the usual rate is just over 3 percent. At that time, people outside China said that there were "debt defaults and a shortage of cash in the Chinese inter-bank loan system." This was the so-called "money squeeze." Facing this situation, we were not flustered. We neither loosed nor tightened our monetary policy. Yet, frankly, even if we did not get flustered, we had to pay attention to the issue. Why? Let me give you an example. Our communications network is now very developed. Someone just deleted the word "inter" and changed the whole meaning of the sentence "defaults occurred in the Chinese inter-bank market" to "defaults occurred in the Chinese banking market" and spread it online. We all know that the Bank of China is one of the four state-owned commercial banks with the most subsidiaries in the world. As they are in different time zones, banks in China are closed while those on the other side of the world are open. That immediately triggered discussion. "Are there problems in the Chinese financial system?" We responded rapidly by clarifying the facts to the outside world. We need to realize that a single spark can start a major fire. Taking into consideration the overall situation, we asked the People's Bank of China and commercial banks to strengthen their liquidity management and maintained a moderate money supply. In addition, instead of loosening monetary policy, we rationally guided social expectations and enterprise behavior to prompt steady growth. If we had loosened monetary policy or if we had increased the deficit, we could have been accused of the ancient phrase "carrying firewood to put out a fire," -- adopting a wrong measure to save a desperate situation, only to make it worse. Therefore, we have chosen to stick to a steady fiscal and monetary policy.

Secondly, we must be accurate in exercising our strength. Promoting economic development not only requires us to stabilize policy, promote reform and energize the market, but also to strengthen structural adjustment, a key part of which is to expand domestic demand. We have introduced a series of policies and measures to stimulate consumption. We will be issuing 4G licenses shortly. Information consumption and e-commerce are developing rapidly. Online retail trade reached 1.3 trillion yuan in 2012, while the figure in the first three quarters of this year has already approached last year's total, which has boosted employment. Many people work in online sales. They run a small shop themselves, with no rent and low costs. Entrepreneurship is not easy, but by making things convenient and developing new business formats, we can create more opportunities for entrepreneurship. At the same time, we are taking a great effort to develop pension and health services. We are lacking in this area. We have a large surplus of products and we must take measures to absorb this excess capacity. We are short on services. There is large disparity between China's service industry and those in foreign countries. Even compared with countries at the same income level, we are still behind by about 10 percent in terms of our service industry's contribution to GDP. Apparently, in some large cities, if people start to apply for a space in a state-owned nursing home at the age of 50, they will have to wait for 30 or even 40 years. By that time you are more than 80 years old. This shows the serious lack of supply. China's per capita GDP is now more than US$6,000. Our service industry has great potential for development. We should take measures to encourage this, breaking down barriers and absorbing more social capital. At the same time, we cannot abandon the manufacturing sector. While focusing on strengthening energy-saving and environmentally friendly industries through structural upgrading, we must also quicken our conversion of shanty towns. This will benefit the people's livelihoods, and promoting economic growth. In recent years, we have transformed shanty towns and made great progress. But even so, there are still about 40 million people nationwide living in shanty towns, including those in urban, industrial and mining, forest, and land reclamation areas. 70 percent of shanty town residents are retired workers. Not long ago, I visited workers living in a mining shanty town in Western China and talked to an old retired worker. I asked him when he had moved there. He told me that in the 1950s-1960s, he joined the "Third Front" program. He said that in those days, production came first and living conditions came second. He had worked hard all his life, but still had to live in a shanty town when he retired. Out of fear of carbon monoxide poisoning, his family didn't burn much coal in the stove in winter. When they went to sleep at night, they not only had to cover themselves with quilts, but also keep their daytime clothes on. Several hundred people shared one bathroom. The old man hoped he could move into a proper building. This is why we must speed up our conversion of shanty towns. Encouraging structural adjustment will narrow the gap between east, central and western China, and the urban-rural gap, and the dual system within cities.

Thirdly, we must open more to the outside world. After years of efforts, China has become the world's second largest economy. The fact that our export industry has become increasingly competitive has played an undeniable part in this. Many Chinese have been abroad, and we can see products labeled "made-in-China" everywhere. However, due to the sluggish global economy, the World Trade Organization (WTO) has continued to reduce its world trade volume and growth forecasts. A trade war has emerged. Every country is to trying to protect its own industries and job market. But this protection is protection of backwardness, which is something that cannot be protected. As a large country, China mainly relies on domestic demand, but exports should also be kept stable, because about 30 million people are employed directly in the export industry, and about 100 million people in related support industries. A rapid drop in exports would cause problems in employment, therefore we should carry out reasonable foreign exchange, safeguard our national interests and oppose trade protectionism. You probably still remember the China-Europe photovoltaic case that emerged in April and May this year. The European Union attempted to conduct a so-called "double reverse investigation" of China's photovoltaic products. During my tour of European countries, I repeatedly said this would harm others and not benefit the EU. Besides, if the EU really carried out the investigation and imposed an additional 47 percent punitive tariff, our photovoltaic companies would have to withdraw completely from the European market. Therefore I said that, China would take countermeasures. After I returned to China, I went to visit the biggest domestic photovoltaic company. I was told that although there was a two-month mitigation period for negotiations, the company would not be able to survive for more than two months if the tariff were imposed. How many people are involved in the photovoltaic industry? More than 400,000. It is not just an employment problem for 400,000 people. Once we set such a precedent, those countries would never stop. Many trade wars will break out aiming at taking sanctions against China. China is number one in the world in terms of export volume. We must hold high the banner of opposing trade protectionism, and oppose the "double-reverse investigation" and other measures. For this reason, I spoke to the EU leaders from Beijing, negotiated with them and solved the problem through consultation.

During my recent visit to Thailand, I talked about China's high-speed railway, in particular its leading technology, safety and reliance, and our rich operation experience. In "going out", China's companies should not only buy other people's products, but also sell ours, including ordinary items such as clothes, shoes and hats, as well as our middle-and-high-end products. There is great potential for us in this field.

Fourthly, we should guide market expectations. We have done a lot of work, but worries remain in the market. Some worry that our reform measures such as efforts to streamline administration and delegate power, and economic restructuring may not pay off this year. In addition, the predictions of the "collapse of China's economy" have reemerged. Some have said that there will be a hard landing for China's economy. Even some well-known economists predicted that China's economic growth will fall to 3 percent this year. Foreign guests have said the same thing to me. Although we are not pursuing high speed growth and are not relying solely on GDP, a reasonable growth rate is still necessary. We will therefore focus on a reasonable range of economic growth, in order to guide market expectation. What is a reasonable range? I have always been asked where the bottom line and the top limit are. Our bottom line is a growth rate of about 7.5 percent, which was set at the 12th National People's Congress (NPC) this year. This figure is directly related to employment. When I visited export firms in the first quarter this year, I was told that they would not lay off employees even during the hardest periods when export orders remained stagnant. I said thank you on behalf of your employees including migrant workers and the government and I hoped all the other firms could do the same. College graduates are the treasures of our nation. The number of college graduates reached 6.99 million this year, a record high. In this complex economic environment, we have introduced the "College Graduates Employment Promotion Plan" in order to safeguard graduate employment. When a graduate fails to sign employment contracts twice in a row, the government will not stand by. Universities and human resources and social security departments should fully understand the employment status of college graduates, and should provide training, employment guidance and opportunities. We also required that there should be no "zero-employment families." The labor unions have done a lot in this regard. When I worked in northeast China, I visited families where nobody was employed. It was heartbreaking to see all the family members including young men and women unemployed and living with little hope. We must provide security for them. The purpose of maintaining reasonable economic growth rate, as I just mentioned, is to guarantee employment. So, in order to guide the market expectation, we proposed "the reasonable range", which means an economic growth rate of about 7.5 percent as the bottom line and a CPI growth of 3.5 percent at most. As food accounts for 33 percent in our price statistics, we have to make sure the price increase is affordable. There are still a lot of people on low to medium incomes. Over 20 million urban residents and more than 50 million rural residents are enrolled in low-income insurance, 5 percent of the entire population. Therefore, the message is clear, if China's economy moves out of the reasonable range, the government will have to take measures; if not, we will unleash more "reform dividends" and continue our reform to make as much progress as possible. In pushing forward reform, we should encourage economic restructuring and stimulate market vitality in order to cultivate an endogenous driving force of economic growth. This is not to say that the government has no responsibility to stabilize the macro-economy. In fact, the government is not only responsible, but also able to do so. We must make this message clear to the outside world.

I think you are aware of the economic data released in the first three quarters of this year. The economy grew by 7.5 percent in the second quarter and 7.8 in the third quarter. In September, CPI grew to 3.1 percent but its average growth rate in the first three quarters stood at 2.5 percent, within the 3.5 percent limit. More importantly, we created more than 10 million jobs in urban areas, and the registered unemployment rate for urban residents was 4.04 percent in the first three quarters. In the third quarter, industrial electricity consumption grew by 9.8 percent, and the railway cargo volume rose by 7.3 percent, which was in line with the overall pace of economic growth. I read the foreign media today, which said that China's economic data looked upbeat. Some foreign economists wrote objectively that the "collapse of China's economy" prediction had been proven wrong once again and those who believed China's economy would have a hard landing would be disappointed. Therefore, China's economy is stable and is on the rise. We have the ability to fulfill our major social and economic development goals this year. Where does our confidence come from? I think it comes mainly from the great working class, from the diligence and wisdom of hundreds of millions of Chinese workers who all of you here represent. You may remember that in 2009, China's economy fared well after the financial crisis in 2008. Photos of Chinese workers including migrant workers appeared on the front cover of Time magazine. They believed that China's high-speed growth was supported by Chinese workers, largely because their diligence, diligence, diligence! They admitted that Chinese workers are the most diligent in the world. But I told them that they forgot another word, which I said to them three times: wisdom, wisdom, wisdom!

Of course, we don't just want to keep the economy stable, but also strive for social progress. In fact, we have tackled an array of challenges in the course of social progress, including natural disasters, in order to maintain economic stability. For example, after an earthquake broke out in Sichuan Province's Lushan County this year, the CPC Central Committee and the State Council galvanized efforts on all sides to provide disaster relief in a timely, effective, scientific and orderly way. When I arrived there, the road was blocked and vehicles could not get through at all. But soon helicopters arrived at the epicenter and the leadership from neighboring provinces also came, demonstrating the spirit of all sides coming to help when one is struck by disaster. The immediate response of the Sichuan Province also demonstrated that what had been learned from the Wenchuan earthquake had been applied to the full. We made a decision right on the spot: Sichuan would lead the disaster relief efforts while the State Council would assign a work group in support, which would ensure scientific and orderly disaster relief. Sichuan was the demander while we were the supplier -- Sichuan made requests and we met them. The relief work was carried out in an orderly manner and the death toll was kept at the lowest level. The central Party leadership then decided that future disaster relief work should be carried out under the same mechanism. We also controlled the H7N9 flu in a scientific and orderly manner based on our experience in combating SARS and influenza.

We have also spared no effort to solve problems that the people are concerned about. Take air pollution as an example. We have produced the Action Plan for Air Pollution Prevention and Control, attempting to improve Beijing's air quality in three to five years. We will make great efforts to deal with the sources of pollution, but of course it will take some time. We have also intensified our efforts to supervise drug and food safety. The China Food and Drug Administration was set up during the cabinet reshuffle earlier this year, integrating the work done by several departments in the past and rectifying previously undefined obligations and responsibilities. We also dealt with the baby milk powder issue. We supervised the way we do with medicine, to ensure its safety. We have not only encouraged economic and social development, but have also coordinated the two. Only in this way can we ensure long-term, sustainable and healthy economic growth.

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