The digital economy is transforming the landscape of the real economy, according to experts at a seminar held in Beijing in early February.

At the seminar, the Academic Division of Economics at the Chinese Academy of Social Sciences (CASS) and JD Group signed a cooperation agreement.

Cai Fang, CASS vice president, analyzed the current Chinese economy and the digital economy’s effect on it. The drop in the working-age population has impacted the supply side, causing the potential growth rate to continue to decline. Economic growth driven by labor and capital investment is no longer sustainable, and future economic growth will be driven mainly by an increase in productivity. The aging of the population also affects consumer demand in terms of total population, age structure, and income distribution, and has an impact on the demand side.

In theory, the digital economy connects both sides of supply and demand. Its fundamental starting point, and biggest advantage, is to increase total factor productivity to solve the challenges faced by the supply side, Cai noted. The development of the digital economy is an effective measure that organically combines the implementation of a strategy which expands domestic demand with the deepening of supply-side structural reforms. As such, innovation and high-quality supply can lead and create new demand.

However, these functions of the digital economy are not realized naturally, Cai warned. During its development, attention must be paid to prevent the rigidity of resource allocation within sectors and the “reverse kuznetsization” of resource allocation among sectors. In addition, it is important to avoid blindly following the trickle-down effect hypothesis.

All in all, a fully competitive real economy is still the cornerstone of the digital economy, Cai concluded. It is necessary to expand comparative advantages through reform and opening up, remove institutional barriers to the flow of production factors among industries, increase redistribution, and guide the development of the digital economy with new development concepts.

Li Yang, former CASS vice president, focused on the problems of low and even negative interest rates that have emerged since the end of the 20th century. He said that this unusual phenomenon can be explained with three economic concepts. The first is the real economy. Deterioration of the demographic structure and slowing down of technological progress have slowed the real economy’s growth and reduced the rate of return on capital. This is manifested in macroeconomic operations as the long-term increase of total savings over total investment, which will consequently lead to low interest rates.

The second consideration is the financialization of the real economy. Since the global wave of financial innovation and financial liberalization in the 1990s, the real economy has gradually become financialized. The first financialization was housing, followed by staple products, and now digital products—such as Bitcoin—are having their turn. Such continuous deepening has caused changes in the operating laws of the real economy, and macroeconomic regulation and control often appears to be “targetless,” Li said.

The third concept to observe, is the change in monetary policy’s logic. Monetary policy circles have reached a consensus that the great economic crisis of the 1930s spun out of control mainly because monetary authorities adopted a tight monetary policy when the entire economy most needed liquidity. Based on this understanding, most monetary authorities in various countries today do not hesitate to adopt a loose monetary policy when there is a downward trend in macroeconomic operations, even allowing a surplus of money to enter into the economy. Excessive liquidity naturally causes the interest rate benchmark to move downward. As such, solving this problem obviously requires multiple measures.

Wang Yiming, vice-chairman of the China Center for International Economic Exchanges, called for fostering an innovative ecosystem under digital conditions. Digital innovation puts forward new requirements for institutions and policies. It is necessary to strengthen the competition policy’s fundamental position, build a policy environment centered on competition, and reduce the crowding out effect of selective policies. It is necessary to avoid setting policy thresholds simply based on the scale of enterprises, profitability, and the number of patents, while preventing small-scale enterprises from being discriminated against by policies, and creating a more dynamic innovation ecosystem.

China’s digital economy has been at the forefront of the world, and the digital economy has profoundly changed the development process of China’s real economy, said David Daokui Li, director of the Institute for Chinese Economic Practice and Thinking at Tsinghua University. He suggested establishing a digital financial regulatory agency to optimize regulation of the digital economy, while focusing on protecting consumers, finance, and small and medium-sized enterprises to promote the sustainable and healthy development of the digital economy.

Huang Yiping, deputy dean of the National School of Development at Peking University, said that the big data model solves two major problems faced by traditional credit services: difficulty with customer acquisition and risk control. It also greatly improves financial inclusiveness. Through digital technology, financial companies can reach more small, medium, and micro enterprises, as well as rural people, agriculture, and rural areas, at a lower cost. Digital finance has not only changed people’s lifestyles, but also affected the development process of China’s economy.

Shen Jianguang, vice president of JD Group, introduced the Group’s use of big data for economic analysis and research. In his view, big data generated by internet platforms have shown great economic and social value, and are worth in-depth development and research in academia and industry.