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New Normal of China’s Economy: Unleashing New Vitality and Cultivating New Force for Development
2015-02-13
By Li Wei
Research Report Vol.17 No.1, 2015
The year of 2015 will be an extraordinary year for at least three reasons. First, President Xi Jinping’s scientific exposition that China’s economy is entering the new normal will be adopted as the general idea when we formulate development strategies, plans and policies for the new development period this year. Second, 2015 is not only the last year of the 12th Five-Year Plan (2011-2015), but also the year in which the new Five-Year Plan (2016-2020) is formulated. Third, the year of 2015 is also essential in which a solid foundation should be laid for completing the task of comprehensively deepening reform in 2020. To ensure a well-done job in 2015, a very important prerequisite is to comprehend and follow the general idea of “understanding the new normal, adapting to the new normal, and leading the new normal” for China’s economic development at present and in the future.
I. Adapting to and Leading the New Normal Must be Based on Scientific Understanding of the New Normal
At the Central Economic Work Conference held last month, President Xi Jinping gave a systematic exposition of the economic new normal and summarized clearly the tendency changes brought by the new normal. This is the starting point where we can have the right understanding of the new normal. The new and the most remarkable change in the external environment is the profound adjustment in the world development pattern. When making plans for China’s development in the future, it is crucial to have a sober understanding of the changes in the world pattern of which adjustments are shown in the following aspects.
First, the world economic growth pattern has been changing dramatically. With the impact of the international financial crisis, major economies in the world have adopted various measures to boost economic growth. But the prospects for economic growth are still dim so far, and there is no sign of an up-trend.
Second, the division of labor is accelerating to shape a new pattern worldwide. To catch up with the developed countries, developing countries are accelerating industrialization. While influenced by the international crisis, developed economies have also carried out a “reindustrialization” strategy, resulting in an even more complex division between the developed and developing countries.
Third, the global economic pattern is becoming increasingly complex. Since the new round of WTO negotiation comes to a deadlock due to no breakthrough progress being made, various kinds of regional cooperative initiatives and institutions have been established continuously. This situation deepens regional cooperation, and in the meanwhile it makes world economic governance more complicated, changeable and uncertain, which to some extent, affects the development of international trade.
II. Adapting to and Leading the New Normal Must Accelerate the Cultivation of New dDriving Forces for Economic Growth
Facing new environments, opportunities, challenges and requirements in the economy’s new normal, it is essential to fully understand that development is of overriding importance and is the key to solving all problems of the country. China has to constantly promote development to avoid falling into the middle-income trap and to maintain China’s independent status in the world. It’s well known that development is essential, so China needs to keep its economy growing at a certain rate in the new normal. This means that growth can be relatively slower than before, but it is still a definite must. The growth rate we need, of course, is different from the traditional growth pattern, but it must still be achieved at a rate with quality, efficiency and sustainability powered by new driving forces.
First, a certain rate of growth is inevitable for China entering the new stage. After more than 60 years of development, especially after the reform and opening-up in the past three decades, China has developed into a middle-income country from a low-income one. But its modernization process is not finished yet. In 2013, China’s per capita GDP was about $7,000, accounting for only one-eighth of the US and representing a large gap between that of Chile, Turkey and Brazil. It ranked just around the 80th across the world. To realize the great rejuvenation of the Chinese nation and construct a modern and strong country with wealthy people, China has to maintain sustainable, fast and stable economic growth for the following reasons.
First of all, it is important for China to become a high-income society. From a brief review of the history of the world economic development since the industrial revolution, it is found that the key factor determining a country’s development is whether or not the country’s economy can develop at a certain rate. During the past 30-plus years, China’s GDP had an average annual growth rate of around 10 percent. But this doesn’t mean that the stable growth will last forever. If the economy stopped growing, all efforts for the country’s modernization would be wasted. Second, growth is necessary for social stability. Employment is the essence of people’s livelihood, and it is also the cornerstone of social stability. So, to maintain a stable society, a certain growth rate is crucial for creating jobs. China is facing a decreasing working-age population. Therefore, with regard to the total supply of and demand for labor force, the employment pressure is not huge. However, as the structure of labor supply and demand changes in the future, the structural conflict in the labor market will stand out. In the future, China will have more than seven million undergraduates, graduates and PhD graduates each year who all want decent jobs. Considering the relevance and continuity between economic growth and employment, only when moderate growth connected with the previous growth momentum is maintained, can more and better jobs satisfying social demand be created. The third reason for keeping stable economic growth lies in its essential role of preventing financial risks. The risks of local government debt, financial system and business operation are likely to be covered up during high-speed growth due to the rise of prices, like asset prices. In fact, China’s financial risks have already accumulated to a certain level that can’t be ignored. Statistics published by the National Audit Office of China showed that the government debt at all levels had amounted to 30 trillion yuan ($4.80 trillion) by the end of June 2013, equal to 51 percent of GDP in 2013. If there were a remarkable decrease in economic growth rate, asset prices would shrink substantially, resulting in a sharp fall in the business profit rate and a big impact on fiscal revenue growth. This may turn potential financial risks into realistic threats.
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