China has entered into a new normal of slower but higher quality economic growth. This is the necessary result of development in the past, yet heralds a new stage of growth that is full of great change and creativity. It is important to understand and adapt to such a new normal. Even more important is to lead the new normal and promote China's economic development to a new stage.

A new normal is a necessary stage for China's economic development to reach a higher stage

A new normal has emerged as China's economy finishes its growth transition and enters a stage of medium-high growth. The economy entering the new normal fits into the pattern of economic development in countries that are catching up with developed ones. It is a necessary result of change in the connotations of late-comer advantages and strength as well as change in the mode of technological progress. In essence, it implies that economic development has entered into a higher stage.

Economic growth in the modern sense started in the 18th century, with industrialization as a mark. Since then people have created more wealth than what had been created in the past thousands of years. All industrialized countries, old and young, have shown distinctive features in this stage of economic development, with their experiences expounded on in many economic theories. Such features are especially evident in the economic journey of countries that are catching up with developed ones. Such countries enjoy late-mover advantages.

The so-called late-mover advantage means that latecomers can follow a path that has been blazed by others so there will be fewer uncertainties in economic development. Other examples include that late-mover countries can utilize a number of new technologies in a short period of time although it might take a longer time for them to emerge in developed countries and that the long evolution of production and consumption in developed countries could be realized in a much shorter period of time in late-mover economies. For example, almost 100 years passed in the US for households to transition from buying cars to televisions, refrigerators and computers, and then to buying smart phones. In China, the span of time for most ordinary Chinese people to have such goods was reduced to some 20 years.

It is because of the late-mover advantage that less developed countries will go through a stage of high-speed development as they try to catch up with developed ones, with the gap of economic development and people's living standard with developed countries diminishing rapidly. When the advantage gradually dwindles, economic growth for late-mover growth will noticeably slow down.

For industrialized economies, their economic growth started to slow down when their per capita GDP reached $10,000 to $12,000 in terms of purchasing power parity. Germany, Japan, the Republic of Korea as well as Taiwan have all gone through such a stage. The Chinese mainland, despites its development features, is not an exception.

Now that China's per capita GDP is approaching $10,000, features of a slowed economy are becoming more evident. The Chinese economy entering into a new normal of medium-high growth results from the pattern of late-mover economic development in the industrialized age. China has not finished its industrialization and urbanization. Its per capita GDP is moving from the level of mid-income countries to that of high-income ones, so a new normal of economic growth is a direct result of the country's industrialization drive. In other words, a new normal is a necessary stage that the economy has to go through before it moves into a more advanced stage that features more complicated labor division and a more reasonable structure.

The core feature of a new normal: Connecting new driving forces with old ones

The most fundamental factor that initiated China's rapid economic development is reform and opening-up. Reform of economic growth removed the constraints imposed by the planned economy and thus unleashed the enthusiasm and vigor of both individuals and companies. Opening-up offered China a chance to integrate into the world and engage in global labor division with its own advantages. Reform and opening-up promoted and benefited each other, bringing about unprecedented economic prosperity.

Facing the outside world, China attracted international direct investment and industrial transfers with its cheap labor. Its rapid integration into the world introduced a great deal of surplus rural labor into the manufacturing sector. The move helped advanced technology spread from the trade sector to non-trade sectors and acquired a large amount of much-needed capital for China's economic construction. Domestically, the government abandoned plans from the period of the planned economy stressing heavy industry while slighting light industry and gradually scaled up its investment and production based on market demands.

Thanks to China's huge population, the domestic market developed fast and the effect of the scale-economy was in full swing. This coupled with China's unique system of competition among local governments resulted in rapid and widespread adoption of effective measures and development patterns and therefore sped up the process of the country's economic development. Cheap yet fine labor, technology ready for adoption, huge market demand, and a powerful government as well as its ability to mobilize resources have been major driving forces for China's rapid development in the past three decades.

Those driving forces, however, have seen dramatic changes after years of rapid development. First, a rapidly aging population is fueling the already surging labor cost. Chinese labor is now obviously more expensive than that in India, Vietnam and Bangladesh and almost as expensive as that in Mexico. That's why some labor-intensive industries are flowing out of the country. Second, productivity was once improved by either labor transfer from the agricultural sector to non-agricultural sectors, especially the manufacturing sector, or technological breakthroughs based on technological transfer. Now the efficacies of both are remarkably weaker than before. Surplus rural labor is decreasing so both the speed and scale of labor transfer is not as high as before. Meanwhile, because of its progress in technological development, China has become a leading nation in some fields, so it is hard to introduce cutting-edge technology. That means China has to rely on industrial upgrade and independent innovation to improve productivity.

Third, economic development used to be less subject to natural resources and environmental protection efforts. Now that China has a sizeable economy, the extensive and resource-dependent development mode has been put under unprecedentedly strict control. People nowadays have higher and higher demands for clean air and water as well as a comfortable living and work environment with increased income and improved living standard. It is an inevitable trend to meet people's demands and choose a road of green, low-carbon development. Under new circumstances, noticeable changes have been found in both supply and demand, and economic constraints are different from before. So this means that former driving forces for economic growth must be adjusted. For example, the mode of scale-based extensive rapid growth should be replaced by the mode of quality-oriented intensive efficient growth. Growth based on factors of production should be replaced by innovation-driven growth. In a word, whether economic development will reach a higher stage under the new normal depends on whether old driving forces will be successfully replaced by new ones.

Risks, challenges and opportunities co-exist in the new normal

Risks have accumulated during China's rapid economic development in the past three decades. Those risks, once hidden behind high-speed economic growth, are gradually exposed as the economy slows down. The manufacturing industry, burdened with overcapacity, is confronted with asset restructuring and structural adjustment. The process will bring about industrial replacement, some companies being replaced by others and workers changing their jobs.

There are also some risks in local government debt, shadow banking, real estate and mutual corporate guaranty. High leverage and economic bubbles will finally accumulate in fiscal and financial sectors. Also, when a country reaches the mid-income level, all its economic, political and social problems will become more conspicuous.

When people's basic demands are met, they will come up with more demands for fairness, justice and politics. All the long-standing issues such as the gap between rich and poor, corruption, environmental protection, food safety and insufficient credit are likely to trigger social unrest. If social instability happens, the pace to catch up with developed countries will slow down or even abort. These are risks and challenges that must be dealt with in the new normal.

Nevertheless, we should be aware that there are new opportunities as well. As the economy enters into a new normal, despite some changes in the connotations and conditions of the period of great strategic opportunities as well as in the mode of China's economic development and its economic structure, what is unchanged is the fact that China is in a period of great strategic opportunity and that the Chinese economy is generally strong. Economic restructuring will definitely bring about some pains, but successful restructuring will help improve asset quality and industrial structure as well as create new jobs and more value.

The market is saturated for some traditional industries, but some new technologies, industries and demands are emerging. Although international demands for China's exports have slowed, China may seize a historic opportunity to move upwards along the industrial chain in the new round of international labor division with its advantage in equipment, supporting facilities and capital output.

Indeed, environmental protection efforts will incur costs, but low-carbon, green development such as providing eco-friendly products will generate new economic driving forces. China's economic growth has slowed down but it will never fall sharply.

China's economic development varies in regions. About 260 million migrant workers will become urban residents. About 100 million people living in shantytowns need new homes, and hundreds of millions of poor people will shake off the shackles of poverty. The changes mentioned above will generate huge market demand. Meanwhile, China still benefits from reform and opening-up. Each year some 7 million college graduates join the labor force. The country boasts sound infrastructure and supporting industries. It is deeper involved in global labor division, and Chinese people are getting more innovative. All those advantages mean that it is possible for China to realize medium-high economic growth and high-level development.

The new normal requires the government to change its function and prompts the market to play the decisive role

The new normal is a stage that the socialist market economy will go through as it evolves into a higher stage of development. It is also a strategic choice made by the government that respects the role of the market and adjusts the development way of thinking. China started its efforts to develop a market economy after the implementation of the planned economy for some time, and the government has played an important role in sustaining high-speed economic development. Among others, regional governments as market players are active in economic activities. By offering favorable land, energy and taxation policies, they have helped attract investment and have improved society's rate of investment as well as economic growth.

Despite their achievements, they have brought about some negative effects: the efficiency of industries has been affected as they have failed to be arranged in the pattern of regional economic development and distorted factor prices have caused overcapacity as they facilitate investment. As the economy enters the new normal, there will be greater industrial and technological uncertainties, and the government's support for certain sectors might face greater risks. In fact, the government is required to cut its direct interference if a unified and effective market is to be established. The role of the government in high-speed economic growth does not fit into the current stage of development.

If we would like to see better synergy of the government and the market, then the government should cut its interference in deciding the direction and mode of industrial upgrading and in the system where the fittest survives. Meanwhile, the government should shift its focus to creating a favorable environment for the market to play its role. The key is that it should stimulate market enthusiasm by introducing reform; create a favorable, innovative environment for transforming the mode of economic development; ensure survival of the fittest; promote industrial upgrade; implement social regulations about environment, quality and safety; and provide basic social security for industrial transformation and upgrade.

Principles of macroeconomic control in the new normal and recent important policies

As the economy enters the new normal, the market economy is performing in wider areas and at deeper levels, and the market force is being strengthened. To adapt to and lead the new normal, the government is required to adjust its ideas and tools about macroeconomic regulation and thus improve the efficacy of policies.

First, what to be adjusted first is the foundation on which the goal of growth is based. Change in supply and demand as well as environmental constraints cut China's potential growth rate. More attention should be paid to performance-related indexes when macroeconomic regulation goals are decided. Such goals should not be taken as planned or imperative.

Second, attention should be paid to risks as well as bottom lines in macroeconomic regulation. As the economy enters into a new normal, market expansion will slow down and competition will get fiercer, causing more risks in economic growth.

Third, in the new normal, efforts should be made to solve the problem of overcapacity and at the same time boost new industries. As it becomes more difficult to balance goals of economic development, innovative means should be introduced to implement differentiated and accurate regulation.

Fourth, in addition to demand management, efficiency and capacity improvement on the side of supply should be stressed in macroeconomic regulation. More support should be given to human resources, intellectual property protection as well as scientific and technological innovation to make innovation a real driving force of economic growth.

Finally, as economic development takes on more international features in the new normal, a global vision and a strong ability in coordinating international financial policies are required in macroeconomic regulation.

2015 is a crucial year for comprehensively deepened reform and is also the last year of the 12th Five-Year Plan period (2011-2015). Based on economic development in 2014, especially the second half, it is likely that the economic growth slowdown will continue this year. That indicates that negative effects of previous stimuli and restructuring are lingering and the key tasks for this year's macroeconomic control are to stabilize growth, control risks and promote industrial transformation.

It is essential to ensure continuous and stable macroeconomic policies and to further implement proactive fiscal policies and prudent monetary policies. It is especially important to come up with some reform measures that will produce positive effects on demand to push short-term demand and improve long-term efficiency of supply. Meanwhile, a close eye should be kept on such things as real estate, overcapacity and finance to prevent regional or systematic risks.

The article is excerpted from the keynote speech President of the DRC Li Wei made at the sixth Forum on China's Economic Outlook.

The author is the President and a research fellow of the Development Research Center of the State Council (DRC). The article appeared in China Economic Times published on Jan 26, 2015.