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New Normal of China’s Economy: Unleashing New Vitality and Cultivating New Force for Development

2015-05-15

Li Wei

Research Report Vol.17 No.2, 2015

I. “New Normal” Means China’s Economy Has Reached a Higher Stage in the Catch-up Process

In 2014, China’s GDP, calculated by annual average exchange rate, reached 63.6 trillion yuan, or over US$10 trillion, ranking the second in the world and making China a real economic power. Over the past 30 years, due to the high-speed growth driven by late-developing advantages, China realized industrialization, which took some countries nearly a century. For any economy, however, it is impossible to sustain rapid growth forever due to the changes in the development connotation at different stages.

In recent years, major changes have taken place in the environment and conditions for China’s economic development. With new phenomena and features, such as economic slowdown, and accelerated structural adjustments, China’s economic development has entered a transitional stage marked by “new normal”. Such transition is common in the process where developing countries catch up with the developed ones. It is generated by the changes in the connotation and strength of late-developing advantages as well as the changes in the model of technological progress. It reflects, in essence, that China’s economy has reached a higher stage in the catch-up process.

Developing countries, at each stage of the catch-up process, have differentlate-developing advantages and growth potential, resulting in different economic growth rates, driving forces and development modes. Based on international experience and China’s economic performance, we can divide the catch-up process of late-developing countries into four stages.

The first is the take-off stage. At this stage, driven by system reform or external environment, late-developing economies, shift from the low-level equilibrium to sustained rapid growth.

The second is high-growth stage. At this stage, there are huge market demand and sufficient supply of labor and other production factors. Therefore, it is easy for enterprises to organize and expand production through the introduction of technologies. In the process of expanding production, the demand for investment in infrastructure and fixed assets grows by a great margin. A large number of surplus or idle resources are effectively utilized. Productivity and capital stock per capita grow rapidly. At this stage, rapid optimization and upgrading are witnessed in the structures of industry, consumption, urban and rural societies, and export. The high-speed growth in the 30 years since China’s reform and opening up is achieved at this stage.

The third is the medium-high-growth stage. At this stage, the demands for infrastructure, residents’ consumption and export grow at a slower rate. It is difficult to continue the simple growth model of extensive expansion often seen at the early stages due to the increase in difficulty and cost of introducing advanced equipment and technologies as well as tight supply and rising cost of production factors. The improvement of production efficiency is mainly achieved by simulating innovation and eliminating the weakest in competition within industries. At this stage, growth deceleration is the phenomenon and the effect, while the changed connotation of growth model is the essence and cause.

The fourth is the medium-low-growth stage. At the later stage of the catch-up process, late-developing countries further close the gap of per capita GDP with the advanced economies and have unleashed most of the late-developing advantages. During this period, traditional markets are saturated and production factors cost much more. Enterprises begin to engage in cutting-edge innovation, make great profits and release the pressure of rising costs by creating brand-new products, technology road maps and business models.

Economic development evolves into the aforementioned four stages in steps. Economic growth is underpinned by expansion in quantity at the first two stages, while better quality is the backbone of the latter ones. It is true that whether a country or economy can successfully progress into each stage depends on its specific situation. China’s economic development enters into the new normal state, meaning China’s economy shifts from high-speed growth featured by expansion in quantity to medium-high-speed growth featured by improvement in quality. The shift indicates that China is moving to a higher stage in the catch-up process rather than approaching to the end of it.

II. China Boasts Multiple Favorable Conditions for Medium- high Growth

At the two sessions of the National People’s Congress and the Chinese Political Consultative Conference (NPC and CPPCC) closed not long ago this year, the Chinese government set the growth target for 2015 at about 7%, 0.5 percentage points lower than last year. We have to realize that the current economic slowdown in China, rather than the periodic fluctuation commonly seen, reflects trendy and structural characteristics. It is the result caused by internal and external conditions for development as well as medium and long-term factors. Such slow down is also necessary for China to transform the growth mode and update the economy. As the slowdown is not an off-cliff fall, there are still multiple favorable conditions for China’s economy to sustain medium-high growth.

First, with respect to per capita GDP, the figure in China is only two-thirds of the global average, one-eighths of the United States.Hence China is still a developing country with huge potential. It is still a long-term task for the Chinese government to maintain stable economic growth and continuously raise people’s income level.

Second, China is still in the process of industrialization and urbanization. There are serious problems like regional disparity and unbalanced development between urban and rural areas. The reform of the market economy is not yet completed, and the dividend from reform is still tremendous. What’s more, 260 million migrant workers need to be urban residents enjoying the same rights as their urban counterparts. One hundred million residents living in dilapidated homes in urban run-down areas need new homes. And 200 million people in remote areas need to get out of poverty, all of which implies huge space for development.

Third, with some 7 million university graduates every year, good infrastructure and strong ability of integrating and coordinating different industries, China is enhancing its innovation ability in the areas such as aerospace, biology, new energy and information technology, and gradually cultivating new competitive advantages. New advantages combined with huge potential will surely cultivate new force for economic growth.

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