By Zhang Junkuo & Wu Zhenyu, General Office of DRC

2018-4-19

The analysis and understanding of China’s endeavor and economic potential to catch up with the advanced economies is not only an academic project, but also a key matter concerning the formulation of China’s development goals and regulation policies. To make an objective analysis of China’s growth potential, the catching-up law, technological background changes and the specific domestic and international environment should be taken into account. In the macroeconomic management, it’s necessary to deal properly with major relations between the real growth rate and potential growth rate, the traditional drivers and new drivers, as well as the relations between the government and the market. China’s economic growth has continued to decline since 2011. The economy showed signs of stabilizing performance in 2017, and the GDP growth is expected to be higher than the previous year. After a long period of adjustment, favorable factors for economic stability for the medium-high growth rate are on the rise, but there will still be uncertainties in the future in view of the high leverage rate, weak demand and insufficient market confidence. The changes in actual economic conditions in recent years have also provided new ideas for theoretical analysis. It is of great significance to consider various factors and combine the theoretical logic with the history for understanding the law of growth during the transitional period to high-quality development and properly dealing with the important relations in economic operation.

The development level is the fundamental factor determining the growth potential of the catch-up countries. From the perspective of history, China’s development has been changed from an agricultural to an industrialized modern country, and it has also been a catch-up process from absorbing and utilizing international advanced technologies to independent innovation. In the early academic discussion, two kinds of views are most typical. One is that China’s economy will still be able to maintain a long period of high growth in the future because of its lower per capita GDP compared with the US; the other is that the potential growth of China’s economy will decline gradually because China has reached the absolute level of per capita GDP during the transitional period of growth. In fact, the key of the contradiction does not lie in the choice between the absolute per capita GDP and the relative per capita GDP, but lies in the neglect of impact of different technological background on the connotation of the absolute and relative level of GDP. Firstly, when the technological frontier is fixed, the same analysis conclusion can be obtained from the absolute and relative level. The absolute per capita GDP determines the demand structure and investment behavior of the population, and then affects the potential growth of the catch-up countries, while the relative per capita GDP affects the catch-up space and technology import potential of the developing countries, thus affecting the potential growth. There is a window period in which the relative level of per capita GDP influences the potential growth. In the static analysis, the absolute and relative levels of per capita GDP are unified, which jointly determine the catch-up space and potential growth. Secondly, when the technological background changes, the growth potential of absolute or relative per capita GDP varies. With technological advancement, the demand and production structure represented by the absolute per capita GDP will change, and simple international comparison will underestimate the growth potential; however, due to the development of the frontier countries, with the same relative level of per capita GDP, countries that are developed later will have a higher absolute level of per capita, and the simple international comparison will overestimate the growth potential. Overall, under static conditions, the analysis based on the absolute per capita GDP may underestimate China’s future growth potential, whereas the analysis based on relative per capita GDP may overestimate China’s future growth potential.

The national conditions and international environment will also affect growth potential. Firstly, in terms of national conditions, China’ potential growth is higher after the transformation of the growth stage. 1. The transitional characteristics from the planned economy to the market economy have enabled China to have more bonuses brought about by the improved systems after the transformation in the growth stage. For example, the economic value of rural homestead and construction land has not been developed. Banks and state-owned enterprises have not given full play to the due efficiency of market entities. The central and western regions are being more influenced by the commercial culture, which will affect the future growth potential through more market-oriented behavior of micro subjects. 2. The huge market space provides favorable conditions for China to cultivate new industries and enhance its international competitiveness. With the huge domestic market, the access cost of new industries can be reduced through scale advantages and companies with international competitiveness would spring up. Entering the stage of high-quality development, we can rely more on the huge domestic market to share the cost of scientific research and development and improve the competitiveness of innovative industries. 3. The unbalanced development between the urban and rural areas and among regions contains new impetus for economic growth. The industrial transfer among different regions in China has brought synergy, which is more conductive to sustain economic growth. The vast rural areas have a large number of production factors that are not fully marketized and there is a huge demand for infrastructure construction. Secondly, the international environment changes have provided new opportunities as well as challenges for China’s development. 1. Major changes have taken place in the international economic landscape. Developing countries have a larger share of the global economy than developed countries, which will provide new space for demand. China’s trade, financial and technological exchanges with developing countries have exerted a profound influence on the development of low- and middle- income countries and have formed positive feedback on China’s development. 2. The development of the Internet and other new technologies has created conditions for China to achieve a higher potential growth. New technologies both at home and abroad have boomed. The transformation of the Internet in manufacturing can unleash new growth space. The technical progress of traditional service industries is slow. As the percentage of the service industry in all of the industries increases, it will affect the growth rate of the total factor productivity improvement in China. These changes reflect the rising importance of new technologies in economic growth. 3. The adjustment of the global value chain has increased the pressure on China to explore the international market. The energy revolution has brought down the cost of production and the rapid development of intelligent manufacturing and robotics has jointly opened up new strengths and new space for manufacturing in developed countries. In the wave of “reindustrialization”, the developed countries, on the one hand, are maintaining their high-end manufacturing, and on the other hand, trying hard to rebuild its competitiveness in the medium market as well. The intensification of international market competition and the anti-globalization move will bring adverse effects on China’s future development.

The full release of the growth potential requires the proper handling of three important relationships. Firstly, understanding the relationship between the current real growth and potential growth accurately. Searching and setting up a platform for sustainable growth under the New Normal is in fact the exploration of potential growth. In the New Normal, the potential growth needs to be created through reform and discovered through regulation. The current state of the economy is not a natural reflection of the potential growth. We should neither regard the decline in growth caused by unfulfilled reform and economic conditions as insufficient potential, nor mistake the short-term effects of policy stimulus as growth potential. The potential growth of the New Normal is achieved through deepening reform and opening up, rather than automatically accomplished or simply copied from real growth. Secondly, understanding the relationship between cultivating new economic drivers and exploring for traditional drivers correctly. Cultivating new drivers of economic growth should neither ignore the changes in the growth stage nor go beyond the historical development stage. We should note that the growth of total factor productivity, especially the growth pushed by the original innovation, is the main source of growth after China becomes one of the high-income economies. Meanwhile, we should also note that restricted by the laws of scientific and technological progress, this form of total factor productivity growth costs more but the growth rate is limited. At present, China only has sufficient knowledge reserve and capital strength in part of technological and industrial fields, while the development of original innovation needs to be carried out in combination with objective conditions. China’s per capita stock is still far behind that of developed economies, and there is still room for the traditional investment-driven measures. From the perspective of demand dynamics, especially the transformation of consumption structure, China’s large number of permanent residents has not really integrated into the urban production and consumption system. However, the problems such as urban traffic congestion, the poor living environment and the lack of infrastructure construction in rural areas have also indicated that there is still room for further development in the field of traditional demand. The institutional factors of the transitional economy not only overdraw growth space, but also restrict the release of traditional driver. With the large volume and the unbalanced development of regional economies, there is still a large space for the release of traditional drivers. Thirdly, to understand and also manage the relationship between the government and the market properly. To meet the new requirements of economic transformation, it is necessary to reform the relationship between the government and the market, and the key lies in giving proper and powerful play to the role of the government. The government function to guide the development and release potential in the transition period has not been weakened. The government still plays a fundamental role in the market cultivation and construction in various important areas. The international experience shows that the national industrial policy of catch-up countries has not been weakened after the transformation period of growth. The distorted relations of different interests in the reform require the government to promote adjustment. The sustained release of growth potential needs the government to adjust the priority in economic and social work. The need to foster an innovative ecology and environment is increasing. The role of the government in intervening in economic development should be adjusted and more emphasis should be placed on the formulation of market rules. More frequent foreign economic exchanges can bring greater participation in the coordination of international macro economic policy. Social problems are relatively more obvious, demanding new requirements for the social management of the government.